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Directors' know how is a monthly article, which highlights key rule changes, proposed changes and market updates so that you know what is coming down the track.

MiFID II comes into force

The Markets in Financial Instruments Directive II – otherwise known as MiFID II – came into effect on 3 January 2018 and amends the legal framework governing the requirements applicable to investment firms, trading venues data reporting service providers and third-country firms providing investment services or activities in the European Union.

There are three main areas affecting small and mid-size quoted companies:

  • SME Growth Markets – This new market classification allows growth markets across the EU to benefit from more flexible rules. AIM became an SME Growth Market on 3 January 2018. It is hoped that this will facilitate better access to capital markets for small and mid-size quoted companies and, once quoted, allow them to benefit from a set of more proportionate rules that are appropriate to their size.
  • Investment research – Fund managers are now unable to receive investment research and access to companies unless they have paid for these services. This could lead to small and mid-size quoted companies being unable to have research produced on them, thus restricting their ability to raise finance and grow. A reduction in investment research could lower demand from fund managers for research on small and mid-size quoted companies, reducing incentives for brokers and analysts to produce it. Nonetheless, after our patient and consistent lobbying, the FCA confirmed that fund managers would be able to continue receiving small cap research without payment where it has been commissioned and paid for by a smaller quoted company, including when issuing new shares. This will also cover broker research.
  • Deferred Publication Regime – Delayed trade reporting for abnormally large trades of shares is a feature of trading which mitigates the liquidity risk associated with material investment, particularly for smaller companies. After sustained campaigning by our Secondary Markets Expert Group, MiFID II Level 2 measures will revise the delays available, which could have had an unduly punitive effect on less liquid securities, such as those of small and mid-size quoted companies.

We will be sending QCA members guidance on how their quoted company should be responding to MiFID II in the coming weeks.

ICSA: The Governance Institute and Board Intelligence research suggests the size of board packs is an obstacle to effective oversight

ICSA: The Governance Institute and Board Intelligence have released a joint report on the challenges to effective board reporting.

Having surveyed 80 governance professionals representing organisations of all sizes and sectors on how board reporting operated in their organisations, the report identifies four main challenges facing companies:

  1. Board packs are too long – This is particularly the case for quoted companies.
  2. Board packs are time-consuming to prepare – The most common challenge faced, this was reflected by the view that board packs were too long, as well as that some of the information included is not necessarily required.
  3. Getting the focus and balance packs right is a challenge – There were concerns that board packs did not always past the test as to whether it helped board members identify and understand the key issues for discussion at meetings.
  4. The overall process of preparing board packs could be improved – Among the issues mentioned when preparing board packs included receiving papers after the deadline; a lack of standardised reporting formats; and managing the revision and collation of the various reports.

In response to their findings, ICSA: The Governance Institute and Board Intelligence stated that they intend to develop a number of tools which will support organisations prepare their board reports more effectively. You can also read this article by Chris Hodge, a policy adviser at ICSA: The Governance Institute and Board Intelligence, for more information.

FRC Financial Reporting Lab calls for action to promote digital reporting

The Financial Reporting Council’s Financial Reporting Lab has published a report 'The digital future of corporate reporting' regarding the use of XBRL (eXtensible Business Reporting Language) in financial statements.

The report studied how XBRL – which allows businesses to present financial information in a structured and uniform digital format enabling users to easily analyse large amounts of financial information – could be used to produce, distribute and consume the annual reports of listed companies. It concluded that XBRL will play an important role in the digitisation of company reporting.

However, there are gaps between the characteristics that users and preparers desired from digital reporting and the expected implementation of XBRL for listed company reporting. With the new European Single Electronic Format (ESEF) for digital corporate reporting due in 2020, the Lab has made a number of recommendations that will help to ensure the full benefits of XBRL can be realised:

  • Companies need to start giving serious consideration as to how they might implement XBRL and support the development of the technology and regulation.
  • A single committee in the UK with representatives from each of the regulators and relevant government departments and agencies should be formed to explore the potential benefits of driving digital reporting in the UK, facilitate cross-regulator working to ensure that the adoption of ESEF (or a UK alternative) is efficient and effective, and engage with the wider reporting community.
  • Investors and analysts need to actively engage with regulators to ensure that any regulatory changes increase access to company data in a usable format.
  • Technology companies must help the business community realise the full benefit of the technology, while also continuing to innovate with regards to their product offers, in order to assist the increasing number of companies preparing and using XBRL-enabled data.

HMRC has also updated its XBRL guidance for UK companies, which you can find here.

Investment Association publishes Public Register for the first time

The Investment Association has launched the Public Register of listed companies which have had significant shareholder rebellions.

The register – established in response to the government’s response to the Green Paper on corporate governance reform in August 2017 – includes FTSE All-Share companies which have received votes of 20% or more against any resolution or withdrew a resolution prior to their Annual General Meeting (AGM) in 2017. It will also highlight how these companies have responded to their investors' concerns. The primary purpose is to increase transparency, accountability and scrutiny of listed companies by shareholders, media and the wider public.

The first data published showed that 22% of companies listed on FTSE All-Share are on the Public Register. Pay related issues and the re-election of company directors were the top two concerns raised by investors.

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