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.
The new People of Significant Control Register and what quoted companies need to do
The UK Government has brought in legislation that requires companies to keep a register of people with significant control (PSC – ie those that own 25% or more of the shares in a company), taking effect from 30 June 2016. Companies that have disclosure obligations under the Disclosure and Transparency Rules (DTR) No. 5 (which are listed companies and AIM companies) are exempt from the requirement. However, the DTR5 exemption only apples to the company with traded securities, not each member of the group. Unfortunately, it is therefore necessary for each of the DTR5 company's subsidiary companies incorporated in any part of the UK to prepare and maintain a PSC register. Edward Craft, Partner at Wedlake Bell and Chairman of our Corporate Governance Expert Group, has written an article for quoted companies highlighting what they need to do with regard to this.
A win in the implementation of the Markets in Financial Instruments Directive II
The European Securities and Markets Authority (ESMA) released the final version of its Draft Regulatory and Implementing Technical Standards on MiFID II/MiFIR on 28 September 2015, which includes a number of changes to the implementing standards that will ensure that trading in small and mid-size quoted company shares is not negatively impacted by these new rules. As suggested by the Quoted Companies Alliance, ESMA has introduced a new low liquidity band, which will allow for a delay in the notification of large trades in illiquid shares, and more granular tick sizes.
Changes are coming to the UK market abuse regime
The new EU Market Abuse Regulation (MAR) will come into effect from 3 July 2016 and, as a result, the UK's market abuse regime will be adapted to fit the new requirements of the regulation. Whilst the current UK market abuse regime is broadly similar to what is outlined MAR, there will be changes to the FCA Handbook, the Disclosure and Transparency Rules, the Financial Services and Markets Act (FSMA) and the AIM Rules for Companies because MAR is a regulation and so EU Member States have very little flexibility in terms of how the legislation is implemented.
The European Securities and Markets Authority (ESMA) issued its final report on Draft Technical Standards on the Market Abuse Regulation on 28 September 2015. The good news is that ESMA has slightly reduced the content requirements for insider lists, which we campaigned for in order to reduce administrative burdens on companies. The European Commission now will publish delegated acts and regulations, which will provide further detailed information on how various aspects of MAR will work in practice.
In the meantime, AIM published an article in Inside AIM on 28 October 2015, which sets out their preliminary thoughts on how they expect the new MAR obligations to sit alongside the disclosure obligations in the AIM Rules for Companies. The note explains that they plan to retain AIM Rule 11 as it is important to maintain the integrity of the market. Furthermore, the Exchange notes that keeping AIM Rule 11 should not materially change a company's approach to disclosure compared to existing market practice. AIM will undertake consultation to the AIM Rules if required, presumably once more detail on the implementation of MAR has been published.
The FCA then published its policy proposals and Handbook changes related to the implementation of MAR on 5 November 2015. In this paper, the FCA proposes to:
- make substantial amendments to the Code of Market Conduct to ensure that it conforms with MAR;
- replace the Model Code with guidance; and
- replace the Disclosure Rules in Chapters 1 to 3 of the Disclosure and Transparency Rules with Disclosure Guidance that signposts relevant provisions in MAR.
Nonetheless, the FCA notes that its policy proposals are subject to the publication of the European Commission's forthcoming delegated Acts and regulations on MAR.
The end result is that there will be changes to the market abuse regime and what companies need to do comply with these changes, but this is dependent on forthcoming level II measures from the European Commissions and the FCA's consultation on their policy proposals. We are working to ensure that the transition to this new market abuse regime works well for small and mid-size quoted companies and does not add additional administrative burden on them. We will be sure to brief our members on the key changes they should consider once further detail on the delegated acts and regulations are published.
BIS and FRC aim to ensure that new Audit Directive and Regulation are proportionately applied in the UK
The Department for Business, Innovation and Skills (BIS) and the Financial Reporting Council (FRC) have published their follow-up consultations on the implementation of the EU Audit Directive and Regulation in the UK. The BIS consultation notes that AIM companies will not be classed as Public Interest Entities (PIEs – as defined in the Audit Regulation), which the Quoted Companies Alliance was pushing for. The FRC consultation covers changes to the UK Corporate Governance Code, Revisions to the Ethical Standards, Auditing Standards and Guidance for Audit Committees as a result of the EU Audit Regulation and Directive coming in. Furthermore, the FRC proposes that there will be certain reliefs from the requirements of the Ethical Standards for small quoted companies that are not PIEs and who have a market capitalisation below £100m.
FRC issues year-end reporting tips to small and mid-size quoted companies
The Financial Reporting Council (FRC) issued a letter to the finance directors of small and mid-size quoted companies on 11 November, which highlights areas that companies should focus on in the coming year when preparing their annual reports and accounts. The FRC notes that investors want:
- The Strategic Report to be clear, concise, balanced and understandable;
- Accounting policies to be clear and specific, particularly in relation to revenue recognition and expenditure capitalisation; and
- A clear explanation of how the company generates cash flow.
AIM publishes a regulatory framework guide
The London Stock Exchange has published a useful infographic that explains all various parties involved in the AIM regulatory framework. We are delighted that we were able to persuade the Exchange to make this public as we believe it will help the media and others to understand who is responsible for what.