Directors' Knowhow is a monthly article which highlights changes and updates of relevance to small and mid-size quoted companies.
QCA publications and updates
This section of the Directors’ Knowhow features all of the publications produced by the QCA and any relevant updates that have occurred over the last month.
QCA/YouGov Sentiment Survey
The results of the biannual QCA/YouGov Small & Mid-Cap Sentiment Index have been published. The latest edition reveals that small and mid-cap companies remain positive about their own prospects, despite this optimism being at its lowest point since 2012. Many companies cite Brexit and political uncertainty as continuing to contribute to the neutral outlook on the economy. The key findings are as follows:
- 76% of small & mid-caps are expecting to increase jobs, but 19% anticipate decreasing employment – up from 10% six months earlier.
- 37% of surveyed companies are planning to raise capital - down from 47% when asked six months earlier.
- Companies predict average sales growth of 17%, down from 19.2% a year earlier.
If you wish to see the results of the survey, please do so here.
Reports, guides and regulation
This section features some of the key legislative/regulatory developments and changes, as well as any new reports or guidance issued by industry bodies or regulators, over the last month.
Government’s Green Finance Strategy
On 2 July 2019, HM Treasury and the Department for Business, Energy and Industrial Strategy published their Green Finance Strategy. The policy paper sets out the Government’s comprehensive approach to greening the financial services sector and recognises the key role the financial sector has to play in delivering global and domestic climate and environmental objectives. The strategy is aligned to the UK’s Clean Growth Strategy and 25 Year Environment Plan.
The report comes in response to the Green Finance Taskforce’s March 2018 report on how the government can achieve its carbon budget and related environmental objectives. The strategy has two central objectives, these are:
- To align private sector financial flows with clean, environmentally sustainable and resilient growth, supported by Government action; and
- To strengthen the competitiveness of the UK financial sector.
These two objectives are supported by three strategic pillars, these are:
These two objectives are supported by three strategic pillars, these are:
- Greening Finance
- Ensuring current and future financial risks and opportunities from climate and environmental factors are integrated into mainstream financial decision making, and that markets for green financial products are robust in nature.
- Financing Green
- Accelerating finance to support the delivery of the UK’s carbon targets and clean growth, resilience and environmental ambitions, as well as international objectives.
- Capturing the Opportunity
- Ensuring UK financial services capture the domestic and international commercial opportunities arising from the ‘greening of finance’, such as climate related data and analytics, and from ‘financing green’, such as new green financial products and services.
To read more about the strategy, please do so here.
In response to the Government’s Green Finance Strategy, the FRC, PRA, FCA and TPR have welcomed the Government’s Strategy in a joint statement. The regulators are open to further collaboration to advance progress in tackling climate-related issues.
Update on proposed revision to the UK Stewardship Code
Following its consultation on a revised UK Stewardship Code, which closed on 29 March 2019, the FRC are undertaking targeted outreach to test changes to the proposals on activities and outcomes reporting. The revised UK Stewardship Code is due to be published in October.
Overall, responses to the consultation demonstrated strong support for some of the key changes proposed within the consultation. These include, consideration of ESG issues, extension to asset classes beyond UK listed equity, setting expectations of different entities in the investment community and reporting on activities and outcomes.
To read more on the proposed revisions to the UK Stewardship Code, please do so here.
To read the QCA’s response to the consultation on a revised UK Stewardship Code, please do so here.
Senior Managers and Certification Regime: Finalising FCA rules
On 10 July 2019, the FCA published a statement providing an update on the finalisation of the rules for the extension of the Senior Manager and Certification Regime (SM&CR). The statement explains that the FCA has been working closely with HM Treasury on preparation of the Commencement Order that will enable the FCA to publish its final rules on the extension of the SM&CR. The regime is due to come into force on 9 December 2019.
The SM&CR is intended to reduce harm to consumers and strengthen market integrity by creating a system that enables firms and regulators to hold individuals to account. The Commencement Order will be published by HM Treasury and the FCA will then make a Policy Statement setting out the final rules.
If you wish to read the statement, please do so here.
FCA enforcement annual performance report
On 9 July 2019, the FCA published its Enforcement annual performance report for 2018/19. The report compliments the FCA’s Annual Report for 2018/19 and provides an overview of the FCA’s enforcement activities during this period, focussing on the essential enforcement developments and achievements. The report includes information on retail and wholesale conduct, the confiscation orders issued and the FCA’s work to counter unauthorised business.
In 2018/19, the FCA issued 265 Final Notices, secured 288 outcomes using their enforcement powers and imposed 16 financial penalties that totalled over £225 million.
OTS Inheritance Tax review
On 5 July 2019, the Office of Tax Simplification (OTS) published its second report on its Inheritance Tax review. The report provides recommendations to make substantive aspects of Inheritance Tax simpler and easier to operate. Its initial report, published in November 2018, covered the administrative aspects of the tax, its second report explores the main complexities and technical issues that arise from the way the tax works. The main changes would:
- Streamline gift exemptions;
- Change the way the tax works in relation to lifetime gifts; and
- Address distortions in the operation and scope of reliefs such as those for business property and agricultural property.
The report also has a section relating to the treatment of AIM shares within the policy intent of BPR. In particular, the report recognises the importance of BPR for growth companies: “The OTS notes that the government’s response to the Patient Capital Review consultation published in November 2017 stated the government’s commitment to protecting the important role that BPR plays in supporting family owned businesses and growth investment in AIM and other growth markets. In correspondence and meetings, the OTS has heard evidence of its importance in meeting that objective.”
If you wish to read the full report, please do so here.
AFME report on Building competitive, resilient and integrated financial markets
The Association for Financial Markets in Europe (AFME) has published a report on what it believes the European Union should set as its strategic priorities for the 2019-2024 legislative term. The report highlights the various forces re-shaping aspects of the economy, such as the global economic environment, the growth of new technologies, the drive to a low-carbon economy and the UK’s withdrawal from the EU.
In so doing, the report advances the following objectives:
- Supports European integration and financial stability by providing diversification, shock-absorption and risk sharing channels.
- Promotes the availability of diverse and efficient financing mechanisms for businesses of all sizes, with particular focus on funding for technological innovation and enterprises with high growth potential, through capital market ecosystems.
- Finances the transition to a more sustainable economy and helps to close the yearly investment gap of almost EUR 180 billion to achieve EU climate and energy targets by 2030.
- Provides EU citizens and organisations with a diversity of assets for investment and saving, contributing to wealth creation and the provision of retirement income to address the EU’s demographic challenge.
If you wish to read the full report, please do so here.
GC100 and Investor Group publish Directors’ Remuneration Reporting Guidance 2019
On 22 July 2019, GC100 and Investor Group published its revised Directors’ Remuneration Reporting Guidance. The guidance is designed to assist companies and their investors in the interpretation of the regulations. Following the implementation of the revised Shareholder Rights Directive (SRD II), the guidance has been updated to include the following changes:
- Regulatory definitions for the employee comparator group and directors that are required when calculating percentage change in pay.
- Discussion of measures taken to avoid or manage conflicts of interest in relation to determination, review and implementation of the remuneration policy.
- Extension of coverage to include those considered to be CEO or deputy CEO, even where they are not appointed as directors.
To read the guidance, please click here.
Share repurchases executive pay and investment
On 19 July 2019, the Department for Business, Energy and Industrial Strategy published a research and analysis report on share repurchases, executive pay and investment. The research explores whether there is a relationship between executive pay incentives and share repurchases and between share repurchases and investment levels. The report finds evidence of a correlation between executive incentives and repurchases, but not evidence of a systematic causal relationship.
HMRC employee share schemes statistics
On 27 June 2019, HMRC published data on tax-advantaged employee share schemes, which includes statistics on the number of companies using schemes, number of employees receiving awards, values awarded, number of employees exercising options and estimates of the value of the Income Tax and National Insurance relief received. The data includes statistics for company share option plans (CSOPs), share incentive plans (SIPs), SAYE option schemes and enterprise management incentives (EMI) options for the tax year 2017-18.
The key findings from the report include:
- 13,330 companies operate a tax-advantaged scheme
- 97% of these companies operate only one scheme.
- The estimated annual cost of providing income tax and National Insurance Contributions (NICs) relief for the four schemes in total is around £805 million (£500 million income tax relief and £305 million NICs relief).
The estimated value of income tax and NICs relief for each scheme was:
- CSOP: £45 million.
- EMI: £280 million.
- SAYE: £170 million.
- SIP: £310 million.
To view the statistics, please click here.
Best Practice Principles for Shareholder Voting Research & Analysis
The Best Practice Principles for Shareholder Voting Research and Analysis Group published a revised version of its Best Practice Principles for Providers of Shareholder Voting Research and Analysis. The new principles address the requirements of a 2015 report by ESMA, the Shareholder Rights Directive II and the latest updated stewardship codes. The new principles also refer to the input of investors, issuers and other stakeholders received through a public consultation by the BPPG and a review by the BPP Review Committee chaired by an independent review chair.
The purpose of the principles is to complement the applicable legislation and regulation and contribute to a greater understanding among issuers, investors and other stakeholders about:
- The nature and character of shareholder voting research and analysis services;
- The standards of conduct that are required to underpin those services; and
- How signatories to the Principles (“BPP Signatories”) interact with other market participants.
The main updates to the principles include the following:
- New Governance Oversight Arrangements
- New Reporting Arrangements
- New Monitoring Arrangements
- Updated Principles and Guidance.
If you wish to see the principles, please do so here.
Reporting of non-financial information to the FRC
The FRC has written to the six largest audit firms setting out its expectations for reporting of non-financial conduct to the FRC as part of its Audit Firm Monitoring and Supervision responsibilities. The letter comes as the FRC are seeking to establish a clear process for the regular reporting to the FRC of the level of non-financial conduct complaints and how these complaints are dealt with. The FRC hopes that this will provide them with valuable assurance over the effectiveness of the monitoring arrangements that firms have in place.
If you wish to read the letter, please do so here.
Articles, news and speeches
This section features relevant news, articles and publications for small and mid-size quoted companies that has been published in the last month.
Public M&A trends for first half of 2019
Thomson Reuters Practical Law have published a review of public M&A trends and highlights for the first half of 2019. The review covers takeover offers for both Main Market and AIM companies and provides details of the deals within the report.
Overall, bid activity levels have increased in the first half of 2019 when compared to the first half of 2018. Despite this, there has been a decrease in the amount of bids with a value of £1 billion or over when compared to the same period in 2018.
Brexit uncertainty does not appear to have had a negative impact on the level of activity in the first half of 2019 and M&A volumes are expected to continue to rise in the second half of 2019. Whilst most developments appear to have been made in the small and mid-cap space, market participants seem to have decided that they can no longer continue to justify putting potential transactions on hold. Furthermore, there has been an increase in hostile bid activity, as well as an increased number of competitive bids.
To read the full report, please do so here.
FCA speech on regulating cryptoassets
Early in July, Christopher Woolard, Executive Director of Strategy and Competition at the FCA, delivered a speech at the Cambridge Centre for Alternative Finance annual conference on regulating financial innovation. Within the speech, Christopher highlighted how the UK has led the rest of the world with developments like the FCA’s regulatory sandbox, which enables firms to test innovative products in a controlled environment.
The importance of early engagement was highlighted as a priority by the FCA, due to the important implications this has for monitoring and supervising, as well as for policy purposes. This helps enhance the FCA’s understanding of the quickly-changing landscape of financial technologies.
If you wish to read the speech, please do so here.
Surveys and questionnaires
This section features surveys or questionnaires submitted by industry bodies or regulators that are relevant to small and mid-size quoted companies.
ESMA survey on potential short-term pressures on corporations stemming from the financial sector
ESMA are currently consulting on potential short-term pressures on corporations stemming from the financial sector. They have published a questionnaire which will consider the impact of short-termism as part of ESMA’s work on sustainable finance.
The deadline for the questionnaire is Monday 29 July 2019. If you wish to take the survey, please do so here.
ISS Benchmark Policy Survey 2019
Institutional Shareholder Services (ISS) has launched its Annual Policy Survey, and invites companies, institutional investors, corporate directors, and all other market participants to take part in the survey. The survey is a key component in the ISS’ annual benchmark policy development process, which looks at potential policy changes globally for 2020 and beyond.
This year’s survey covers key topics, such as:
- Board gender diversity;
- Director over-boarding;
- Director accountability relating to climate change risk;
- Combined chairman and CEO posts; and
- The discharge of directors and board responsiveness to low support for remuneration proposals.
The deadline to complete the survey is 9 August 2019. If you wish to take the survey, please do so here.
This section provides an update of any recently submitted QCA consultation responses, as well as the consultation responses the QCA is currently drafting.
QCA policy consultation responses
Our Corporate Governance Expert Group contributed to the QCA’s response to ICSA: The Governance Institute’s consultation to review the effectiveness of independent board evaluation in the UK listed sector.
To view the response, please click here.
Additionally, the QCA is currently seeking member input on the following consultations:
- BEIS: Corporate Transparency and Register Reform
- ESMA: Survey on collection of evidence on undue short-term pressure from the financial sector
- ESMA: Draft Guidelines on disclosure requirements under the Prospectus Regulation
- BEIS: Initial consultation on recommendations by the Competition and Markets Authority
- HM Treasury: Financial Services Future Regulatory Framework Review
If you have any comments you wish to contribute on either of these consultations, please get in touch with Jack Marshall, Policy Adviser, firstname.lastname@example.org.