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 Audit Committee Guide
The QCA’s updated Audit Committee Guide is due to be released at a launch event on Wednesday 11 September 2019. The updated Audit Committee Guide, which is designed to assist companies alongside the QCA Corporate Governance Code, has been prepared to help audit committee members and chairs be effective in their roles through highlighting best practice.
To find more details about the launch event, please click here.
The role of the NED in growth companies
The QCA are due to launch a report which explores the role of the Non-Executive Director in growth companies. The report, which was conducted by Henley Business School and sponsored by Downing LLP, will be launched on Wednesday 4 September 2019.
The report highlights how the size, complexity, type of ownership and stage of development all have an influence over the type of Chair and NED that can add value to your company.
To find more details about the launch event, please click here.
Recent QCA survey results
Towards the end of July, the QCA published the results of two surveys of UK small and mid-caps in coordination with YouGov.
The first survey analysed the extent to which small and mid-caps were managing the regulatory burden. The results indicated that 63% of these companies find regulatory compliance either excessive or demanding and 72% stated that they believe the reason why the number of companies on public equity markets in the UK has fallen is due to the increased regulatory burden.
To read the results of the survey, please click here.
The second survey analysed the impact of Brexit on small and mid-caps in the UK. The key findings include:
- The three years of Brexit preparations has negatively impacted companies
- The information that the UK Government has provided to help prepare for Brexit has been inadequate
- The majority of small and mid-caps are taking action to prepare for no deal
- Small and mid-caps are most likely to favour remaining in the EU
To read the result of the survey, please click 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.
FCA provides guidance on cryptoassets regulation
At the end of July, the FCA published its Final Guidance which sets out the cryptoasset activities it regulates. The Final Guidance aims to provide further clarity on the current cryptoassets regulation following the FCA’s consultation which was published earlier this year. The guidance seeks to help firms understand whether the activities they undertake fall under FCA regulation. This allows firms to have a better understanding of whether they need to be authorised to undertake a particular activity, whilst also ensuring that they are able to comply.
Despite the cryptoasset market being relatively small, it is highly complex and is continually evolving. The majority of respondents to the FCA’s consultation supported the proposals outlined, the Final Guidance has been published to clearly define which cryptoassets fall inside the regulatory perimeter.
To read the guidance, please click here.
FRC publish Annual Enforcement Review to tackle poor quality audit
At the end of July, the Financial Reporting Council issued its first Annual Enforcement Review which reveals a significant increase in sanctions and settlements. The substantial increase in fines comes about as the FRC seeks to take tougher action to tackle poor quality audit. The Annual Enforcement Review is particularly important in providing a baseline for measuring future enforcement as the FRC undergoes its transition into the Audit, Reporting and Governance Authority (ARGA). The review highlights issues identified in enforcement cases and the actions taken to address them.
The key findings from the review include:
- A near trebling in annual fines, from £15.5m in 2017/18 to £42.9m in 2018/19
- Greater use and range of non-financial sanctions, rising from 11 in 2017/18 to 38 in 2018/2019
- A reduction in “legacy” cases
- Increased use of horizon scanning techniques to identify issues requiring investigation
- 25% growth in the Enforcement Division
The Enforcement Review also highlights the role of non-financial sanctions, such as exclusions and ongoing monitoring, to address misconduct and improve behaviour. The emphasis is on explaining the context and use of exclusions and other non-financial sanctions in the hope of driving the quality of audit up and ensuring the reliability of future financial reporting.
To read the Annual Enforcement Review, please click here.
Treasury report on the FCA’s perimeter of regulation
Early in August, the House of Commons Treasury Select Committee published a unanimously agreed report on the FCA’s perimeter of regulation. The report is part of the Treasury Committees ongoing scrutiny of the FCA to make a series of recommendations to the Treasury on the remit and powers of the regulator. The report highlights the need for the FCA to have formal powers to propose regulatory perimeter changes, as the report finds that the current system for the FCA to request changes to the Treasury in relation to the regulatory perimeter is insufficient.
The report summary includes:
- There is a grey area between regulated and non-regulated activities which continues to be exploited. Numerous topics, such as SME lending, mini bonds and cryptoassets, exist within this grey area.
- HM Treasury is responsible for establishing the perimeter and the FCA has no formal mechanism to submit a request to the Treasury to make adjustments to the regulatory perimeter. The FCA should have formal powers to recommend changes, which should be publicly disclosed in order to increase transparency.
- The FCA should be given the remit to highlight the potential risks to consumers of an unregulated activity.
- The FCA’s current inability to gather information on the risks to consumers both at and beyond the perimeter means that it will always be reactive. The Treasury should undertake research on enabling the FCA to determine whether it should gather data from non-regulated entities.
If you wish to read the full report, please do so here.
IIF report on climate-related financial disclosures
On 23 August, the Institute of International Finance published a report on climate-related Financial Disclosures: Examples of Leading Practices in TCFD Reporting by Financial Firms. The report aims to provide insight on current leading practices among financial firms, as well as providing examples of what good disclosure looks like. The examples produced within the report, not only seek to help achieve the goals of the TCFD, and, in particular the appropriate pricing of climate-related risks and financial stability, but also to prompt discussion and inform dialogue amongst regulators, policymakers and the industry as a whole.
The report provides disclosure guidance on issues covering governance, strategy, risk management and metrics and targets amongst others.
If you wish to read the report, please do so here.
Law Commission call for evidence
On 27 August, the Law Commission published a call for evidence on intermediated securities in order to identify issues concerning investors and companies for potential future review. The consultation highlights that shares and bonds are increasingly being held through a system of dematerialisation or being held through a chain of intermediaries, and whilst this system has made trading quicker, cheaper and more convenient, it has been the subject of criticism recently over issues of corporate governance and transparency. In addition to this, there is also legal uncertainty over the legal redress available to the investor.
The Law Commission has been asked by the Department for Business, Energy and Industrial Strategy to seek views on issues, including whether and to what extent:
- Ultimate investors find it difficult to secure and/or exercise voting rights, and confirm that their vote has been received and counted
- The current law limits the ultimate investor’s ability to sue anyone in the intermediated securities chain beyond their immediate intermediary
- The insolvency of an intermediary has the potential to cause problems for ultimate investors
- Technology, such as distributed ledger technology, might make it easier for ultimate investors to exercise rights associated with ownership, particularly voting rights
- There are other jurisdictions that provide examples of good practice and particular considerations in relation to the UK’s devolved jurisdictions
If you wish to view the consultation, please do so here.
Alternatively, if you have any comments to make regards the consultation, please get in touch with email@example.com.
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.
FRC Lab Q2 newsletter
The FRC’s Financial Reporting Lab published its newsletter for the second quarter of 2019 in August. The newsletter provides an update on the Labs current projects, which include: Climate and Workforce, Sources and Uses of Cash and Digital Future.
The climate change and workforce reporting projects continue and have seen significant interest from companies and investors. The Lab has held roundtables recently and expects to publish the reports in the autumn.
The sources and uses of cash project aims to help increase the understanding about the generation, availability and use of cash, both in the assessment of management’s stewardship of a company’s assets, as well as supporting analysis of future expectations. The report is also due to be published in the autumn.
If you wish to view the newsletter, please click here.
AIM market update
Early in August, QCA members, Allenby Capital, published an AIM Market update for the months May and June. The report highlighted that the slowdown in fund raising activity experienced on AIM in the first quarter of 2019 further decreased across May and June due to the continued uncertainty associated with Brexit.
Despite this, M&A activity has been plentiful, with 16 AIM companies having been acquired or in the process of being bid for thus far in 2019. As well as this, there were eight new joiners to AIM in May and June. Three of the new joiners consisted of traditional IPOs, two were transfers from the Main Market, two were reverse takeovers and there was one introduction. There were, however, 11 departures, meaning there were 901 companies on AIM at the end of June.
If you wish to read the update, please do so here.
FCA Market Watch
In the August edition of Market Watch, the FCA share their concerns and findings about the control of access to insider information following recent convictions. As well as this, the newsletter highlights the FCA’s recent thematic review of money laundering risks in capital markets.
The newsletter identifies the recent Abdel-Malek case as an example of the risk of non-deal team staff being granted access to inside information not being identified and appropriately mitigated, leading to criminal activity. The FCA expects firms to take appropriate steps to ensure that the risks of handling inside information are identified and mitigated.
To read the Market Watch newsletter, please do so here.
CBI business analysis of no-deal Brexit preparations
The Confederation of British Industry has recently published a report that puts forward recommendations to help with no deal preparations for UK and EU companies. The report is based on a comprehensive study of the existing plans declared by the UK government, European Commission, member states and companies.
The report arrives at three central conclusions, which include:
- The need to escalate preparations as the analysis concludes that the UK government, the European Commission, EU member states and companies are not ready for no deal.
- The CBI has compiled over 200 recommendations, which can have a material impact and reduce the harm of no deal if the preparations are implemented.
- Many no deal mitigations rely on actions by, and negotiations with, the EU.
If you wish to read the full report, 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
At the end of July, our Corporate Governance Expert Group and Financial Reporting Expert Group contributed to the QCA’s response to ESMA’s survey on collection of evidence on undue short-term pressure from the financial sector on corporations.
At the beginning of August, our Corporate Governance Expert Group contributed to the QCA’s response to the BEIS consultation on Corporate Transparency and Register Reform.
To view the response, please click here.
Additionally, the QCA is currently seeking member input on the following consultations:
- ESMA: Impact of the inducements and costs and charges disclosure requirements under MiFID II
- BEIS: Initial consultation on recommendations by the Competition and Markets Authority
- ESMA: Draft Guidelines on disclosure requirements under the Prospectus Regulation
- HM Treasury: Financial Services Future Regulatory Framework Review
- Law Commission: Intermediated Securities
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.