Directors' Knowhow is a monthly article which highlights changes and updates of relevance to small and mid-size quoted companies.
QCA publications and policy 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 report: ESG in Small & Mid-Sized Quoted Companies - Perceptions, Myths and Realities
In November, the QCA released its report on ESG in small and mid-size quoted companies.
The study was conducted by Henley Business School for the QCA and Downing LLP and examines ESG adoption and practice in small and mid-cap companies in the UK. The findings are based on 30 in-depth interviews and are supported by survey responses from 100 companies and 50 investors.
Within the report, there are a number of questions that companies and investors can ask themselves with regards to their ESG policies and communication.
To read the report, 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.
PEG additional flexibility to end
On 20 November 2020, the Pre-Emption Group (PEG) confirmed that the additional flexibility on non-pre-emptive issuances, offered in response to the COVID-19 pandemic, will end on 30 November 2020. This means that the PEG’s recommendation for investors to apply additional flexibility in considering issuances of shares on a non-pre-emptive basis will revert back to its normal level from 1 December 2020.
As such, the PEG expects companies to revert back to seeking approvals for issuances of a maximum of 10% of their issued share capital (5% for corporate purposes and 5% for specified acquisitions or investments).
The PEG’s recommendation that investors, on a case-by-case basis, consider supporting placings by companies of up to 20% of their issued share capital, was announced on 1 April 2020 and extended in September.
If you wish to read the statement, you may do so here.
OTS CGT review – first report
The OTS have published their first report on their review of Capital Gains Tax, which you can find here. The report sets out the OTS's view of a framework of policy which the Government could consider to simplify the design of CGT, remove distortions and make it easier to understand and navigate. Broadly, the report covers four interlinked areas:
- Rates and boundaries
- The report finds that the disparity in rates between CGT and Income Tax distort business and family decision-making. To correct this distortion, the Government should consider more closely aligning CGT rates with Income Tax rates.
- Annual Exempt Amount
- The current level of the Annual Exempt Amount can distort investment decisions and should be lowered. In addition to this, the Government should explore requiring investment managers and others to report CGT information to taxpayers and HMRC to make compliance easier for individuals.
- Interaction with lifetime gifts and Inheritance Tax
- The Government should think about removing the capital gains uplift on death, consider a rebasing of all assets and extend Gift Holdover Relief to a broader range of assets to make it easier for individuals to give assets away during their lifetime.
- Business reliefs
- The OTS believes that Business Asset Disposal Relief is mistargeted and should be replaced. In addition, the OTS considers that Investors Relief should be abolished.
In addition, the OTS notes that the evidence on the effectiveness of tax-advantaged share schemes in promoting economic growth is mixed. Furthermore, the OTS questions whether tax-advantaged share schemes are the most cost-effective approach to helping people save or encouraging long-term share ownership, as many lower paid employees do not have access to them.
The QCA engaged with the OTS on multiple occasions and through several different means during their consultation period and is concerned by some of the findings of the report. The QCA will continue its work with the relevant Government departments in order to ensure that the interests of small to mid-size quoted companies are protected.
Primary Market Bulletin 31
In November, the FCA published its 31st edition of their Primary Markets Bulletin. This edition highlights the FCA’s approach to assessing eligibility and listing applications for cannabis-related companies; updates on the implementation of the European Single Electronic Format; Coronavirus-related temporary policy measures on corporate reporting; and recent changes to the Prospectus Regulation.
Also included within the Bulletin is reference to an article on the FCA’s work on listed companies’ compliance with the FCA’s rules relating to corporate governance disclosures. The FCA have reviewed the disclosures from a sample of issuers across different listing segments and categories. In conducting the review, the FCA has identified certain areas where disclosures could be improved. This includes:
- Encouraging premium listed issuers to carefully consider whether, when stating how they have applied the Principles of the Code under LR 9, they have done so in a manner which enables shareholders to evaluate how the Principles have been applied.
- Encouraging premium listed issuers to consider including specific details of how the company has applied the Principles in that accounting period.
- Disclosures appeared to be boilerplate for certain companies in that they did not change from year-to-year.
- The quality of Board Diversity Reporting across the sample of entities was low.
HMT Financial Services Statement
In November, Rishi Sunak, Chancellor of the Exchequer, issued a statement setting out the ambitions for the future of UK financial services. Broadly, the statement covers four overarching areas. A summary of the different areas is provided below:
- Positioning the UK at the forefront of green finance
o To help the UK realise its 2050 net zero target and other environmental objectives, the Government will issue its first Sovereign Green Bond in 2021. In addition, the Chancellor also announced the introduction of more robust environmental disclosure standards. The UK will become the first country in the world to make Task Force on Climate-related Financial Disclosures (TCFD) aligned disclosures across the economy by 2025.
- Extending the UK’s leadership in financial technology
o In order for the UK to continue functioning as a pioneer in financial services and remain at the forefront of technological innovation, the government will look to implement several initiatives.
- Equivalence and openness
o To provide certainty to firms and international partners, the Chancellor announced the publication of a guidance document setting out the UK’s approach to equivalence with overseas jurisdictions.
- The UK’s approach to regulation outside the EU
o The Government will undertake a series of reviews to ensure that regulation enhances the UK’s attractiveness to businesses. As part of this, the Chancellor has set out plans to boost the number of new companies who want to list in the UK. This includes establishing a taskforce that will propose reforms to the UK listings regime to attract the most innovative and successful firms and help companies access the finance they need to grow.
To read the statement, please click here.
FCA on share trading obligation
At the beginning of November, the FCA confirmed its approach to the share trading obligation (STO) at the end of the Brexit transition period if mutual equivalence is not agreed. In doing so, the FCA confirmed that only mutual equivalence would mean that firms could continue to satisfy STO obligations at trading venues in both the EEA and the UK.
The FCA will use the Temporary Transitional Power (TTP) to avoid disruption and allow firms to continue trading all shares on EU trading venues and systematic internalisers. Use of the TTP means that UK market participants will continue to be able to access any EU trading venue from the end of the implementation period.
To read the press release, please click here.
FRC on climate change reporting
On 10 November, the FRC released its review of climate change reporting. In its review, the FRC concludes that corporate reporting needs to improve to meet the needs and expectations of investors and other stakeholders. The FRC supports the introduction of global standards on non-financial reporting and encourages public interest entities to report against the Task Force on Climate-related Financial Disclosures (TCFD) recommended disclosures.
The key findings of the FRC’s review includes:
- Evidence of climate considerations influencing business models and company strategy is limited
- It is unclear how the progress of some companies’ climate-related goals have been achieved
- An increasing number of companies provide narrative reporting on climate-related issues
- Consideration and disclosure of climate change matters in the financial statements is behind narrative reporting
- Audits reviewed indicated that auditors need to improve their consideration of climate-related risks when planning and executing their audits
- Investors support the TCFD framework, but also expect to see disclosures regarding the financial implications of climate change
If you wish to view the review, you may do so here.
Law Commission intermediated securities response
In November, the Law Commission published its scoping paper on intermediated securities following the responses they received to their 2019 call for evidence. The scoping paper analyses the law underlying intermediated securities with the concerns of market participants and provides possible solutions to these concerns.
The QCA submitted a response to the call for evidence last year (available here) and is encouraged to see several mentions of the concerns we raised. In particular, we outlined our concerns regarding the complications surrounding the exercise of investors rights, such as the right to vote and communicate with an investee company, which have obvious implications for corporate governance. We are pleased to see that the Law Commission has proposed the creation of a new obligation for intermediaries to arrange for an investor to receive information, attend meetings and vote.
IA Principles of Remuneration
On 16 November, the Investment Association published a revised version of its principles of remuneration for 2021. The main changes to the principles are in relation to pensions, non-financial performance measures, post-employment shareholding requirements and the deferral of bonuses.
In particular, the approach to pensions is as follows:
- Companies should have a credible action plan to align incumbent directors’ pension contributions with the majority of the workforce by the end of 2022
- Any new remuneration policy that does not state that any new executive director appointed will have their pension contribution set in line with the majority of the workforce will result in a red top on the remuneration policy
- Any new executive director or director changing role whose pension contribution is not aligned with the level of the majority of the workforce will result in a red top on the remuneration report
- Where the remuneration committee has not disclosed a credible action plan to reduce the director’s pension contribution to the majority of the workforce rate by the end of 2022, IVIS will red top the remuneration report
If you wish to view the Principles of Remuneration for 2021, please click here.
FRC announces company reporting expectations
On 12 November, the FRC published its annual end of year letter to CEOs, CFOs and Audit Committee Chairs setting out its reporting expectations for preparers of reports and accounts. The letter covers what disclosures should be made to understand the impact of particular events on the company’s position and performance.
This year’s letter is of particular significance as a result of the COVID-19 pandemic, and, given that is likely that this will continue into 2021, this will present additional challenges for finance teams and auditors. As such, the FRC encourages boards to carefully consider whether they should lengthen their reporting timetables for 2021 by making use of the extensions to reporting deadlines.
If you wish to read the letter, please click here.
ISS Benchmark Policy Updates
Following their consultation, Institutional Shareholder Services (ISS) have released their Benchmark Policy updates for 2021. An overview of some of the key updates are provided below:
- Director overboarding – a more lenient view may apply to overboarding for directors serving on boards of less complex companies.
- Board gender diversity – ISS will recommend against the nomination committee chair (or other directors) where the board of a company in the FTSE 350 does not comprise at least 33% women. For AIM and FTSE SmallCap companies, with a market capitalisation over £500 million, ISS will recommend against the nomination committee chair (or other directors) where there is not one woman on the board.
- Remuneration – adding particular attention to the extent to which executive pension contributions are aligned with those available to the wider workforce.
To view the updates, please click here.
IA position on climate change
In November, the Investment Association published its climate change position paper which represents the stance of the UK’s investment management industry. The position paper includes seven commitments from the industry. This includes:
- Engagement with investee companies on climate-related disclosures
- Working with pension fund clients to help them meet their climate-related disclosure requirements
- Development of investment managers’ TCFD disclosures
- Supporting the improvement of sustainability-related disclosures at fund-level
- Linking with advanced initiatives to support Disclosure of Paris-Alignment of Portfolios
- Supporting the FCA-PRA Climate Financial Risk Forum work
- Supporting the creation of investable opportunities
To read the position paper, please click here.
FRC on need to improve cash flow statements
The FRC has published a review of corporate reporting in relation to IAS 7 (Cash flow statement) and the liquidity disclosure requirements in IFRS 7 (Financial Instruments: Disclosures). The FRC continues to identify errors in cash flow statements and this review examines many of the issues faced in their preparation.
The review also addresses the disclosure of liquidity risk and provides recent examples of good reporting companies should find helpful, particularly in light of COVID-19. The FRC finds that there has been an improvement in liquidity risk reporting, including linkage to viability statements and going concern disclosures, in reports and accounts published since the outbreak of the pandemic.
To read more, please click here.
BEIS/FRC letter on accounting and auditing
The Department for Business, Energy and Industrial Strategy and the FRC have issued letters to audit firms and companies setting out changes to the UK’s corporate reporting framework from 1 January 2021. The letter sets out the UK framework for audit and reporting at the end of the transition period.
If you wish to view the letters, please click here.
Aquis market maker incentive scheme
In November, the Aquis Stock Exchange (AQSE) launched a market maker incentive scheme, which is designed to boost liquidity and improve the functioning of the AQSE market for growth stocks. Under the scheme, participating market makers will offer two-way prices, in retail size, for 50% of stocks in the Apex segment of the AQSE Growth Market. Market makers qualifying for the scheme will be awarded warrants convertible into AQSE equity. This opportunity is open to the top five firms each year, with the best performers receiving a larger percentage. Over the three-year term of the scheme, market makers will have the opportunity to get equity up to 19.9% in AQSE.
More details of the scheme are available 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.
LSE 1,000 companies to inspire Britain
1000 Companies to Inspire is London Stock Exchange Group’s celebration of some of the fastest-growing and most dynamic small and medium-sized enterprises (SMEs) in the UK and Europe. As well as identifying 1,000 companies, the annual reports examine in detail the opportunities and challenges facing SMEs and looks at the sectors and trends that will shape the future of the British and European economies.
If you wish to see the report, please click 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
On 9 November, the QCA responded to the Office of Tax Simplification’s call for evidence on their review of capital gains tax. The QCA’s Share Schemes Expert Group and Tax Expert Group contributed to the response to the consultation.
To view the response, please click here.
The QCA is seeking views on the below consultations:
- Lord Hill: Call for Evidence – UK Listings Review
- The call for evidence seeks to stimulate debate about how we can encourage deeper capital markets and improve the flexibility and proportionality of our regulatory system in order to support growth and innovation.
- Treasury Committee: Future of Financial Services Inquiry
- The inquiry will examine how financial services regulations should be set and scrutinised by Parliament, as EU directives will cease to govern new rules and regulations.
- HM Treasury: Financial Services Future Regulatory Framework Review Phase II Consultation
- This consultation considers how the regulatory framework for financial services needs to adapt to be fit for the future, in particular to reflect the UK’s new position outside of the EU.
- Takeover Panel: Condition to Offers and the Offers Timetable
- The consultation proposes changes to the Code relating to conditions and the offer timetable, such as enabling the timetable to accommodate longer timeframes relating to authorisations and regulatory clearances.
- FRC: Revised auditing standard for the auditor’s responsibilities relating to fraud
- ​​​​​​​This consultation has been published in response to the concerns raised in Sir Donald Brydon’s review of the quality and effectiveness of audit and seeks to address these by providing further clarity on the auditors’ obligations and enhance the requirements for the identification and assessment of risk of material misstatement due to fraud.
- FRC: The Future of Corporate Reporting
- ​​​​​​​This Discussion Paper sets out a new principles-based framework for corporate reporting and seeks to stimulate conversation about what the future of corporate reporting should look like.
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.
This section provides information on any upcoming events the QCA may be holding or relevant events that members may be interested in.
FRC/BEIS webinar on Brexit transition
The Department for Business, Energy & Industrial Strategy (BEIS) and the Financial Reporting Council (FRC) will be hosting a joint webinar on Brexit on the latest developments and implications for stakeholders.
Details for the event can be found here.
BEIS webinar on Brexit (Accounting and Audit framework)
The Department for Business, Energy & Industrial Strategy (BEIS) is holding a webinar to provide the audit and accounting sector and businesses preparing accounts with information on the actions that they need to take.
Details for the event can be found here.