Corporate weekly highlights—2 March 2017

Welcome to the weekly highlights from the Lexis®PSL Corporate team for the week ending 2 March 2017, which provide news updates and a comprehensive list of dates for your diary. This week’s edition features: the FCA’s consultation paper on reforming the availability of information in the IPO process, the FCA’s changes to DTR 2.5 to ensure they comply with ESMA inside information guidelines, the Purposeful Company Task Force’s recommendation for reform of executive remuneration, the McGregor-Smith review on race in the workplace, the FRC’s response to a consultation issued by the Task Force on Climate-related Financial Disclosures, the House of Commons Library’s Briefing Paper on key elements of Great Repeal Bill, and the IoD’s policy paper on navigating Brexit.

Headlines (News updates & analysis)

Equity capital markets

FCA looks to improve information availability in IPO processes

The Financial Conduct Authority (FCA) has proposed a package of measures to improve the timing, sequencing and quality of information being provided to market participants during the UK initial public offering (IPO) process in its Consultation Paper (CP) 17/5, 'Reforming the availability of information in the UK equity IPO process'. It follows on from the FCA Discussion Paper (DP) 16/3: 'Availability of information in the UK Equity IPO process’, which identified some areas of the current IPO process that could be improved. These included: restoring the centrality of an approved prospectus in the IPO process, enhancing standards of conduct throughout the process, and creating the necessary conditions for unconnected IPO research to be produced. DP 16/3 set out three possible models for a reformed IPO process.

With the publication of CP 17/5, the FCA are seeking to balance the views expressed by market participants in proposing a package of policy measures to build on DP 16/3. CP 17/5 proposes reforms, including amendments to the FCA Handbook rules, to ensure that a prospectus or registration document is published, and that providers of ‘unconnected research’ have access to the issuer’s management, before any connected research is released.

After the consultation closes on 1 June 2017, the FCA expects to publish a Policy Statement outlining any Handbook changes later in 2017.

FCA to comply with ESMA inside information guidelines

The FCA has published a policy paper on changes to the Disclosure Guidance and Transparency Rules (DTRs). The changes relate to DTR 2.5, which deals with the circumstances in which issuers may delay the disclosure of inside information. The move follows the Consultation Paper CP16/38.

The Market Abuse Regulation introduced a new regime for the disclosure of inside information and gave a mandate to the European Securities and Markets Authority (ESMA) to issue guidelines on the circumstances in which an issuer may delay disclosure. The final version of these guidelines should be read with Article 17 of the Market Abuse Regulation. The guidelines established a non-exhaustive list of the legitimate interests of issuers to delay the disclosure of inside information and situations in which delaying disclosure of inside information is not likely to mislead the public. To comply with the guidelines, the FCA felt it was necessary to amend DTR 2.5. This was due to overlaps between the guidelines and the provisions of DTR 2.5. The specific amendments made are set out in Annex B to FCA 2017/7.

It should be noted that the FCA’s changes are not intended to extend the scope for issuer non-disclosure.

Corporate governance

Consortium recommends reform of executive remuneration

The Purposeful Company Task Force has issued two reports, which set out recommendations across a range of issues, including pay design, company law, and accounting for purpose.

The policy report contains 22 recommendations across six key policy areas: company law and reporting; accounting for purpose; repurposing the investment management industry; blockholding; finance for purpose; and executive remuneration. Specific recommendations include overhauling company reporting to ensure proper valuation of long term value, simplifying pay with focus on long-term equity, and encouraging a greater flow of equity investment towards purposeful companies.

The executive remuneration report sets out recommendations covering reforming pay design, strengthening board accountability for pay fairness, enhancing executive pay disclosures, and toughening shareholder voting powers. The report concludes that reform of executive remuneration is required to ensure incentives are aligned to long-term contribution, and that pay is better seen as deserved by all stakeholders.

UK GDP could rise £24bn if all workers had equal promotion chances, says review

Recommendations on how employers in the public and private sectors can improve diversity within their organisations have been set out in an independent review by Baroness McGregor-Smith. The review's findings include that UK GDP could increase by up to 1.3% if all UK workers progress at the same rate. The review also found that individuals from black and minority ethnic (BME) backgrounds have a 12 percentage-point gap between their employment rates and those of their white counterparts, at 62.8%, with just 6% reaching top level management positions. Baroness McGregor-Smith sets out a number of recommendations to tackle barriers to BME progression. These include: larger companies publishing a breakdown of their workforce by race and pay band and drawing up five-year aspirational diversity targets; organisations encouraging employees to disclose their ethnicity, senior executives taking accountability for ensuring executive sponsorship for key targets; the government legislating to make publishing data mandatory; the government creating a free, online unconscious bias training resource, and the government developing a guide to talking about race at work.

The Department for Business, Energy & Industrial Strategy's (BEIS) response to the review has also been published, as a number of industry representatives called on the government to take positive action to enact the changes. The response states that the government's actions will include: working with businesses to ensure they have the resources needed to fully embed change within their operations; drawing attention to the importance of effective diversity and inclusion policies in its ongoing conversations with institutional funds; and, carefully monitoring the situation over the coming year and taking necessary action where required. In addition to the report, a new Business Diversity and Inclusion Group has been announced.

Accounts and reports

Climate change disclosures ‘should avoid checklist approach’

The Financial Reporting Council's (FRC) response to a consultation issued by the Task Force on Climate-related Financial Disclosures concludes that a principles-based approach to climate-related disclosures by companies should be adopted. The consultation sought views on recommendations for climate-related disclosures aimed at providing a voluntary framework for companies to follow. While the FRC agrees with such financial disclosures being made, it believes they should not follow a prescriptive 'checklist' approach. This is because it risks companies adopting a 'checklist mentality and boilerplace approach' and compliance may therefore lead to the disclosures of material that obscures information investors actually need. Instead, the FRC believes collaboration between companies, investors and climate experts to develop methodologies is a preferred approach.

Brexit related developments

Briefing paper addresses key elements of Great Repeal Bill

The House of Commons Library has published a briefing paper highlighting what it considers to be the key potential elements of any ‘Great Repeal Bill’ to introduce the major legislative changes required to leave the EU. The elements are the repeal of the European Communities Act 1972 (ECA 1972), the transposition of EU law and the proposed use of delegated powers.

UK must ensure EU free trade deal, says IoD in policy report on navigating Brexit

The Institute of Directors (IoD) has issued a policy report, Navigating Brexit: Priorities for business, options for government. The report identifies three top priorities. Firstly, the government should agree to extend the two-year negotiating period with the EU, if necessary, to get a good trade deal. Secondly, politicians on all sides should rule out a second EU referendum in the next parliament, to reduce uncertainty. Thirdly, businesses should start planning for different outcomes of the Brexit talks now and decide how to maintain and increase trade post-Brexit. If the government does not ensure that there is enough time for a new free trade agreement to be signed with the EU before Great Britain leaves the European Union, the IoD believes that considerable economic turbulence would be caused.

Dates for your diary

Date Subjects covered
10 March 2017 Deadline for national competent authorities subject to ESMA's guidelines on the Market Abuse Regulation for persons receiving market soundings to notify ESMA.
17 March 2017 Deadline for the government's call for evidence seeking views on possible reasons for the increase in limited partnerships and whether changes are needed to the wider framework. Following a recent increase in the number of limited partnerships registered in Scotland in comparison to those registered in England, Wales and Northern Ireland, the government has expressed concerns that some of them are being used for criminal activity. A call for evidence has been launched seeking views on possible reasons for the increase and whether changes are needed to the wider framework.
17 March 2017 Deadline for the European Commission's public consultation into the Capital Markets Union (CMU). The CMU is the EU-wide plan to strengthen capital markets and investment in the long term. Evidence-based feedback and specific operational suggestions are sought.
24 March 2017 Deadline for the government's open call for evidence on the extent to which the identification doctrine is deficient as a tool for enforcement against larger companies.

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