Legal development

Ashurst Governance & Compliance Update - Issue 39

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    Audit and Corporate Governance reform

    1. Regulations containing 'size-based PIE' reporting requirements published

    The Department for Business & Trade has published the draft Companies (Strategic Report and Directors' Report) (Amendment) Regulations 2023, together with an explanatory memorandum. The regulations form part of the government's reform agenda to 'Restore trust in audit and corporate governance' (for an overview, see AGC update, Issue 20) and amend the Companies Act 2006 to introduce new reporting requirements for 'size-based' public interest entities or 'PIEs', being public or private UK-incorporated companies with 750 or more employees and an annual turnover of £750 million or more.

    New disclosures

    In-scope companies will be required to publish the following new disclosures:

    1. An annual resilience statement, to be included in the company's strategic report, in which the company must explain the steps it is taking to build or maintain its business resilience over the short, medium and long term, including by:

    • summarising the company’s strategic approach to managing risk and building or maintaining business resilience, including how risk and resilience are considered within the company’s business planning and investment cycle, and within relevant internal governance processes;
    • describing the principal risks that the directors consider could provide a threat to the company’s operational or financial resilience over the short to medium term, and explaining how such risks are being managed;
    • summarising why the directors have decided to adopt the going concern basis of accounting (that the company will be able to meet its liabilities as they fall due over an assessment period of 12 months or more), including any significant judgements or mitigating action taken to reach this conclusion;
    • providing a directors’ assessment of the company’s prospects over the medium term (with this period to be defined and explained by the company), including consideration of the likelihood that the company will be able to continue in operation and meet its liabilities as they fall due over that period. The FRC has confirmed that companies which are also subject to the UK Corporate Governance Code will meet the Code's recommendations by making this statement in relation to going concern as part of their reporting on Resilience;
    • reporting on an annual reverse stress test, which identifies a combination of adverse circumstances that could cause the company’s business plan to become unviable, and identifies any mitigating action put in place in light of the exercise;
    • summarising any long-term trends or factors which could threaten the company’s business model or operations, and any plans the directors may have in place, or be considering, in response.

    2. An annual distributable profits figure, to be included as a note to the accounts, and an annual distribution policy statement, to be included in the directors’ report, requiring the following information:

    • disclosure of distributable profits figure – this must state the company’s accumulated realised profits, or at least a minimum figure for such profits if it would involve unreasonable expense or delay to calculate the total accumulated realised profits; and
    • distribution policy statement – this must explain the company’s policy on the amount and timing of distributions to shareholders over the short and medium term (including dividends and share buy-backs), and any risks or constraints to the implementation of that policy.

    3. An annual material fraud statement, to be included in the directors’ report, providing a summary by the directors of:

    • their assessment of the risks of material fraud occurring at the company (that is, fraud on a scale or of a nature that could influence the investment decisions of shareholders); and
    • the main measures in place and any new steps taken to prevent and detect material fraud.

    4. A triennial audit and assurance policy statement, to be included in the directors’ report, and to include:

    • a description of the company’s internal audit and assurance capabilities, and its plans for obtaining internal assurance over information in the company’s annual accounts and reports over the next three years (including any voluntary disclosures);
    • an explanation of whether the company plans any external (third party) assurance of any information in its annual accounts and reports (beyond the annual statutory audit) over the next three years; and
    • an annual update covering how the audit and assurance policy has been implemented (and potentially updated) in the year


    The draft regulations were laid in Parliament on 19 July 2023 and will be debated in Parliament in due course. The regulations are expected to apply to financial periods of in-scope PIEs with securities admitted to trading on UK regulated markets beginning on or after 1 January 2025. The regulations will apply to all other in-scope PIEs, such as private companies and those with securities admitted to trading on AIM, a year later.


    The DBT has published a helpful overview of the regulations which provides an overview of their scope and application, including in relation to groups of companies, and which describes the purpose underpinning each of the requirements. The FRC plans to consult separately on detailed non-statutory guidance about good practice in complying with the reporting statements; this is expected to be published by the end of 2023 or in early 2024.

    2. Ethnicity Pay Gap reporting will not be mandated

    The government has published its response to the consultation it launched in 2018 which focused on whether and, if so, how companies should report information on ethnicity pay, potentially on the same basis as is currently required in relation to gender pay.

    Its conclusion is that, while ethnicity pay gap reporting can be a valuable tool to assist employers, it may not always be the most appropriate mechanism for every type of employer. Therefore, as set out in the 'Inclusive Britain' report, which was published in March 2022, the government will not be legislating to make ethnicity pay reporting mandatory at this stage. Instead, it has produced guidance to support employers who wish to report voluntarily. This was published in April 2023 and covered in AGC update, Issue 34.

    3. FRC audit quality report

    The FRC has published its annual inspection and supervision results of the largest audit firms (BDO, Deloitte, EY, Grant Thornton, KPMG, Mazars and PwC). Overall, 75 per cent. of audits inspected were good or required limited improvement (compared to 71 per cent. in 2021 and 67 per cent. in 2020).

    The number of audits considered good or requiring limited improvement has improved on the previous two years. The FRC believes that a combination of the FRC’s increasingly assertive supervision approach, as well as investment from the firms in their systems, people and capabilities to improve audit quality, is starting to have a positive impact. However, the picture is mixed, with some 'challenger' firms receiving particularly pointed criticism as to the standard of their work.

    Individual firm reviews and a link to a podcast discussing the results, can be found here.

    Equity capital markets

    4. FCA launches webpage dealing with Russian and Belarusian sanctions confirmations

    The FCA has published a webpage setting out the requirement for issuers to provide a Russia and Belarus sanctions confirmation when making a vetting, guidance or listing application request. The confirmation will be required in the context of:

    • eligibility reviews;
    • review and approval of a document under the Listing Rules or Prospectus Regulation Rules;
    • requests for individual guidance; and
    • applications for the admission and amendment of securities to the Official List and for any issuance programme cases.

    The webpage also includes the form of confirmation. The confirmation must be provided by the issuer, sponsor or advisor and provided for every transaction. No variations to the specified wording will be accepted. The confirmation must be provided as a signed and dated letter on headed paper, or an email which clearly identifies the person providing the confirmation, their role, and the date.

    ESG and sustainability

    5. IFRS Foundation publishes comparison of IFRS S2 with the TCFD Recommendations

    Following the recent publication of the ISSB Standards on climate related disclosures, the IFRS Foundation has published a comparison of the requirements in IFRS S2 Climate-related Disclosure and the Task Force on Climate-related Financial Disclosures (TCFD) Recommendations.

    The requirements in IFRS S2 are consistent with the four core recommendations and eleven recommended disclosures published by the TCFD. As a result, companies that apply the ISSB Standards will meet the TCFD recommendations and do not need to apply the TCFD recommendations in addition to the ISSB Standards.

    There are additional requirements in IFRS S2. These include the requirements for companies to disclose industry-based metrics, to disclose information about their planned use of carbon credits to achieve their net emissions targets and to disclose additional information about their financed emissions.

    The Financial Stability Board has asked the IFRS Foundation to take over responsibility for the monitoring of progress on companies’ climate-related disclosures from the TCFD.

    6. IFRS Sustainability Disclosure Standards endorsed by international securities regulators

    The International Organization of Securities Commissions (IOSCO) has announced its endorsement of the ISSB Standards.

    The announcement follows the recent release of the ISSB’s first two Standards, IFRS S1 and IFRS S2 (see AGC Update, Issue 38) and sends a strong signal to jurisdictions around the world that the ISSB Standards are fit for purpose for capital market use, enable pricing of sustainability-related risks and opportunities, and facilitate enhanced data collection and analysis.

    IOSCO is now calling on its 130 member jurisdictions—capital markets authorities that regulate more than 95 per cent. of the world’s securities markets—to consider how they can incorporate the ISSB Standards into their respective regulatory frameworks to deliver consistency and comparability of sustainability-related disclosures worldwide.

    The IFRS Foundation has released a document outlining how the ISSB and the IFRS (working closely with IOSCO) plan to support implementation of the standards, and the steps already taken.

    Separately, the FRC has issued a call for evidence to inform the proposed endorsement of the ISSB Sustainability Disclosure Standards in the UK. The due date for submissions is 11 October 2023.

    7. Climate-related metrics and targets disclosures – FRC issues thematic review

    The FRC has published a thematic review, assessing the quality and maturity of climate-related metrics and targets disclosures.

    The review considers the TCFD metrics and targets disclosures of twenty UK premium and standard listed companies operating in four sectors (materials and buildings, energy, banks, and asset managers) covered by TCFD sector-specific supplemental guidance included in the TCFD Implementing the Recommendations of the Task Force on Climate-Related Financial Disclosures document (the ‘TCFD Annex’). Four of the companies reported against the TCFD recommendations for the first time, with the others providing a second year of mandated TCFD reporting.

    In undertaking the review, the FRC considered four overarching questions:

    • Has companies’ climate-related metrics and targets reporting improved since last year?
    • Are companies adequately disclosing their plans for transition to a lower carbon economy, including interim milestones and progress?
    • Are companies using consistent and comparable metrics?
    • Are companies explaining how their targets have affected the financial statements?

    The review sets out the FRC's cross-sector and sector-specific observations and its expectations of companies’ future reporting. Better practice disclosures are provided throughout the review.

    The main areas where the FRC believes there is room for improvement include:

    • The definition and reporting of company-specific metrics and targets, beyond headline ‘net zero’ statements.
    • Better linkage between companies’ climate-related metrics and targets and the risks and opportunities to which they relate.
    • The explanation of year-on-year movements in metrics and performance against targets.
    • Transparency about internal carbon prices, where used by companies to incentivise emission reduction.
    • Better linkage between climate-related targets reported in TCFD disclosures and ESG targets disclosed in the Directors’ Remuneration Report.

    The review also found that explanations of how climate targets affect financial statements still need improvement. Boilerplate language on climate being 'considered' provides little insight on impacts.

    8. FRC Lab publishes report on ESG data distribution and consumption

    The FRC Lab has published a report: 'ESG Data Distribution and Consumption' in which it examines how investors obtain and use ESG data on companies, and highlights what actions companies can take to facilitate this.

    The report concludes that there is an ecosystem which is heavily dependent on third parties for the production of comparable ESG data, and while investors use companies' annual reports for qualitative context, most ESG metrics and data come from third-party providers who compile, standardise and derive data from company reporting. Investors occasionally use direct company data to check third-party accuracy.

    The report contains a list of actions to facilitate how investors and data providers consume ESG data, including:

    • Understand the audiences for a publication and target it accordingly.
    • Focus on what is relevant to the company in the annual report and provide further information in datasheets.
    • Ensure a coherent and interconnected narrative backs up the data.
    • Be clear on the scope of the data.
    • Provide clarity and consistency of location of information year-on-year.
    • Align timing of ESG reporting as much as possible to that of the annual report.
    • Simplify content and keep it meaningful to facilitate data collection, including digital scraping.
    • Aim for comparability of data presentation.

    The report also includes a set of questions for boards to ask to understand more about the company's major shareholders and their ESG data requirements.

    Digitisation of securities

    9. Digitisation Taskforce publishes interim report seeking feedback on intermediated securities

    The Digitisation Taskforce has published an interim report which provides recommendations for government and seeks feedback in relation to improving the UK's intermediated system of share ownership.

    The aim of the Taskforce, which is chaired by Sir Douglas Flint, is to drive forward the full digitisation of the UK framework by eliminating the use of paper share certificates.

    The potential recommendations in the interim report are:

    • Introducing legislation and changing company articles of association to stop the issuance of new paper share certificates.
    • Introducing legislation to require the dematerialisation of all share certificates at a future date to be determined.
    • Consulting issuer and investor representatives on the approach and timing for the identification of ultimate beneficial owners (UBOs).
    • Requiring intermediaries to adopt common technology that enables them to respond to requests from issuers about UBOs.
    • Requiring intermediaries offering shareholder services to be fully transparent about client access and charges.
    • Where intermediaries offer access to shareholder rights, providing baseline services and an efficient and reliable two-way communication channel between issuers and the UBOs.
    • Following digitisation of certificated shareholdings, the industry should (with legislative support) discontinue cheque payments and mandate direct payment to the UBO’s nominated bank account.

    In relation to the potential recommendations the interim report raises a series of questions to which the Taskforce is seeking responses.

    The Taskforce welcomes feedback on the report and on the questions posed by 25 September 2023.

    10. Consultation launched on the first Financial Market Infrastructure Sandbox

    HM Treasury has published a consultation on the first financial market infrastructures (FMI) Sandbox, the 'Digital Securities Sandbox' or DSS, which will enable digital services to be tested and ultimately adopted across financial markets.

    The DSS would enable firms to set up and operate financial market infrastructures using innovative digital asset technology, performing the activities of a central securities depository (specifically notary, settlement and maintenance), and operating a trading venue, under a legislative and regulatory framework that has been temporarily modified to accommodate digital asset technology.

    These activities will be performed in relation to existing security classes (which could either be digitally native issuances or digital representations of existing securities). Limits will be put in place for participating entities, which can be increased as progress is made. These limits will reflect the ability of a participating entity to meet requirements and manage risks.

    These will be real-world market activities and assets. The intention is that any digital securities issued, traded, settled and maintained via entities in the DSS will be able to interact with wider financial market activities (e.g. for collateral posting or repos), where this can be done in compliance with existing legislative and regulatory frameworks.


    Authors: Will Chalk, Partner; Rob Hanley, Partner; Marianna Kennedy, Senior Associate

    The information provided is not intended to be a comprehensive review of all developments in the law and practice, or to cover all aspects of those referred to.
    Readers should take legal advice before applying it to specific issues or transactions.


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