Legal development

Ashurst Governance and Compliance Update - Issue 20

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    Audit and Corporate Governance reform

    1. BEIS publishes response to its March 2021 consultation

    Financial reporting 

    2. Covid-19: Financial reporting deadline relaxations come to an end – a reminder

    Narrative financial reporting

    3. ESMA statement: Implications of events in Ukraine for half-yearly financial reports

    4. 30% Club issue guidance on diversity reporting

    Enhancing the effectiveness of the Listing Regime

    5. FCA takes next steps in reforming the Listing Regime – issues for existing listed companies

    6. LSE consults on new Voluntary Carbon Market and changes to Admission and Disclosure Standards

    Takeover Code: Acting in Concert 

    7. Panel consults on amending presumptions on the definition of 'acting in concert'


    8. FRC reports on good practice in audit to assist audit committees

    Audit and Corporate Governance reform

    1. BEIS publishes response to its March 2021 consultation

    The Department of Business, Energy and Industrial Strategy has published its response to the consultation it launched in its March 2021 White Paper: 'Restoring trust in audit and corporate governance'.

    By way of reminder, the stated intention of the White Paper was to 'build trust and credibility in the UK's audit, corporate reporting and corporate governance system, ensure accountability for those playing key roles in that system, and to increase resilience and choice in the statutory audit market'. Precipitated by various corporate failures - Carillion, Thomas Cook, BHS and Patisserie Valerie chief among them, together with long-standing concerns about the lack of competition and resilience in the statutory audit market, the proposals took forward most of the recommendations of three government-commissioned, independent reviews: the Review of the Financial Reporting Council led by Sir John Kingman; the Competition & Markets Authority's Statutory audit services markets study; and the Review of the Quality and Effectiveness of Audit by Sir Donald Brydon.

    The consultation received over 600 responses which perhaps in part explains the time taken for the government to respond. And whilst there was general support for the sentiment underpinning many of the proposals, it is clear that aspects of the detail met with significant opposition, not least due to their potential cost and the impact they might have on the attractiveness of the UK as place in which to invest and do business (thereby running contrary to Lord Hill's review of the UK Listing regime). Consequently, many proposals have either been shelved or watered down, leaving them to be addressed in a 'lighter- touch' way through 'market-based' solutions or 'non-regulatory' interventions in preference to regulation.

    Set out below is a high-level summary of the government's conclusions. We will issue a more detailed update on those conclusions and their implications in due course. Note that the response statement does not set out a precise timetable for what comes next, rather it outlines the actions to be taken, and by whom. Nevertheless, the government does state that it 'is committed to introducing the reforms at a pace that balances the need for action with the time needed for those affected to prepare properly' and to doing so 'proportionately'.

    A new regulator, with new powers

    The Audit, Reporting and Governance Authority (ARGA) will replace the FRC and be constituted with operational objectives to focus on quality, competition and local public audits. It will retain the FRC's statutory duty to promote economic growth and be empowered 'to act decisively where needed, governed both by coherent objectives, set in legislation, and by a clear remit from government. ARGA will be accountable to government, to its stakeholders, and to Parliament'.

    ARGA will have a range of statutory responsibilities and powers that the FRC does not have at present, including formalised responsibility for overseeing the accounting and actuarial professions, a stronger role in auditor registration, and new powers to tackle breaches of company directors’ duties relating to corporate reporting and audit (on which more below). There will be routes to challenge ARGA's decisions through the courts, 'where appropriate'. It will also be equipped to deal with the issues such as those that arose in November 2021 in relation to Liberty Steel – i.e. in cases of exceptional public interest, even if the company concerned is not a public interest entity (PIE).

    The government intends to create ARGA and equip it with powers at the 'earliest possible juncture'. Logically, this must be the first step in seeking to implement the reform package. That said, the government goes on to say that the timescale for this 'and for other legislative measures will depend on the availability of Parliamentary time'. Rather cryptically, it also states that implementation will depend 'on Parliament's agreement' to its proposals.

    In the meantime, the government will review the requirements on existing PIEs (such as listed companies, credit institutions and insurers) to identify potential deregulatory measures that could reduce costs, and will use the legislation it is developing to put any measures in place at the same time.

    Companies in scope and dispensations

    The White Paper argued that larger private companies should fall within the scope of current and proposed regulation given their economic significance. Two options for expanding the definition of PIEs were proposed, neither of which have been taken forward.

    Extending the definition of PIEs

    In summary, the government proposes to create a new category of 'sized-based PIEs' such that:

    • Large private companies with both 750+ global employees and an annual turnover of £750m+ will be PIEs.
    • Companies traded on the Alternative Investment Market or other multilateral trading facilities will be PIEs only if they meet this '750:750 test'. That said, the government also intends to undertake further work with the Financial Conduct Authority, the FRC and the London Stock Exchange to explore whether there is good justification for ARGA to continue certain aspects of FRC scrutiny of all or some companies traded on MTFs even though they will not become PIEs and, if so, on what basis.
    • Limited Liability Partnerships that meet the '750:750 test' will also be PIEs so as to create alignment across the regulatory regime recognising their economic significance.
    Affording PIEs time to prepare

    To ensure that businesses and their auditors have sufficient time to prepare for complying with PIE requirements (for example, businesses ensuring their auditor does not provide excessive or prohibited non-audit services), the government will allow an adequate period between an entity exceeding the '750:750' threshold and being subject to any new requirements. This will be a full annual reporting period as a minimum.

    Note that newly listed companies will not be granted a temporary exemption from the PIE requirements. The government considers that they should have complied with the majority of the requirements when preparing for IPO.

    Groups and subsidiaries

    Where a UK-incorporated parent company prepares consolidated accounts for a group, and that group when aggregated meets the size threshold, then that parent company will become a PIE. Where an entity that is a PIE by virtue of the new size threshold is a subsidiary of a UK-incorporated parent, the parent will also qualify as a PIE. In this regard, the government will consider a mechanism to remove or reduce the risk of duplicative reporting.

    Dispensations for 'size-based PIEs'

    Note that, in line with the government’s commitment to proportionality, it will not require such 'size-based PIEs' to meet all of the same audit requirements as existing PIEs. Thus requirements to have an audit committee, to retender the audit every 10 years, and to rotate auditors every 20 years will not apply to entities that are PIEs by virtue of the new size-based threshold.

    A tiered approach to reporting for all PIEs based on size

    A tiered approach to reporting for all PIEs will be introduced in relation to the new corporate reporting requirements as regards Resilience Statements, Audit and Assurance Policies, the new directors’ statement on fraud measures and the new disclosures about dividends and distributable reserves (each of which are dealt with below). Only PIE companies with 750 or more employees and £750m or more in annual turnover will be required to comply with these requirements even if they are a PIE by virtue of the current definition – e.g. a listed company.

    Internal controls, fraud, dividends and capital maintenance

    To ensure directors could be held sufficiently accountable for the processes that underpin 'true and fair' reporting, the White Paper proposed requiring directors to report on a company’s internal controls and fraud-prevention measures (which many likened to a version of the US Sarbanes-Oxley regime), with auditors providing assurance on the latter. It also set out proposals for strengthening confidence that the law on dividends and capital maintenance is being respected.

    Internal controls and fraud

    In light of consultation responses, the government believes an incremental approach to strengthening the UK’s internal control framework is the appropriate course at this stage. It will therefore invite the regulator to strengthen the UK Corporate Governance Code to provide for an explicit directors’ statement about the effectiveness of the company’s internal controls and the basis for that assessment, and to work with companies, investors and auditors to develop appropriate guidance and establish when assurance would be appropriate.

    PIEs which meet the '750:750 test' will be required to state, as part of the proposed 'minimum content' for the new Audit and Assurance Policy, whether or not they plan to seek external assurance of the company’s reporting on internal controls.

    The FRC will be asked to explore with investors and other stakeholders whether and how the content of the auditors’ report could be improved to provide more information about the work auditors have undertaken on the internal controls over financial reporting. Thus the proposals for a 'SOX-lite' regime have been watered down considerably.

    As regards fraud, the government intends to legislate to require directors of PIEs meeting the '750:750 test' to report on actions they have taken to prevent and detect fraud. Auditor responsibilities in this area will be unchanged.

    Dividends and capital maintenance

    The government plans to strengthen confidence that the law on dividends and capital maintenance is being respected by giving ARGA a new responsibility for issuing guidance in accordance with the Companies Act 2006 on what should be treated as 'realised' profits and losses. It will also require PIEs meeting the '750:750 test' to disclose their distributable reserves (or a 'not less than' figure if determining an exact figure would be impractical or involve disproportionate effort) which itself will be subject to audit. Companies will be 'encouraged' but not required to disclose an estimate of dividend paying capacity within their group.

    These requirements will be set in a broader context by requiring companies to provide a narrative explaining the board’s long-term approach to the amount and timing of returns to shareholders. Directors will also be required to make an explicit statement in the annual report confirming the legality of proposed dividends and any dividends paid in year. Note that the government has decided not to require directors’ assurance that a dividend would not be expected to jeopardise the future solvency of the company over a period of two years.

    Resilience Statements and Audit and Assurance Policies
    Resilience Statements

    To improve the available information about risks faced by significant companies and make the degree of assurance obtained by those companies clearer, the government will introduce a new statutory Resilience Statement which will 'incorporate and build on existing going concern and viability statements'. This will apply to PIEs meeting the '750:750' test.

    The Statement will include a requirement to report on matters considered to be a material challenge to resilience over the short and medium-term, together with an explanation of how a company has arrived at this judgement of materiality. New guidance will be produced to assist in this regard.

    Instead of the five-year mandatory assessment period originally proposed for the combined short- and medium-term sections of the Resilience Statement, companies may choose and explain the length of the assessment period for the medium-term section. Companies will be required to include a description of how resilience planning over the chosen period aligns with the company’s strategy and business investment cycle. If the assessment period is the same as the one chosen in the previous year, the company will need to explain why it continues to be justified. They will also be required to incorporate principal risks and uncertainties within the Statement, perform at least one reverse stress test (as opposed to the originally proposed two), and identify material uncertainties to going concern.

    Audit and Assurance Policies

    A new statutory Audit and Assurance Policy (or 'AAP') requirement will also be introduced and apply to PIEs meeting the '750:750 test'. These will be published every three years but will not be subject to an advisory shareholder vote as originally proposed. Instead companies must state how they have taken into account shareholder views in developing the AAP and whether, and if so how, the views of employees have been considered.

    AAPs will, however, be complemented by an annual implementation report, in which directors (typically through the audit committee) must provide an update of how the assurance activity outlined in the AAP is working in practice. Other mandatory content AAP requirements include:

    • whether, and if so how, a company intends to seek independent (external) assurance over any part of the Resilience Statement or over reporting on its internal control framework;
    • a description of internal auditing and assurance processes, including how management conclusions and judgements are challenged and verified internally;
    • a description of the company’s policy in relation to the tendering of external audit services, including whether a company is prepared to commission non-audit services from its statutory auditor;
    • whether any independent assurance proposed within it will be 'limited' or 'reasonable' assurance (as defined by the FRC) or whether an alternative form of engagement or review, as agreed between the company and the external provider, will be undertaken; and
    • whether any independent assurance beyond the statutory audit will be carried out according to a recognised professional standard.
    Supervising corporate reporting

    ARGA will be tasked with exercising effective oversight of corporate reporting to raise standards and improve the informativeness of company reports. To this end, most of the White Paper’s proposals for strengthening the regulator’s corporate reporting review powers will be taken forward.

    The government intends to ensure that ARGA can direct changes to company reports and accounts, rather than having to seek a court order as is currently the case; it will also grant ARGA powers to publish summary findings following a review as well as correspondence in exceptional circumstances. ARGA will also be able to require or commission an expert review to support its corporate reporting review work. Its powers will extend to cover the entire contents of the annual report and accounts so that ARGA can review elements such as corporate governance statements, directors’ remuneration and audit committee reports, and the CEO's and chairman’s reports.

    The government does not intend to give ARGA new powers to offer a pre-clearance service for aspects of corporate reporting.

    Enforcement of directors' duties

    This is one of the more controversial areas of the reform package given concerns that a new directors' duties enforcement regime may affect the recruitment of non-executive directors and the diversity of company boards.

    Justifying it on the basis of promoting confident investment in UK markets and in individual PIEs, the government intends to give ARGA powers to investigate and, if necessary, sanction directors, including non-executive directors, of all PIEs for breaches of their corporate reporting and audit-related duties and responsibilities. The government states that this new civil enforcement regime will be 'targeted, proportionate and transparent', and directors will only be accountable for a failure to discharge their duties in a way that could reasonably be expected of a person in their position. ARGA will be required to set out what it reasonably expects of PIE directors by way of compliance with their legal duties. Sanctioned directors will have recourse to an independent tribunal should they wish to appeal a decision.

    The government is also considering whether, in exceptional circumstances, ARGA's powers could also be applied to a non-PIE's directors, if doing so was justified by the public interest (for example, if it appears that a large group is structured in such a way so as to frustrate proper scrutiny).

    The new directors’ enforcement regime will not replace existing arrangements for taking action against company directors, for example in respect of offences under the Companies Act 2006 or breaches of the FCA's Listing Rules, Transparency Rules or the UK Market Abuse Regulation. Similarly it will not prevent the Insolvency Service from taking action under the Company Directors Disqualification Act 1986. ARGA’s powers to take civil regulatory enforcement action against PIE directors will work in tandem with those of other regulators, including the FCA, the Insolvency Service and the Serious Fraud Office. ARGA will not have any powers to prosecute offences and will refer relevant cases on to other regulators, for example the Serious Fraud Office or the Insolvency Service. Finally, the government will ensure ARGA's powers complement the Insolvency Service’s existing powers to disqualify individuals from acting as a director of any company for a period of up to 15 years.

    Remuneration – malus and clawback

    The government will also invite the regulator to consult on changing the UK Corporate Governance Code to provide greater transparency about the malus and clawback arrangements that companies have in place in order that remuneration can be withheld or recovered from directors for misconduct, misstatements, and other serious failings (please see our earlier briefing on this issue here).

    The Code already provides that variable remuneration schemes and policies should include provisions that would enable the company to recover and/or withhold sums or share awards from executive directors and specify the circumstances in which it would be appropriate to do so. Not surprisingly then, whilst the majority of investors who responded to the consultation were supportive of this proposal, a number of listed companies and some professional bodies noted that the existing malus and clawback conditions were sufficient.

    Whilst the Code currently leaves it to individual companies to decide what the appropriate triggers should be for operating malus and clawback and how long it should apply, a practice has built up amongst listed companies to apply clawback for two years post-vesting, with standard minimum triggers comprised of gross misconduct and material misstatement of results or an error in performance calculations.

    The government proposes initially to ask the regulator to consult on two changes to the Code: to recommend certain minimum triggers for malus and clawback and that these apply for at least two years after an award is made – i.e. in accordance with market practice.

    The minimum triggers proposed are:

    • material misstatement of results or an error in performance calculations;
    • material failure of risk management and internal controls;
    • misconduct;
    • conduct leading to financial loss;
    • reputational damage; and
    • unreasonable failure to protect the interests of employees and customers.

    These changes would apply only to premium listed companies and would operate on a 'comply or explain' basis. At a later stage, following a review, the government will consider broadening the application of the changes to apply to all listed companies, possibly through the Listing Rules.

    Improving the informativeness and quality of audit

    Responses to the consultation suggested to the government that improvements to current audit standards and practice, driven by ARGA in its role as an 'improvement regulator', are likely to be more effective and targeted than legislative changes. The government will therefore look to ARGA to drive improvements in audit quality, in line with its quality objective. This includes ARGA taking on responsibility for the registration of PIE auditors.

    The government continues to support the Brydon Review’s long-term vision of expanding the future scope and purpose of audit to make it more informative. In the light of consultation responses, it believes that the first stage in doing so will be the successful introduction of the AAP and subsequent development of the market for assuring financial and non-financial information beyond that in the financial statements. The government does not propose to create a legislative framework for this market 'at such an early stage in its development'.

    Rather than trying to create a new professional body for auditors that is independent of the existing accountancy professional bodies, the government will ask professional bodies to improve auditor qualifications, skills, and training in order to help create a more effective and distinctive audit profession.

    The government is not planning to mandate the assurance of Alternative Performance Measures and Key Performance Indicators and will leave it to directors and investors to decide whether specific assurance is necessary through the AAP process.

    The current 'true and fair' standard and current audit liability framework will be retained.

    The government considers that auditors’ existing requirements to identify and report material inconsistencies in directors’ reporting will be sufficient in reporting on directors’ fraud statements.

    Audit committee oversight

    The government intends to take forward the White Paper proposals to give ARGA powers to set new minimum requirements for audit committees of FTSE 350 companies relating to the appointment and oversight of auditors. The regulator will be asked to draft 'clear and concise' minimum standards that do not conflict with current requirements in place for audit committees from the FCA, Prudential Regulation Authority, CMA and in the UK Corporate Governance Code and to consult on the draft standards before they are introduced.

    ARGA will be empowered to monitor compliance with the new requirements, however it will not be given a power to place an observer on an audit committee. Rather, the government believes that an appropriate monitoring system will be possible without this potentially intrusive power through information provided by other means and, where necessary and in limited circumstances, through expert reviews.

    The government does not intend to pursue Sir John Kingman’s proposal that ARGA should be able to appoint the auditor in limited circumstances believing that to do so would risk undermining the independence of the audit committee, would be difficult to implement without a supplementary power to compel the auditor to undertake an audit and would present significant challenges to ARGA's ability to supervise and inspect any such audits independently.

    Finally, the government is taking forward a series of proposals to empower shareholders to engage more meaningfully with audits, particularly in the context of the AGM, and matters affecting audit quality. It also intends to make changes to the regime applying when an auditor leaves office by requiring certain positive statements to be made by the auditor relating to their recent relationship with the company and its audit committee.

    Boosting resilience, competition and choice in the audit market

    To support ARGA’s objectives to promote high-quality audit and effective competition in the audit market, the government has decided to proceed with a package of measures to increase choice, to 'improve resilience' in the audit market for the largest companies, and to enhance professional scepticism. Measures include:

    • A 'managed shared audit' regime, to be introduced on a phased basis. This will give challenger audit firms the opportunity to audit a 'meaningful proportion' of subsidiary audits conducted for FTSE 350 companies. ARGA will be given the power to set the 'meaningful proportion' threshold, giving it flexibility to increase that over time as challenger firms grow in capacity and capability. In recognition of the scale and complexity of certain audits, ARGA will be able to authorise exemptions from the regime.
    • Powers to give ARGA the ability to operate a 'market share cap', either in the event of a significant audit firm collapse or if further intervention is required once the managed shared audit regime is in place.
    • Powers for ARGA to require 'operational separation' of the largest firms, improving governance of the audit practice with a view to promoting greater professional scepticism within multidisciplinary firms.
    • Powers for ARGA to monitor the 'health' of audit firms and to address any concerns around an audit firm’s resilience.
    Financial Reporting 

    2. Covid-19: Financial reporting deadline relaxations come to an end – a reminder

    By way of reminder, the relaxations to the timing of the publication of annual and half-yearly reports for companies subject to the FCA Handbook (and, in particular, Chapter 4 of the Disclosure Guidance and Transparency Rules) come to an end for relevant financial periods ending on or after 28 June 2022. The relaxations also come to an end for AIM companies for relevant financial periods ending after 28 June 2022. More detail can be found in Ashurst Governance & Compliance update, Issue 16.

    Narrative financial reporting

    3. ESMA statement: Implications of events in Ukraine for half-yearly financial reports

    The European Securities and Markets Authority has published a statement addressing the implications of the events in Ukraine on the publication of half-yearly financial reports under IFRS.

    The statement emphasises the importance of useful information that adequately reflects the current and expected impact of Russia's invasion of Ukraine on the financial position, performance and cash-flows of issuers. ESMA also highlights the importance of providing information on the identification of principal risks and uncertainties to which issuers are exposed.

    The statement highlights the main IFRS requirements which may be applicable and sets out ESMA’s expectations regarding disclosures in a number of areas, including: judgements made, significant uncertainties and going concern risks; the impairment of non-financial assets; and impairment of financial instruments and other financial risks. In the statement, ESMA also:

    • Recommends including all relevant information in a single note or providing mapping where different notes address the events in Ukraine. Issuers with operations in, or significant exposure to, markets or commodities affected by the crisis should either explain the impact of the events in Ukraine, or why they have not had a material impact on the issuers' financial statements.
    • Encourages including narrative information for applicable estimates, judgements and assumptions used to determine the future impact of the crisis on the issuer's business, and how the different uncertainties faced affected the estimates made and the strategies undertaken.
    • Suggests that audit committees enhance their oversight role.
    • Notes that its comments apply to reporting in other interim periods in accordance with IAS 34 (Interim Financial Reporting) and to annual financial statements prepared in accordance with IAS 1 (Presentation of Financial Statements).
    • Reminds issuers of their obligation to promptly disclose any relevant material information about the impact of the events in Ukraine in accordance with the Market Abuse Regulation.

    4. 30% Club issue guidance on diversity reporting

    The 30% Club UK Investor Group has published: 'Reporting on Diversity – A guidance toolkit for companies by investors', intended to be used as a 'high-level' reporting framework. It is principally aimed at FTSE 350 companies and includes examples of reporting that illustrate how companies have approached disclosure on their diversity policies, metrics and outcomes.

    The guidance was created:

    •  To establish a shared understanding of what constitutes useful reporting on diversity, so investors can use that information more confidently in their decision-making processes and engagements.
    • To help companies better understand what investors value most in disclosure on diversity and provide insights on how company reporting can be made more effective and comprehensive.

    In the Investor Group's opinion, good diversity reporting has the following qualities:

    • Authentic and strategic. Where there are areas for development, investors encourage honest discourse and how that will be addressed. The more embedded diversity is within the strategy, the better the reporting tends to be. More than anything, investors want to see true accountability from the board and CEO.
    • Quality over quantity. Better reporting does not mean more reporting. Investors want to get a sense of a company's approach to diversity, without having to trawl through lengthy disclosure. Whether companies set out their diversity and inclusion activities in separate documents or integrate them in broader reporting, the information should be clear, concise and easy to find, and the diversity strategy linked to and part of the company's broader strategy.
    • Action-led. Investors want to see tangible evidence of the actions the board is taking to encourage and improve diversity and how it is meeting its objectives or targets. Progress should be reported annually. Boilerplate reporting should be avoided.
    • Explanatory and informative. While there are common data gaps that investors are interested in, such as ethnic diversity, national origin and gender diversity below the board level, data alone is not sufficient. Numbers and quantitative data should be supported with insightful narrative.
    • Flexible but comparable. Building on the base of common metrics currently required by regulation and voluntary targets, developing an understanding of what companies think as being strategically important is useful for investors.

    Examples, intended to highlight useful or innovative approaches to disclosure by companies, are divided into disclosures relating to the following areas:

    • Governance and oversight.
    • Strategy and business model.
    • Training, recruitment and pipeline development.
    • Diversity commitments and data.
    Enhancing the effectiveness of the Listing Regime

    5. FCA takes next steps in reforming the listing regime – issues for existing listed companies

    The Financial Conduct Authority has published Discussion Paper 22/2 which sets out the FCA's vision for potential reform to the way companies list in the UK, with the overarching aims of attracting more high quality, growth companies and giving investors greater opportunities. The Discussion Paper follows on from Lord Hill's UK Listings Regime Review (published in March 2021), a key recommendation of which related to the structure of the listing regime, and FCA Consultation Paper 21/21 - Primary Markets Effectiveness Review (published in July 2021) in which, amongst other things, the FCA commenced a wider discussion on the value and purpose of the listing regime. The Discussion Paper includes the FCA's response to feedback received on the structure of the listing regime set out in the discussion chapter of CP 21/21 and also seeks views on how the UK listing regime could be further reformed.

    Single segment for equity shares in commercial companies

    Central to the reform proposals is the removal of the current division between the standard and premium listing segments and the creation of a single segment for equity shares in commercial companies under which companies would simply be designated as having a 'UK Listing'. This new unified segment would feature a single set of eligibility criteria which would be accompanied by two sets of continuing obligations: a minimum mandatory set and an enhanced supplementary set. In respect of the sponsor regime, the intention is for it to be applied to the single segment in the same way as it currently applies to the premium listed regime.

    Single set of eligibility criteria

    The single set of eligibility criteria, which would aim to negate the perceived 'quality' differential between different issuers, would be based on the current premium listing segment. However, in a bid to broaden access to listing for a wider range of companies, particularly those operating in the tech and bioscience spaces, the FCA is considering removing certain financial eligibility requirements - a three year representative revenue earning track record, three years of audited historical financial information representing at least 75 per cent of the issuer's business and a 'clean' or unqualified working capital statement - and moving to a more disclosure-based regime. Rather than a reduction in standards, the FCA states that this shift in approach should be seen as a move towards a regime where investors are able to consider the characteristics of each issuer on a case-by-case basis. The FCA recognises that these financial requirements might in any event be considered to be important for investors under the new regime, but the reformed regime would allow investors to make this decision.

    Re-categorised continuing obligations: mandatory and supplementary

    Under the proposed single segment regime, it is envisaged that continuing obligations would be re-categorised into two distinct groups: a mandatory set for all issuers and a supplementary set, with issuers deciding at the point of listing whether 'opting-in' to the supplementary continuing obligations would be suitable for them and their prospective shareholders. Obligations under the UK Market Abuse Regulation and the FCA's Disclosure Guidance and Transparency Rules would continue to apply as part of the wider continuing obligations requirements.

    The mandatory set of continuing obligations would consist of requirements founded on transparency and shareholder protection where there might be a divergence in interests as between management or a significant shareholder and ordinary shareholders and would include, amongst others, the control of business rules, the related party transaction rules, shareholder approval for cancellation of listing and pre-emption rights. The supplementary set of continuing obligations would be those premium listing requirements that allow shareholders to have an enhanced role in holding companies to account on an on-going basis, including the controlling shareholder regime, the significant transactions regime (see below for further information on the proposed revisions here) and the independent business requirement.

    Once listed, moving in and out of the supplementary regime would be dealt with similarly to moving across listing segments currently, requiring shareholder approval where appropriate. For the purpose of achieving clarity for investors as to which set of obligations applies to each issuer, issuers would be required to make disclosures in their annual reports. The FCA suggests that this disclosure could also be enhanced by appropriate labelling by trading venues and clear demarcation on the Official List.

    Further, in line with the FCA's objective to remove unnecessary complexity, the FCA is considering removing duplicative eligibility criteria and continuing obligations and instead including an eligibility requirement that the company confirms its ability to comply with the relevant continuing obligations.


    It is envisaged that the single segment would primarily apply to equity shares in commercial companies. A separate listing regime would therefore be retained for other types of issuer currently listed in the standard listing segment such as SPACs, issuers of debt and debt like securities and issuers of depositary receipts as well as for secondary listings of overseas companies.

    Dual class share structures

    The FCA is seeking views on the treatment of dual class share structures (DCSS) in the context of the single segment regime and considers that one possibility would be for the form of DCSS recently introduced to the premium listing segment (under FCA PS 21/22) to be permitted. Whilst noting that this would reduce some of the flexibility present in the standard segment, the FCA states that a more relaxed form of DCSS would run contrary to the high levels of investor protection, corporate governance and transparency which underpin the UK listing regime.

    Premium listing principles

    In line with the objective of maintaining high standards on listed markets, the FCA is consulting on extending the premium listing principles to all companies in the single segment regime.

    Significant transactions

    The FCA highlights the concerns raised in the feedback it received relating to class 1 transaction requirements, including the time and cost involved with preparing a circular and holding a general meeting, which potentially disadvantage premium listed issuers subject to the significant transactions regime as compared with private companies or listed issuers who are not subject to the regime. The FCA is seeking views on whether it would be appropriate to increase the current 25 per cent threshold for class 1 transactions.

    Index inclusion

    Whilst noting that many respondents to CP 21/21 flagged the relationship between the premium listing segment and the FTSE UK series, the FCA states that the setting of index criteria does not fall directly within its jurisdiction and acknowledges that index providers may opt for criteria that require adherence to both mandatory and supplementary continuing obligations or indeed other criteria beyond the listing regime.

    Transitional provisions

    Noting that it would not be in the interests of shareholders of standard listed issuers who were unable to meet the new single segment requirements to be required to delist, the FCA states that it is likely that transitional provisions would be included to allow such issuers to retain their standard listing. Another option would be for standard listed companies wanting to be included in the single segment to undergo an eligibility assessment with the FCA. For premium listed issuers, rather than a wholesale move to the mandatory or mandatory and supplementary continuing obligations, the FCA suggests that a shareholder vote might be an appropriate method to determine whether the supplementary continuing obligations are suitable for the listed company. In this way, the intended flexibility of the new regime would be achieved.

    Sponsor regime

    As set out above, the FCA is proposing that the application of the sponsor regime be extended to all 'listed' companies in the new segment given its importance in maintaining market standards and investor protection. However, the FCA highlights that in view of other potential reforms, such as a revision of the class 1 transaction threshold, the number of instances in which a sponsor would be required post-listing may in fact be reduced. The FCA also explores the scope for improvement in the sponsor regime within the context of the suite of its potential reforms, recognising that there may be some inefficiencies in the current regime.

    Next steps

    The 'discussion period' ends on 28 July 2022. The FCA will then provide feedback and consider whether to issue a consultation paper or whether a further discussion is appropriate. The FCA is continuing to consider its response to feedback relating to removing duplication between admission to the Official List and admission to a trading venue which will be addressed separately.

    6. LSE consults on new Voluntary Carbon Market and changes to Admission and Disclosure Standards

    The London Stock Exchange has published a consultation (Market Notice N12/22) setting out proposals to create a Voluntary Carbon Market for publicly traded carbon funds following a commitment made in November 2021 at COP26.

    The Voluntary Carbon Market is intended as a designation rather than a separate market and would be open to investment funds with securities admitted to the Official List or AIM with an investment policy focused on carbon reduction and/or carbon removal projects expected to yield carbon credits. Other eligibility criteria will apply. The LSE hopes that the market will encourage companies to allocate capital to climate change mitigation initiatives. A new Schedule 8 to the Admission and Disclosures Standards has been created for this purpose.

    The LSE is also proposing the following minor amendments to its Standards:

    • Permitting formal applications to be submitted via a Self Service Portal on its website.
    • Enabling confidential communications with issuers , so that an issuer cannot disclose them without the LSE's consent.
    • Granting the LSE jurisdiction to investigate breaches of the Standards for issues occurring while an issuer had securities admitted to LSE markets, even if, at the time of the investigation, those securities have ceased to be publicly traded.

    Responses to the consultation are required by 11 July 2022 with final rules expected in September 2022.

    Takeover Code: Acting in Concert

    7. Panel consults on amending presumptions on the definition of 'acting in concert'

    The Takeover Panel has published a consultation on proposed amendments to the presumptions on the definition of parties 'acting in concert'. By way of reminder, the term 'acting in concert' is effectively an anti-avoidance concept which prevents certain requirements of the Takeover Code – and the mandatory offer requirement, in particular – from being subverted by one party taking action on behalf of, or in co-operation with, another party. The Takeover Panel has noted that certain of the presumed categories of concert parties have remained largely unchanged since they were originally introduced, and the proposed amendments are therefore designed to reflect the current nature of investment markets, as well as current Takeover Panel practice.

    In particular, the proposed amendments include the following:

    • Raising the threshold for 'associated company' status from 20 per cent to 30 per cent (bringing this figure in line with the threshold at which a company is deemed to control another company under the Takeover Code).
    • Distinguishing between voting rights and equity share capital, and as a result applying different thresholds to determine associated company status, on the basis that the former is not diluted through a chain of ownership whereas the latter (normally) is.
    • Treating a fund in the same way as a company, such that an investment in a fund is equivalent to a company's equity share capital.

    Responses to the consultation are required by Friday 23 September 2022.


    8. FRC reports on good practice in audit to assist audit committees

    The Financial Reporting Council has published 'Key Findings Reported in 2020/21 Inspection Cycle' and 'Good Practices reported in 2020/21 Inspection Cycle'. These reports set out the findings of the FRC's Audit Quality Review team following recent audit quality inspections at the seven largest audit firms and have been published to share key points and good practice with auditors, audit committees and investors.

    By way of reminder, in November 2021, the FRC published a report setting out the key elements that make up a good audit. For a summary, please read Ashurst Governance & Compliance update, Issue 8.

    If you would like to receive future Ashurst Governance and Compliance updates, please contact our Data Compliance Team on

    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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