Ashurst Governance and Compliance Update - Issue 24
04 August 2022
IN THIS EDITION WE COVER THE FOLLOWING: |
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The UK Market Abuse Regime 1. Carillion: FCA sanctions the company and key executives for market abuse |
ESG 2. FRC and FCA mark listed companies' TCFD homework |
Economic Crime and Transparency 3. Register of Overseas Entities now in force: further guidance published |
Financial Services 4. The Consumer Duty moves a step closer |
Audit and Corporate Governance Reform 5. FRC consults on funding model for its successor: ARGA |
The UK Market Abuse Regime |
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1. Carillion: FCA sanctions the company and key executives for market abuseThe Financial Conduct Authority has published a Decision Notice for Carillion plc (in liquidation) – formerly one of the government's biggest contractors – together with Decision Notices for three of its former executive directors for breaches of the FCA's Listing Rules and the UK Market Abuse Regulation. SanctionsThe FCA fined the former chief executive officer £397,800, the former finance director (until 31 December 2016) £318,000 and the former finance director (for the subsequent period) £154,400. The three former executive directors have referred their respective Decision Notices to the Upper Tribunal where they will each present their case. Carillion has not referred its Decision Notice to the Upper Tribunal. In view of the FCA's need to balance deterrence against the need to act in the wider interests of creditors, the FCA has imposed a public censure on Carillion rather than a financial penalty. However, if Carillion were not insolvent and in liquidation, the FCA would have imposed a financial penalty of £37,910,000. FactsOn 10 July 2017, Carillion announced an expected provision of £845 million in relation to 58 contracts within its construction business; of this, £375 million related to projects in Carillion Construction Services, which operated Carillion's construction business in the UK. This led to Carillion's share price falling by 39 per cent on the day of the announcement and by 70 per cent within three days. However, Carillion's previous announcements, in particular its trading update of 7 December 2016, its 2016 financial results published on 1 March 2017 and its AGM statement of 3 May 2017 had given no indication to the market that such a provision was likely to be required. Carillion went into liquidation on 15 January 2018. BreachesMisleading and reckless announcementsThe FCA considers that Carillion's previous announcements (December 2016, March 2017 and May 2017) were misleading and were made recklessly. They did not accurately or fully disclose the true financial performance of Carillion. They made positive statements about Carillion's financial performance generally and in relation to its UK construction business in particular, failing to disclose significant deteriorations in the expected performance of Carillion's UK construction business and the increasing financial risks associated with it. For example, the December 2016 trading update referred to Carillion's performance 'meeting expectations' with expectations for 'strong growth in total revenue and increased operating profit' and described Carillion as 'well positioned to make further progress in 2017'. The FCA states that these positive statements were not justified and were made despite the fact that, at a board meeting on the day before the release of the trading update, there had been discussions relating to a possible deterioration in the trading performance of the business in addition to the 2017 budget having been described as 'challenging'. The FCA found that Carillion disseminated information in the announcements that gave false or misleading signals as to the value of its shares in circumstances where it ought to have known that the information was false or misleading, thereby breaching Article 15 of UK MAR (prohibition of market manipulation). By failing to take reasonable care to ensure that its announcements were not misleading, false or deceptive and did not omit anything likely to affect the import of such information, the FCA found that Carillion was also in breach of Listing Rule 1.3.3R (misleading information must not be published). Inadequate procedures, systems and controlsFurther, in the FCA's view, Carillion's systems, procedures and controls were not sufficiently robust, in breach of Listing Principle 1. In this respect, the FCA states that a listed company should have in place procedures, systems and controls that provide clear, consistent and transparent reporting throughout the company. The FCA highlights that Carillion's procedures, systems and controls were considered to be inadequate for the following reasons: (i) significant pressure placed on Carillion Construction Services to meet targets; (ii) lack of awareness and application of Carillion's internal policies; (iii) lack of proper records relating to contract accounting judgements; (iv) inconsistent management and financial information, with inconsistencies not being properly investigated or resolved; and (v) failure to inform the board and the audit committee about the significant financial risks being reported. The FCA also considers that Carillion breached Premium Listing Principle 2 by failing to act with integrity towards holders and potential holders of its shares. Commenting on the Decision Notices, Mark Steward, Executive Director of FCA Enforcement and Market Oversight, highlighted Carillion's failure to take reasonable steps to establish and maintain adequate procedures, systems and controls to enable it to comply with its obligations under the Listing Rules. He added that: 'As a result its true financial position remained hidden over many months and the effects of its collapse were aggravated, causing substantial harm to shareholders and creditors. This is market abuse, and as damaging to market integrity as insider dealing and manipulation, though not often described in this way. It should be'. Last week, the Financial Reporting Council sanctioned KPMG LLP, a former KPMG partner and four KPMG employees in relation to the audit of the financial statements of Carillion for the period ended 31 December 2016. |
ESG |
2. FRC and FCA mark listed companies' TCFD homeworkThe FRC and the FCA have published two reports focused on the reporting of premium listed companies in accordance with the Task Force on Climate-related Financial Disclosures' (TCFD) recommendations and the associated Listing Rules and, in both cases, accompanying guidance. The reports find that in-scope companies have made significant steps forward in the quality of climate-related information provided in their financial reports. Nevertheless, further improvements are still needed. The FRC's thematic report can be found here; and the FCA's here. By way of reminder, for reporting periods beginning on or after 1 January 2021, premium listed commercial companies have been required to include a statement in their annual report which sets out whether they have made disclosures consistent with the TCFD recommendations. More recently the FCA has extended the regime to standard listed issuers for financial periods beginning on or after 1 January 2022; with a similar regime applying to 'large' LLPs and 'large' listed, AIM-quoted and private companies for financial periods beginning on or after 6 April 2022. The FRC's report is required reading for all in-scope entities. The FRC's conclusionsThe FRC reviewed the reports of 25 larger companies potentially more impacted by climate change. It found that companies were able to provide many of the TCFD disclosures expected by the relevant Listing Rule (LR 9.8.6R(8)). Perhaps unsurprisingly, it also concluded that climate-related reporting in financial statements – i.e. the extent to which companies considered climate-related risks in meeting IFRS requirements - showed a significant improvement. However, the FRC also identified several areas where companies need to raise the quality of their disclosures, including:
The report includes examples of good disclosures as well as highlighting areas for improvement and practices to be avoided. The FRC also summarises its expectations against each of the respective Listing Rule and TCFD requirements. The FCA's conclusionsThe FCA undertook its analysis in two parts through:
Unlike the FRC's sample which was, as stated, weighted towards larger companies in climate-intensive sectors, the FCA's analysis considered a range of company sizes and sectors. Accordingly, conclusions differ under some pillars of the TCFD's recommendations. The FCA's quantitative review of compliance concluded that:
As to the FCA's analysis relative to each TCFD pillar:
While the FCA states that it is encouraged by the overall improvement in the completeness and accuracy of disclosures, it has also issued the following reminder of its expectations (of application to both premium and standard-listed issuers):
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Economic Crime and Transparency |
3. Register of Overseas Entities now in force: further guidance publishedWe reported in AGC Update, Issue 23 that the Economic Crime (Transparency and Enforcement) Act 2022 was due to come into effect on 1 August 2022 as to those aspects of it dealing with the Register of Overseas Entities. Since that Update, Commencement Regulations (No. 876/2022) have been made and published and bring into force most of the provisions in Part 1 of the Act. This means that overseas entities which own a relevant qualifying estate have six months within which to either dispose of the property or apply for it to be added to the Register. Failing to act could lead to criminal sanctions against either the company or its officers. An overseas entity disposing of a relevant estate during the transitional period will still need to disclose beneficial ownership information to the Registrar. By way of further update:
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Financial Services |
4. The Consumer Duty moves a step closerThe FCA has published final rules (in PS 22/9) in relation to the new and controversial Consumer Duty requiring financial services firms 'to deliver good outcomes for retail customers'. It has also published supporting guidance. Despite receiving 151 responses to its consultation, the FCA has made very few concessions in its final proposals. Even the biggest change – a delay to the implementation date for 'live' products and services - was for a relatively insignificant three months. You can find our full briefing here. Item contributed by Lorraine Johnston, Partner in our Financial Regulation team. |
Audit and corporate governance reform |
5. FRC consults on funding model for its successor: ARGAThe FRC has published a consultation on the proposed statutory funding model of its successor body: the Audit, Reporting and Governance Authority. The consultation sets out guiding principles for ARGA's overall funding arrangements, the proposed funding model and the groups that would fund different regulatory activities, with the aim of ensuring funding groups are levied proportionately relative to the areas and extent of regulatory oversight to which they are subject. Of note here is the fact that listed companies, large private companies and other Public Interest Entities would fund the cost of regulating corporate reporting, including reporting and audit standard-setting, monitoring and enforcement against directors. Listed companies would also fund ARGA's work in relation to corporate governance and audit committees. It is proposed that contributions would be paid through an annual levy based on market capitalisation, turnover or alternative size measures. Responses to the consultation are requested by 21 October 2022. |
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