Legal development

Ashurst Governance & Compliance Update – Issue 43

Ashurst Governance & Compliance Update – Issue 43

    Audit and Corporate Governance reform

    1. Audit reform put on pause and Governance Code changes significantly scaled back

    As predicted in AGC Update, Issue 42, the King's Speech did not set out plans for an Audit Reform Bill in the next session of Parliament. This follows the withdrawal of draft regulations which required enhanced corporate reporting by a new category of 'size-based' public interest entities.

    Not bringing forward this legislation means that various measures, previously seen as core to the government's agenda of restoring trust in audit and corporate governance, are on hold. In practice the establishment of the successor body to the Financial Reporting Council, namely the Audit, Reporting and Governance Authority, the empowerment of ARGA with the ability to hold directors to account for breach of their financial reporting duties and measures to create more competition in the audit market will not be enacted for the foreseeable future, if at all. 

    In light of these developments, and following feedback on its consultation on proposed changes to the UK Corporate Governance Code (see AGC Update, Issue 37), the FRC has issued a 'policy update'. This states that it intends to take forward only a small number of the original 18 proposals set out in the consultation and to stop development of the remainder. Specifically:

    • The FRC will implement a small number of changes that streamline and reduce duplication associated with the Code that were 'overwhelmingly supported' by stakeholders in the interests of reducing burdens.
    • The significant changes which will also be taken forward relate to proposals on internal controls – i.e. providing a stronger basis for reporting on, and evidencing the effectiveness of, a company's internal control framework during a reporting period. The FRC states that these will now be 'more targeted' and 'proportionate' so as to ensure that the approach in the Code is clearly differentiated from the 'much more intrusive approach' adopted in the US. The FRC will give companies more time to implement the changes without being specific as to how much more. By way of reminder, the revised Code was due to apply to financial reporting periods beginning on or after 1 January 2025.
    • The FRC will not take forward proposals relating to the role of audit committees on environmental and social governance issues and modifications to existing Code provisions around diversity, over-boarding, and Committee Chairs engaging with shareholders.
    • Given the withdrawal of the 'size-based PIE' enhanced reporting requirements, proposals relating to an audit and assurance policy and resilience statements will also not be pursued.

    The FRC intends to publish the updated Code in January 2024.

    In a further policy shift, given concerns about how guidance associated with the Code can have unintended effects on businesses, investors and their advisers, the FRC's Stakeholder Insight Group will be given a remit to ensure the right balance is struck in that guidance between supporting effective governance and reducing unnecessary burdens. By way of reminder, the Insight Group’s membership consists of a mixture of investors, report preparers, advisors and related membership bodies. The Group will report on this additional remit directly to the FRC CEO.

    2. Views sought on general regulatory landscape

    The government has published a call for evidence seeking views on the general regulatory landscape in the UK. This builds on the introductory report, Smarter Regulation to Grow the Economy, published in May 2023. 

    The Smarter Regulation programme across government - led by the Department for Business and Trade - has three core pillars:

    • Minimising regulatory burden and future-proofing regulations.
    • Making regulation a last resort, not a first choice.
    • Ensuring a well-functioning landscape of regulators.

    The call for evidence does not focus on any particular sector or regulator, but rather asks for feedback on any regulator or regulatory framework outside of financial services within the UK. Particular areas of focus include:

    • How easy it is to navigate the landscape of regulators and understand what their objectives are.
    • The speed with which regulators make decisions and whether they have the right balance of skills to deliver effectively.
    • Whether the focus of regulatory authorities is proportionate.
    • How regulatory authorities are governed, and how well they deliver outcomes and communicate their decisions.

    Feedback should be provided by 7 January 2024. 

    3. FRC to strengthen auditor reporting requirements

    The FRC has launched a consultation to strengthen auditor requirements to detect and report material misstatements from non-compliance with laws and regulations and to clarify instances when auditors should report such breaches, and other significant matters, to the relevant regulators.

    The changes seek to enhance the useability and informativeness of an audit and provide greater assurance to users of financial statements that potential material misstatements have been properly assessed by the auditor.

    Specifically, the FRC is consulting on strengthening both ISA (UK) 250 Section A and ISA (UK) 250 Section B.

    The FRC proposes an effective date for the changes for audits of financial statements for periods beginning on or after 15 December 2024. Earlier adoption would be permitted.

    Responses to the consultation should be submitted by 12 January 2024.

    4. QCA publishes revised Governance Code 

    Earlier today, the Quoted Companies Alliance published the 2023 version of its Corporate Governance Code. This is free to members and on sale to others. Accompanying guidance is only being released to QCA members for the time being. By way of reminder, the QCA Code is principally aimed at small and mid-cap companies and is used by the majority of companies admitted to AIM. We will publish an overview of the changes made to the Code and the implementation timetable in due course.

    Company law reform  

    5. Economic Crime and Corporate Transparency Act 2023 receives Royal Assent

    The government recently enacted the Economic Crime and Corporate Transparency Act 2023 (ECCTA).

    The Act introduces a broad package of measures to tackle economic crime more effectively, including fundamental reforms that will expand the role and powers of the Registrar of Companies and modernise Companies House operations. An identity verification regime for new and existing directors, LLP members and persons with significant control, together with other changes to improve corporate transparency, will affect how every UK corporate entity is formed and administered. 

    ECCTA widens the scope of corporate criminal liability, creating a new offence of failure to prevent fraud committed by employees or agents that will apply to large organisations. The Act also expands the common law identification doctrine to allow for the attribution of criminal liability to companies where 'senior managers' commit certain economic crimes 

    Our briefing note on ECCTA is here.

    Directors' duties 

    6. Directors’ duty to consider creditors’ interests -  Stephen John Hunt v Jagtar Singh [2023] EWHC 1784 (Ch) 

    The English High Court recently considered the point at which the directors' duty to consider the interests of creditors (the creditor duty) arises. The High Court held that where a company is faced with a claim in relation to a current liability of such a size that its solvency is dependent on successfully challenging that claim, then the creditor duty arises if the directors knows or ought to know that there is at least a “real” prospect of the challenge failing.

    The judge distinguished the Supreme Court's decision in BTI 2014 LLC v Sequana SA and others on the basis that the company in that case had been solvent at the time the creditor duty was said to have arisen. By contrast, this case involved a situation where the company was substantially insolvent throughout the relevant period taking into account the liability which was the subject of the claim. 

    The judge emphasised that the point at which the creditor duty arises does not necessarily mean creditors' interests become paramount at that time or that the directors would be exposed to liability if they took actions which did not necessarily maximise the return for creditors. However, the case highlights that directors need to be much more aware of their obligations towards creditors once the solvency of a company comes into question.

    Artificial Intelligence  

    7. Boards must act to prevent the risks from AI

    According to the Chartered Governance Institute UK & Ireland (CGI), directors must act quickly to ensure arrangements are in place to take advantage of the developing technology around artificial intelligence and overcome the issues arising from its use.

    Effective governance for AI is paramount, with the main goal being to foster AI adoption characterised by consistency, transparency, accountability and openness. The CGI suggests Boards will need to develop a governance framework for AI that sets out clear roles and responsibilities, as well as policies and procedures for managing AI risks and opportunities. This framework should be regularly reviewed and updated to reflect changes in the business and the AI landscape.

    Financial and Narrative Reporting

    8. Government seeks views on Scope 3 emissions reporting 

    The Department for Energy and Net Zero has published a call for evidence on:

    • the costs, benefits and practicalities of Scope 3 greenhouse gas emissions reporting to help inform the government’s decision on whether to endorse the ISSB standards in the UK; and
    • the current Streamlined Energy and Carbon Reporting (SECR) framework as part of which companies are required to disclose their Scope 1 and Scope 2 emissions but in relation to which Scope 3 emissions disclosure is largely voluntary.

    By way of reminder, the GHG Protocol classifies a company’s emissions into:

    • Scope 1 emissions. These are the direct emissions from owned or controlled sources;
    • Scope 2 emissions. These are the indirect emissions from the generation of purchased energy; and
    • Scope 3 emissions. These are all indirect emissions, not included in Scope 2, that occur in the value chain of the reporting company.

    Matters on which views are sought include:

    • The ISSB’s rationale for including Scope 3 disclosures within IFRS S2, and the wider implications of the possible approach to Scope 3 reporting.
    • How long organisations will need to create the capability to prepare Scope 3 information.
    • How investors would use Scope 3 information and its anticipated impact on investment decisions, including the size and types of company where Scope 3 data would be particularly valuable.
    • How SECR reporting could be streamlined.
    • Whether current SECR requirements target the correct businesses, and whether consistent reporting requirements should apply regardless of whether the reporting entity is quoted, unquoted or an LLP.

    The FCA recently published Primary Market Bulletin 45 in which it covered the implementation of the ISSB standards for listed companies – see AGC Update, Issue 41. The ISSB's inaugural standards for sustainability-related disclosures include requirements for entities to report their Scope 1, Scope 2 and Scope 3 GHG emissions.

    9.  FRC Lab publishes report on materiality

    The FRC Lab has published a report on materiality in connection with information in a company's annual report and accounts. The report contains a toolkit to help companies apply a 'materiality mindset', divided into the following sections: 

    Thinking about investor needs and decision-making

    • The FRC spoke to investors to understand what core information they look for and how they use it for decision-making. It has distilled these views into a toolkit to help companies understand investor decision-making.

    Taking a holistic approach to materiality

    Companies and their advisers told the FRC that materiality is typically considered through three separate lenses:

    • Quantitative financial thresholds – typically assessed as a set threshold for correcting errors and including disclosures about significant transactions;
    • Qualitative financial aspects – generally an informal understanding of ‘what’s important’ to the company that frames narrative reporting; and
    • Sustainability-related information – a focused review on sustainability-related issues, typically collecting multiple stakeholder viewpoints and mapping these on a matrix.

    Further insights on how to take a holistic approach to materiality can be found here.

    Embedding a materiality mindset

    • The FRC spoke with companies and advisors about what they found helpful when reporting. To aid companies, the Lab has collated the following tips on how to embed a materiality mindset.

    10.  ESMA common enforcement priorities for 2023 annual reports 

    The European Securities and Markets Authority has published a public statement setting out the common enforcement priorities for the 2023 annual financial reports of companies listed on markets in the European Economic Area.

    The priorities for IFRS financial statements include climate-related matters and the macroeconomic environment.  For non-financial statements, the priorities include disclosures relating to Article 8 of the Taxonomy Regulation, disclosure of climate-related targets and Scope 3 emissions.  

    Issuers are expected to start, as soon as possible, ad hoc transition projects to implement the new reporting requirements under the Corporate Sustainability Reporting Directive and European Sustainability Reporting Standards. For our overview of CSRD, click here.

    11.  European Commission call for evidence in relation to rationalisation of reporting requirements 

    The European Commission has launched a call for evidence in relation to the rationalisation of reporting requirements.

    In particular, it seeks:

    • Indications of areas where inefficient requirements are particularly problematic, with quantitative data on the burden induced by them.
    • Concrete ideas for rationalisation, modernisation or optimisation, such as eliminating redundant requirements, adjusting reporting frequency, proposing options for digitalisation, making better use of other data sources, or other possible efficiency gains (without undermining policy objectives or standards of conduct and protection).

    The call for evidence is open for feedback on the Commission’s ‘Have Your Say’ portal until 28 November 2023.

    The Commission states that, based on the results, it will prepare concrete rationalisation plans for 2024 and thereafter, and will work towards a full repository of reporting requirements with a view to monitoring their relevance and performance, and with the aim to reduce their burden by 25 per cent.


    12.  ESMA report on disclosures of climate-related matters in financial statements 

    The European Securities and Markets Authority has  published a report on disclosures of climate-related matters in financial statements 

    In the report, ESMA aims to assist issuers in providing more robust disclosures and improving consistency in how climate-related matters are accounted for in financial statements drawn up in accordance with IFRS. 

    ESMA expects issuers and auditors to take this report into account when considering how to assess and disclose the degree to which climate-related matters play a role in the preparation and auditing of IFRS financial statements. 

    MAR and Equity Capital Markets

    13.  FCA publishes observations on market soundings and guidance on market abuse

    The FCA has published Market Watch No. 75 in which it shares its observations about market soundings and provides guidance on what firms can do to minimise the risks of insider dealing and unlawful disclosure. 


    By way of reminder, market soundings are interactions between issuers and investors which help determine interest in a transaction before its announcement. By allowing issuers to gauge investors’ opinions on possible transactions to help set their price, size and structure, market soundings aim to support the proper functioning of financial markets and price discovery. In overview, if the disclosure of the inside information falls within the market soundings regime, as set out in the UK Market Abuse Regulation (UK MAR), the disclosure will be deemed to be made in the normal exercise of a person’s employment, profession or duties and will therefore be exempt from the prohibition on unlawful disclosure of inside information. The market soundings regime provides formalised arrangements for issuers and their advisors acting as Disclosing Market Participants (DMPs) to disclose inside information legitimately; these include producing standardised scripts for communications with Market Sounding Recipients (MSRs) during market soundings and obtaining an MSR's consent to receive a market sounding and inside information.

    Under UK MAR, MSRs must independently assess for themselves if they hold inside information from the market sounding which would prohibit them from trading. In addition to the information which the DMP discloses at any stage, this assessment should include any other information the MSR has - for example, when an issuer has previously held regular and similarly-sized funding rounds executed by the same advisory firms. 

    FCA observations

    Recently, the FCA has observed cases where MSRs have traded the relevant financial instruments during the time period after a DMP has initially communicated with them or sought their consent to receive the sounding and inside information, but before the DMP has disclosed the inside information. Whilst the DMPs did not, during the initial communication, disclose the identities of the financial instruments or the nature of the proposed transaction and the likelihood of its taking place, the MSRs were still able to identify those details using other information available to them. Frequently, this has occurred where there has been a delay between the DMP requesting the MSR’s consent and the MSR providing its consent. The FCA's view is that, in such cases, the MSRs have provided rationales that are not easily reconcilable with the circumstances of the trading - for example, an MSR selling a financial instrument immediately after a DMP has sought its consent to receive inside information, then buying back the same quantity of the financial instrument in the subsequent placing does not reconcile with ‘rebalancing a portfolio’.

    The FCA notes that it is possible that MSRs might have other information available to them that allows them to identify, with reasonable confidence, the financial instruments referred to before they consent to receiving and protecting the inside information in the market soundings. MSRs who have determined the identity of the security in a market sounding before agreeing to receive the inside information should assess whether they possess inside information before trading. The FCA highlights that, in these circumstances, MSRs remain subject to the prohibitions in both UK MAR and the Criminal Justice Act 1993 on using that information. The market sounding regime only provides protections against the unlawful disclosure of inside information by the DMP and not to insider dealing by the MSR. 

    Minimising the risks of insider dealing and unlawful disclosure 

    To minimise the risks of insider dealing and unlawful disclosure, the FCA advises that, amongst other things: 

    • DMPs should carefully consider and assess the standardised information which they intend to provide to MSRs in their initial communications and requests for consent. It should be made clear at the start of a market sounding that the communication is a market sounding. This gives the MSR the opportunity to decline and reduces the risk of disclosing any inside information arising from the market sounding.
    • MSRs should consider putting in place the 'gatekeeper' arrangements previously highlighted by the FCA (including appointing particular staff as the first point of contact) and ensure that staff who receive and process market soundings are properly trained.
    • Time intervals between the DMP's initial communications and consent requests and the MSR giving its consent should be minimise.

    The FCA concludes by noting that firms and their employees should be aware of the breadth of information that it can request and which is available to it when reviewing trades, communications and documentation relating to soundings. The FCA will intervene when it has reason to suspect behaviour detrimental to confidence in, and the fairness of, UK markets. 

    Authors: Will Chalk, Partner; Rob Hanley, Partner; Vanessa Marrison, Expertise Counsel; Shan Shori, Expertise Counsel; 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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