Ashurst Governance and Compliance Update Issue 12

FCA Handbook changes now in force – impact on annual reporting and AGMs

As part of its 'Primary Markets Effectiveness Review (CP21/21)', the Financial Conduct Authority proposed various minor amendments and simplifications to its rulebook, confirming many of the changes in December 2021. More detail on both the proposals and final policy position can be found in Ashurst Governance and Compliance updates Issue 3 and Issue 9 respectively. The changes are now in force.

Of relevance to annual reporting and AGMs in 2022 are the following:

1. Dissemination of information (DTR 6.3.5 R): An exemption has been created from the requirement to publish regulated information in unedited full text subject to the fulfilment of certain conditions. This means that the information contained in an annual financial report which would have previously been required to be published in unedited full text - in short, the information which would also be required in a half-yearly financial report - need not be published in this way if:

• the regulated information has been filed with the FCA by uploading it to the National Storage Mechanism (NSM) in unedited full text;
• the information has been communicated to the media; and
• the communication  (i.e. company announcement) contains a statement that the information is available in unedited full text on the NSM.

Announcements relating to the publication of such information must continue to indicate the website from which the information can be found.

2. Copies of documents to be sent to the FCA (LR 9.6.1 R and 9.6.2 R): Outdated references to the requirement for companies to submit two copies of documents to the FCA, including annual reports and certain resolutions passed at an annual general meeting, have been removed. This is on the basis that submissions have for some time now been made electronically. To that end, the rules have also been updated to refer to uploading such documents to the NSM as opposed to being forwarded to the now defunct Document Viewing Facility.

3. Amendments to constitutions and amendments to or approval of share schemes (LR 13.8.10 R, 13.8.11 R and 13.8.14 R): Companies proposing changes to constitutions (predominantly, articles of association) and share schemes or seeking the approval of a new share scheme must either include the full terms of those changes or a summary of them in their circular to shareholders. Those who opted to include a summary were required under the old rules to, amongst other things, make the full terms available for inspection at a physical place in or near the City of London. The revised rules instead require the full terms to be made available through the NSM from the date on which the circular was sent to shareholders.

AGM notice and announcement templates should be amended accordingly.

Proposed changes to the Financial Promotion regime under consultation

HM Treasury has published a consultation paper outlining five proposed revisions to the financial promotion exemptions for high net worth (HNW) individuals, sophisticated investors, and self-certified sophisticated investors.

HM Treasury is of the view that while financial promotion exemptions are important and should be retained (especially to facilitate capital raising for SMEs), thresholds for exempt investors should be recalibrated to reflect investor's experience or their ability to absorb losses, revisions are required to help ensure exempt investors understand the regulatory protections they are losing, and revisions are also required to reduce the risk of firms mis-using the exemptions (as is the case with some firms, particularly those which are unauthorised).

The five proposals aimed at achieving this are:

1. Increasing the net income threshold to £150,0000 and the net assets threshold to £385,000 for HNW individuals.
2. Dropping the word 'certified' from the HNW individual exemption.
3. With respect to self-certified 'sophisticated' investors, removing the ability to rely on an investment in an unlisted company in the previous two years as an indicator of sophistication. The test relating to an individual being a director of a company with a turnover over a certain threshold has been retained but it is proposed that the turnover threshold itself be increased to £1.4m (from £1m).
4. Introducing a requirement for firms to believe on reasonable grounds that an investor meets the HNW or sophisticated investor definitions and to document how they have come to this conclusion.
5. Updating HNW and self-certified sophisticated investor statements so that they are clearer, and enable more investor engagement.

Responses to the consultation should be submitted by 9 March 2022.

For more information, please read our Financial Regulation team's briefing which can be found here.

Separately, the Financial Conduct Authority has published a consultation containing proposals aimed at 'Strengthening our financial promotion rules for high risk investments, including cryptoassets' (CP22/2). The proposals reflect the FCA witnessing a rapid growth in the proportion of consumers holding high-risk investments since the start of the pandemic, with many of those investments driven by 'social or emotional factors'.

Changes are proposed in the following areas:

• The classification of high-risk investments. The focus here is to address the fact of certain marketing restrictions being difficult to navigate and understand.
• The 'consumer journey' into high-risk investments. The FCA is concerned that too many consumers are just 'clicking through' and accessing high-risk investments without understanding the risks involved.
• The role of firms approving and communicating financial promotions. The FCA wants to strengthen the role of 'section 21 approvers' of financial promotions as they play an important role in enabling unauthorised issuers of high-risk investments to reach consumers. The proposals would require that an approver of a qualifying promotion would need to take 'reasonable steps' to monitor the promotion's continued compliance with the rules. Approvers would also be required to collect an attestation of 'no material change' from the promoter every three months during the lifetime of the promotion.
• Cryptoassets. HM Treasury has confirmed that it intends to extend the scope of the financial promotion 'perimeter' to include qualifying cryptoassets. Consequently the FCA is focusing on how it will categorise these assets once they are brought into the financial promotion regime.

For more information, please read our Financial Regulation team's briefing which can be found here.

Responses to the consultation should be submitted by 23 March 2022.

[Item contributed by Lorraine Johnston, Partner in our Financial Regulation team.]

Mandatory climate-related disclosures - final regulations published

As set out in Ashurst Governance and Compliance update - Issue 7, in-scope companies and LLPs will be required to make TCFD-aligned disclosures in their annual financial reports for financial periods beginning on or after 6 April 2022.

By way of reminder, the disclosure requirements will apply to entities with more than 500 employees and which are:

• currently required to produce a non-financial information statement (NFIS), being UK companies which have either transferable securities admitted to trading on a UK regulated market (such as the main market of the London Stock Exchange), or are banking companies or insurance companies;
• UK registered companies with securities admitted to AIM;
• UK registered companies which are not caught by the preceding categories, which have a turnover of more than £500m; and
• LLPs which have a turnover of more than £500m.

By way of update, The Companies (Strategic Report) (Climate-related Financial Disclosure) Regulations 2022 (SI 2022/31) have now been published together with an explanatory memorandum. The regulations are in substantially the same form as the draft version published in October. They will come into force on 6 April 2022.

The Limited Liability Partnerships (Climate-related Financial Disclosure) Regulations 2022 have also been published together with an explanatory memorandum. These regulations will also come into force on 6 April 2022.

Anti-deforestation supply chain due diligence and associated reporting moves closer

As part of the government's commitment to combat illegal deforestation, the Environment Act 2021 prohibits the use in the UK of certain commodities associated with illegal deforestation. To ensure that 'forest risk commodities' have been produced in compliance with local laws, large businesses will need to undertake adequate due diligence of their supply chains in relation to each 'forest risk commodity' that they use. While the Environment Act received Royal Assent on 9 November 2021, a date is yet to be set for the requirements to come into force. A consultation on the due diligence and associated reporting obligations closes on 11 March 2022, with detailed guidance to be provided in due course. We will produce a further update when more information is available.

What commodities do the requirements apply to?

Exactly what constitutes a 'forest risk commodity' will be set out in forthcoming regulations, however, it is generally understood to mean commodities which are associated with wide-scale deforestation. The consultation lists an initial seven key commodities which the government has identified as the cause of such deforestation: cattle (beef and leather), cocoa, coffee, maize, palm oil, rubber and soy. The production of timber and timber-related products are regulated separately.

The government is proposing to introduce legislation in phases to prioritise the commodities associated with the highest risk of deforestation before expanding the scope to a larger number of commodities.

Who are the requirements likely to apply to?

The legislation will focus on 'regulated persons'. According to the proposals, a 'regulated person' is an organisation carrying on commercial activities in the UK which exceeds a turnover threshold in the previous financial year, or a subsidiary of such an organisation. The current consultation seeks views on what the turnover threshold should be, proposing that it should be set at either £50 million, £100 million or £200 million. The thresholds may differ for different commodities.

What are the due diligence requirements?

A regulated person must establish and implement a due diligence system which will enable it to:

• identify and obtain information about the commodity;
• assess the risk that relevant local laws were not complied with in relation to that commodity;
• mitigate that risk; and
• annually report to the regulator on the actions that it takes to establish and implement the due diligence system.

The consultation proposes that through the due diligence process businesses should "eliminate risk or reduce risk to as low as reasonably practicable".

The purpose of the reporting requirement is to enable a regulator to identify areas for further scrutiny and to use resources efficiently to investigate possible cases of non-compliance. The consultation states that the 'due diligence report will be distinct from a business' corporate reporting under the Companies Act [2006]' which it is assumed to mean that it will not form part of a company's annual financial report. Nevertheless, information from the report will be made public 'to support further accountability' and will need to include a range of information including on the regulated commodities and derived products used, the sourcing risk assessment and risk mitigation strategies, and the manner in which the due diligence exercise has been carried out.

What are the consequences of non-compliance?

An enforcement regime will be set out in secondary legislation. The consultation proposes that both criminal and civil sanctions will apply. At this stage the proposals do not provide details on the potential sanctions, but do propose a potential variable monetary penalty of up to £250,000 in line with other regimes, such as the Ivory Act.

[Item contributed by Joanna Fox, Associate in our Environment team]

FRC publishes three year plan

The Financial Reporting Council has published its 'Draft 3-Year Plan' for the period to 2025 in which it sets out its priorities and intended expenditure for 2022 to 2023 together with a summary of its expected overall costs and headcount growth for 2023 to 2025. It is based on the assumption that the government will implement its reform proposals as set out in 'Restoring trust in audit and corporate governance' and require the FRC to become the Audit, Reporting and Governance Authority or 'ARGA'. A notable priority for 2022 to 2023 includes aligning the FRC's programmes to monitor and evaluate both the UK Corporate Governance Code and UK Stewardship Code

Companies House Direct and WebCHeck services to close in 2022

Companies House has announced that its Companies House Direct and WebCHeck services will close later in 2022. No precise date has been given. Users are instead directed to 'Find and update company information' as this is considered now to be Companies House's primary search function, including for records of dissolved companies.