Governance & Compliance 5: The launch of PISCES

WILL:
Hello, and welcome to the fifth in our series of AGC Ashurst Governance and Compliance Podcasts, where we focus on the latest developments in the world of governance, compliance, and reporting. I'm Will Chalk a partner in Ashurst's London corporate team focused on corporate governance. In this edition, we're going to focus on two issues. First, the latest in relation to sustainability, and in particular what companies should be doing in response. Regular listeners will recall this was the subject of our first podcast. And second, we'll cover the development of a new share trading facility for private companies, PISCES.

I'm delighted to be joined by Becky Clissmann, our very own sustainability council, and Marianna Kennedy, a senior associate in our London corporate transactions team who focuses on the equity capital markets. Thanks both very much for joining me.

Becky, let's turn to you first if that's okay. We've had some big sustainability announcements in the UK in the last week, including three, not one, but three consultations. So just bring us up to speed on what's been happening, if you wouldn't mind.

BECKY:
Thanks, Will. I mean, it's one of those things, isn't it? You wait for one consultation and then three come along at once. So yeah, we've got this package of three consultations, which is the government's first step in developing a UK sustainability reporting framework.

So the first of the consultations is on adopting the International Financial Reporting Standards. That's IFRS standards, to create a UK sustainability reporting standards, so UKSRS. Sorry, we're already into acronym world.

The second consultation is on introducing climate-related transition plan requirements.

And the third is on developing an oversight regime for the assurance of sustainability-related financial disclosures.

So we've been expecting the UKSRS and transition plan consultations for some time now, and both of them are likely to result in further consultations on specific legislation to introduce requirements. But what we've got at the moment is, as I say, these two that look at what should the standards be that the UKSRS [contain], what should they be and whether or not we should be making specific requirements in relation to transition plans.

And just to give you a couple of headlines, in relation to the UKSRS, basically the UK is adopting the international standards pretty much wholesale. There are a few minor changes, including some changes to the transitional reliefs, which people will want to have a look at. But essentially, what we've got is the international standards, and that's quite good because the whole point of those standards was to provide that global baseline. So the UK is in the right club, really.

And then, in terms of the transition plan consultation, the main question that it's looking at is whether or not... They've got various options that they talk about. And one is whether or not companies should be required to do what we call 'comply or explain' disclosure. So have you got a transition plan? If not, explain why not. Or the other option is, should we ask them to develop and then disclose and possibly even also implement a transition plan? So those are the headlines.

WILL:
And let's just be clear, who are we talking about these consultations, these requirements applying to?

BECKY:
Yes, very good question. At the moment, the consultations are not absolutely clear. So they talk about [applying to] large companies and certainly in relation to transition plans, the commitment that the government made back in 2021 was that they would look at large UK companies and financial services companies. They haven't specified yet and they won't do so until they actually publish their package of requirements, but it's very likely that it's going to be people who already in scope of the climate-related disclosures regimes in the UK, whether that's under the company's act or the Listing Rules. So if you are already in scope, you'll probably remain in scope.

WILL:
So let's just dive into a little bit of the detail and addressing a concern that many have. I believe the transition plan is meant to cover an entire group. How much time do you envisage it's going to take to produce one?

BECKY:
Yes, another very good question. Well, that is, of course, it's like asking a bit how long is a piece of string because it will, of course, depend on the complexity of the company involved and the amount of external stakeholders they need to engage, where exactly... , what their business does. So that is a movable feast. But as a whole, if I had to put a figure on it, I'd say in between a year, and possibly two years, and for very large entities, possibly even longer, but these are important strategic documents. It's not just a report.

And really, the magic is in the process. Of course you get a report out there at the end, which is important and that's important for investors obviously, as well as regulators and other stakeholders, but the key value, if you like, to the company is in doing that transition planning process so that they understand what targets they've got, what their implementation levers are, which is basically what actions they'll take to reduce their greenhouse gas emissions, as well as looking at whether they have the right governance processes in place to make sure that those steps are taken and adequately monitored.

WILL:
But no implementation timetable yet?

BECKY:
No. We're very much at the initial phases where the government's gauging the reaction to whether or not they should introduce something and proposing some high level options. And then based on the responses, they'll then curate that into a tighter set of proposals. So I think we can expect those probably now early next year than this year, but no specific legislation at the minute.

WILL:
So a lot to unpack, nevertheless. What can companies be doing now?

BECKY:
Yes, there is a lot to digest. I think the key steps for any company though are make sure you read the consultations and understand where the process is at and obviously read our alerts. Bit of a shameless plug there. We've just put out an alert on all three consultations and obviously we're very happy to follow up with anyone on that.

The next thing companies can do is check that they are in-scope once the legislation is available. So once we know what the UK sustainability reporting standard, once they're endorsed, we'll then have another consultation, which we'll look at who exactly should be making disclosures using those standards. And once you see that piece of draught legislation, then you'll be able to check whether you're in scope.

And then another useful piece of work that companies can be doing if they think they're very likely to be in scope is do a gap analysis between their existing reporting and what is in the UK SRS. Because essentially, you can look at the exposure drafts now and they're not going to change very much. And then you can see what are you doing, what have you got to get to. And for a lot of companies, It is going to be a bit of a change because they're moving from probably just or climate only and maybe some sustainability disclosures in a voluntary report into something that's more formal. So there will be a gap and there will need to think about how they beef that up.

WILL:
Thanks, Becky. So final question, possibly unfair one, but our first podcast was about the Omnibus Directive and a shift in direction there. We've seen, since then, headlines about scrapping CS3D, Corporate Sustainability Due Diligence Directive, MEPs making amendments to CSRD under the Omnibus package. Well, where's the EU now and what are the likely time frames there? And are we fundamentally heading... Is the UK heading…. in a different direction?

BECKY:
Yes, it does feel a bit that way, doesn't it? I think the important thing to say is that throughout the UK consultations, there is a recognition that there is a sort of a potential or certainly a perception that the UK is on a different pathway. And they do repeat quite a few times in all of the consultations that they [the UK SRS] should be aligned with the government's wider ambition of simplifying the UK's corporate and non-financial reporting framework and reducing administrative costs for businesses. So they are very conscious of that. And I think also the UK is seeking to learn from the experience that the EU has had as early adopter of some quite rigorous standards.

In terms of where the EU is at, it's having a bit of a tough time at the moment because we've seen the Omnibus, we've seen the Commission's proposals. We now have the Council's negotiating position, and we're just waiting to see what the MEPs will settle on in terms of their position. At that point, it will then get negotiated between the co-legislators.

What we're seeing is a shift beyond what the Commission had originally proposed. So lots of calls by Council and MEPs for changes, particularly in relation to CSRD, as you said, to scrap it, but also changes in relation to thresholds [to bring companies in-scope] that hadn't been proposed. So there's a lot going on. And the backdrop as well to all of that is revisions to the ESRS by EFRAG who produced the standards. So there is a lot going on.

In terms of the timetable, they're looking to have the Omnibus in... Well, the content Directive, which forms the substantive changes in place by the end of the year with the revised ESRS is obviously the standards that companies would report against under CSRD. They're looking to have that in place shortly thereafter. So really, a lot of moving parts and people need to keep on top of it at the moment.

WILL:
So Mariana, turning to you, what is PISCES in basic terms?

MARIANNA:
Thanks, Will. Let's start with the basics and just following on from Becky's numerous acronyms. PISCES stands for Private Intermittent Securities and Capital Exchange System, much simpler just to refer to 'PISCES'. It's basically a new type of private stock market that allows intermittent trading of existing private company shares using public market infrastructure. So the framework is essentially founded on a 'hybrid model'. It uses some public market features and also has private market features. For example, companies will retain control over the process. On the more practical side of things, firms wanting to run a PISCES platform will need to apply to the FCA, and once approved, they'll be able to run intermittent trading events.

WILL:
So why has it been introduced?

MARIANNA:
Private markets are continuing to grow and companies staying private for longer. The PISCES framework is looking to respond to this by providing companies with an alternative liquidity route for their founders, early stage investors and employees. And it correspondingly makes investment in private companies more accessible, answering to the increasing demand for investors to be able to trade shares in private companies more easily. The idea is to essentially connect existing shareholders wanting to sell shares with a variety of buyers. And ultimately, the aim is to allow private companies to scale up and grow and support the pipeline of future IPOs by bridging that gap between private and public markets.

WILL:
Are there any eligibility criteria for companies that might want to use it?

MARIANNA:
Yes. Companies whose shares aren't admitted to trading on a public market either in the UK or abroad are eligible. So this includes UK private and public-limited companies as well as overseas companies.

WILL:
And once it's up and running, who can buy shares on PISCES?

MARIANNA:
Well, because PISCES shares inherently have a different risk profile to publicly traded shares, the eligible investor base is limited. To begin with only institutional investors, employees of participating companies and investors who meet the criteria to be considered as 'sophisticated' or 'high net worth' investors will be able to buy.

WILL:
Okay, that makes sense. And obviously one of the huge benefits of the public markets is that companies can raise money through them. Is that possible through PISCES?

MARIANNA:
Interesting. Not to begin with. PISCES will only operate as a secondary market facilitating the trading of existing shares to start with.

WILL:
So when it comes to trading, do the companies themselves determine the frequency of the trading events, if you want to call them that?

MARIANNA:
Yeah, and just as a little bit of background, PISCES has been described as employing a 'private plus' model, essentially leveraging and enhancing private market practice. And in line with this, a PISCES company will be able to determine the frequency of its trading windows, whether that's quarterly, bi-annually, annually, thereby providing liquidity at specific intervals.

And PISCES companies will also have discretion to determine who's permitted to buy the shares subject to certain FCA and market operator requirements, as well as the ability to set floor and/or ceiling prices for their PISCES shares. And just on this point, the concept of a PISCES company retaining a significant degree of control over the process is essential to this model.

WILL:
One of our favourite topics is obviously market disclosure. What regime are PISCES companies under here?

MARIANNA:
Well, it's a good question, and again, reflective of this 'private plus' mindset, disclosures only need to be made ahead of each trading window. And disclosures are only made available within a private perimeter. That means they only go to those entitled to access a relevant PISCES trading event.

Critically, disclosures aren't disseminated publicly, unlike the public markets. In terms of what needs to be disclosed, PISCES companies will be required to disclose certain core information, and that constitutes, amongst other things, a business overview, a management overview, certain financial information, information on a PISCES company's shares and information about any employee share schemes. That's the general disclosure requirement, which will be supplemented by a requirement for PISCES operators to have arrangements in place that essentially facilitate the provision of additional information to the extent those core disclosures don't provide sufficient for investors.

Interestingly, the FCA isn't mandating a 'sweeper model' for additional company disclosures, which would basically have required a PISCES company to disclose any other information known to it that it considered relevant to investors. This standard was considered to be overly burdensome for private markets. So again, we see that private plus mindset coming through.

WILL:
Other key features we should draw out?

MARIANNA:
I think the tax advantages are worth highlighting. PISCES transactions will be exempt from stamp duty and SDRT. So that's aligning with a position on AIM.

And the government has also confirmed that it'll legislate to allow employers to amend existing enterprise management incentives and company share option plan contracts to include PISCES as an exercisable event. And that will ensure employees can continue to benefit from the tax advantages on their share options.

WILL:
This seems to be happening at a fair old pace. What happens next?

MARIANNA:
Practically, prospective PISCES operators can now submit an application for a PISCES approval notice. And interestingly, the London Stock Exchange has confirmed that it's looking to launch its own platform using the PISCES framework in the near future.

First trading on PISCES platforms is expected later this year, so we'll have to watch this space to see the extent to which the regime will be embraced by companies, operators, and investors alike.

However, it's certainly another concrete step in the UK capital markets reform process and very much reflects the political and regulatory will to reinvigorate our capital markets.

WILL:
Marianna, Becky, thanks so much for joining me, and thank you for listening to our podcast. You can find links to relevant publications on the subject matter we've just discussed in the show notes. Our regular Ashurst Governance and Compliance updates cover issues like these and more. Let us know if you'd like to be added to the distribution list.

There are more episodes to come, many of which will develop the issues in our board priorities for 2025, which you can find on our website.

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Bye for now.