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19 July 2019

Corporate Law Update

In this week's update: ESMA consults on replacements for the CESR prospectus content recommendations, ESMA updates its Prospectus Regulation Q&A, a consultation on guidance for board risk committees, a consultation on changes to the Modern Slavery Act and a few other items.

ESMA proposes new guidelines to replace CESR recommendations

The European Securities and Markets Authority (ESMA) is consulting on draft guidelines for how issuers can comply with the disclosure requirements in the new EU Prospectus Regulation, which will apply in the UK from 21 July 2019.

If adopted, the new guidelines would replace the current recommendations issued by the former Committee of European Securities Regulators (CESR) (known informally as the “CESR recommendations"), which provide guidance on disclosures under the EU Prospectus Directive.

The proposed new guidelines generally follow the content and order of the CESR recommendations, although there are some changes and they are framed as formal guidelines, rather than recommendations. In particular:

  • The CESR recommendations on “selected financial information” (20-26) will not be carried forward, as this information is no longer required under the Prospectus Regulation.
  • At this point in time, the CESR recommendations relating to specialist issuers (128-145) are not being converted into guidelines and so will remain in place.
  • There will be new guidelines on working capital statements, capitalisation and indebtedness for credit institutions and insurance undertakings, designed to reflect their business models.
  • Some of the other CESR recommendations will not be carried over, as they are now dealt with by legislation or ESMA’s prospectus Q&A or are not compatible with the new regime.

ESMA has asked for comments by 4 October 2019. We will provide a more detailed update on the new guidelines when they are formally adopted.

ESMA updates its Prospectus Regulation Q&A

ESMA has published an updated version of its Q&A on the new EU Prospectus Regulation, which will apply in the UK from 21 July 2019.

ESMA has added 25 questions to the Q&A. 22 of these new questions carry over content from ESMA’s existing Q&A on the EU Prospectus Directive (which will continue to apply to prospectuses produced under the old regime until they expire).

There are two new questions relating to distributions of securities by financial intermediaries, including where the intermediary is distributing is own securities (and not those of another person).

In the last question, ESMA has confirmed that an issuer may continue a “bridging offer” begun with a base prospectus approved under the Prospectus Directive regime by issuing a new base prospectus under the new Prospectus Regulation regime. However, it will need to produce new final terms annexing a revised summary of the individual issue, which should be prepared under the new regime.

Risk Coalition consults on guidance for the financial services sector

The Risk Coalition is consulting on draft principles and guidance for the risk committees of boards of financial services businesses. The purpose of the guidance is to develop a common understanding of the purpose and remit of risk functions, and to provide a benchmark for measuring performance.

The Coalition is an association of not-for-profit professional and membership bodies whose objective is to improve risk governance and management in the UK financial services sector.

The draft guidance identifies eight key principles that should be applied by a “mature board risk committee” (or, if the business does not have a separate risk committee, its audit committee), along with examples of how each of those principles can be met. It also identifies nine key principles to be applied by a business’ chief risk officer and second-line risk function and again includes examples.

The guidance assumes that organisations operate the “three lines of defence model”, under which:

  • management own risks and take responsibility for risk-taking (first line);
  • management decisions are challenged by an independent risk committee, headed by a chief risk officer (second line); and
  • the business’ internal audit function reviews its governance, risk and internal control arrangements (third line).

The Coalition has asked for comments by 20 September 2019.

Government consults on reforms to modern slavery statements

The Government has responded to recommendations for strengthening compliance with section 54 of the Modern Slavery Act 2015, which requires certain commercial organisations to explain the steps they have taken each year to eliminate slavery and human trafficking from their supply chains.

The recommendations were made following an independent review of the Act as a whole, including an interim report dedicated specifically to section 54.

At the same time, the Government has published a consultation on measures designed to strengthen compliance with section 54.

In response to the recommendations, the Government does not intend to require organisations to designate responsibility for their modern slavery statement to a specific board member, as it sees this as a “collective responsibility”. Nor does it intend to require companies to refer to their modern slavery statement in their annual report, as this might lead to an “overly compliance-driven approach”.

However, it does intend to adopt other recommendations and make other changes. These include:

  • Making reporting on certain areas mandatory. Currently, section 54 encourages (but does not require) organisations to report on six key areas – organisational structure, policies, due diligence, risk assessment, performance outcomes and training. The Government is proposing to use these as a starting point for mandatory reporting.
  • Creating a Government-run central registry of modern slavery statements. It will be interesting to see to what extent this overlaps with the independent registry maintained by the Modern Slavery Registry, which also tracks statements under the equivalent legislation in California and Australia.
  • Imposing a new single reporting deadline. This would mean all organisations subject to section 54 would file their statements at the same time. Government believes this would make it easier to compare different organisations’ modern slavery statements. The consultation asks what date would be best for the proposed deadline.
  • Giving the Home Office the power to impose fines for failing to publish a modern slavery statement. This would become logistically easier if the Government adopts a single reporting deadline. There would be a one-year grace period after any changes to the current regime.
  • Requiring certain public sector organisations to publish a modern slavery statement. This may need to take a tailored approach, rather than simply extending the regime in section 54. However, the Government is proposing to retain a threshold of £36m.

The Government has also said it will revise its guidance on transparency in supply chains in 2020, once the consultation has closed. In particular, it intends to create a template of the information organisations are expected to provide in their section 54 statements, and to encourage organisations to report on their modern slavery priorities for the forthcoming year.

The Home Office has asked for responses to the consultation by 17 September 2019.

Other items

  • FCA publishes Prospectus Rules changes. The Financial Conduct Authority has published the Prospectus Regulation Rules Instrument 2019. The Instrument will replace the FCA’s Prospectus Rules with a new rulebook known as the Prospectus Regulation Rules, which refers substantially to the relevant parts of the EU Prospectus Regulation. The changes take effect on 21 July 2019.
  • ESMA updates Single Electronic Format manual. ESMA has published an updated version of its manual for reporting under the new European Single Electronic Format. The manual is designed to assist issuers required to report using in-line XBRL for financial years beginning on or after 1 January 2020. The updates focus mainly on technical aspects of implementing the XBRL architecture, including syntax, structure and taxonomies.
  • FRC reports on diversity in FTSE 100 companies. The Financial Reporting Council has co-published a report with Cranfield University. The research found that female NEDs server shorter tenures than men (on average, 3.8 years versus 5 years) and are less likely to be promoted to senior roles. It also found that just 11% of women on boards are from Black, Asian or other Minority Ethnic backgrounds.
  • FRC amends FRS 101. The FRC has announced that it has amended Financial Reporting Standard 101 (Reduced Disclosure Framework) in line with its consultation in January. The changes mean that entities within the scope of IFRS 17 (Insurance Contracts) will not be able to report under FRS 101. IFRS 17 applies to financial years beginning on or after 1 January 2021.
  • FRC consults on changes to ethical standards. The Financial Reporting Council is consulting on changes to its ethical and auditing standards. The proposed changes cover (among other things) limitations on the non-audit services which the auditor of a public interest entity may provide and how it may be remunerated for them.
  • NEX updates Growth Market rulebook. NEX Exchange has updated its Growth Market Rules for Issuers. The changes follow a consultation in May and are designed to bring the Rules in line with the new prospectus regime under the EU Prospectus Regulation. The Exchange has also published a summary of the feedback it received, along with its responses. It has decided not to proceed with several proposed changes, including dropping the requirement for a working capital statement in the admission document for an application to the NEX Exchange Growth Market.
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