Corporate Law Update

In this week’s update: Legislation is published to bring mandatory climate-related financial reporting into force, the Government is to regulate promotions of cryptoassets, the FCA consults on tightening the regime for approving financial promotions, the FRC publishes its draft three-year plan and Companies House confirms it plans to close Companies House Direct and WebCHeck.

Legislation is published to bring mandatory climate-related financial reporting into force
The Government confirms its intention to regulate promotions of cryptoassets
The FCA is consulting on changes to tighten the regime for approving financial promotions
The FRC publishes its draft three-year plan, setting out its proposed priorities for 2022/2023
Companies House confirms its intention to close Companies House Direct and WebCHeck

Legislation published mandating climate-related financial disclosures

Legislation has been published to bring mandatory climate-related financial reporting into force.

The changes are being made by new regulations for companies and separate regulations for limited liability partnerships (LLPs).

Under the new regime, certain companies and LLPs must make climate-related financial disclosures based on the specific recommendations in the Final Report of the Financial Stability Board’s Taskforce on Climate-related Financial Disclosures (the “TCFD Recommendations”). This includes, among other things, scenario analysis.

The regime will apply to the following entities. In each case, the entity will come within the new reporting regime only if it has more than 500 employees.

Public interest entities (or PIEs). This includes companies with securities admitted to a regulated market, as well as credit institutions and insurance undertakings.
All AIM companies, irrespective of their market capitalisation or balance sheet.
Other companies with turnover above £500m. This would capture particularly large non-publicly traded (“private”) companies.
Limited liability partnerships (LLPs) with turnover above £500m.

Companies will need to include their disclosures in their strategic report. LLPs that publish a strategic report will need to include their disclosures in that report. Other LLPs will need to include their disclosures in their energy and carbon report.

A company need disclose information in its strategic report only if it is material to the company. If a company does not make climate-related financial disclosures on this basis, it will need to explain this decision in its strategic report.

Reporting will apply both at group level and at the level of an individual entity.

The new regime applies to financial years beginning on or after 6 April 2022, meaning we will see the first disclosures sometime in 2023.

Government to regulate cryptoasset promotions

The Government has announced that it intends to enact legislation to regulate promotions of cryptoassets, such as Bitcoin.

HM Treasury published a consultation back in July 2020, in which it proposed to bring certain types of cryptoasset within the UK’s financial promotions regime. Under that regime, it is a criminal offence to publish a financial promotion unless the person making the promotion has been authorised by the Financial Conduct Authority (FCA) or the Prudential Regulation Authority (PRA), or the promotion is exempt or has been approved by an FCA-authorised or PRA-authorised person.

The effect of the Treasury’s proposals, if implemented, would be that promotions of “qualifying cryptoassets” would need to be approved by an FCA-authorised person before being published, unless a relevant exemption applies.

Certain cryptoassets are already subject to the financial promotion regime. These include “security tokens” that act like shares or debt instruments. However, the regime does not currently apply to “exchange tokens” (or cryptocurrencies, such as Bitcoin and Ether) or to “utility tokens” (which can be exchanged for a specific product or benefit within a particular environment).

The Treasury has now published its official response to the consultation. It has decided to press ahead with its proposals, with some modifications.

To fall within the expanded regime, a cryptoasset will need to have two specific qualities:

Transferability. It must be possible to transfer the cryptoasset to another person (other than a merchant in exchange for goods or services). The Government intends to include specific exceptions to exclude tokens such as loyalty points and travel passes from the regime.
Fungibility. It must be possible to interchange the cryptoasset readily with other cryptoassets of the same type. For example, one Bitcoin can be readily exchanged for another Bitcoin. However, non-fungible tokens (NFTs) (such as works of digital art) cannot be readily exchanged for similar NFTs (such as an identical work of digital art) and so would not be within the expanded regime.

However, in a change from the consultation proposals, a cryptoasset will not need to employ distributed ledger technology (DLT) to be within the expanded regime. The Government believes this will “future-proof” the regime so that it encompasses future innovations in technology.

The Government is not intending to change any of the specific activities that are regulated by the regime. It notes that activities such as cryptoasset lending and decentralised finance (DeFi) are likely, in the right circumstances, to fall within the expanded regime.

Finally, it is worth noting that two of the exemptions from the regime commonly used for equity securities – the “certified high net worth individual” and “self-certified sophisticated investor” exemptions – will not apply to cryptoassets.

The Government will now work on draft legislation to implement its proposals.

FCA consults on tightening financial promotions regime

The Financial Conduct Authority (FCA) is consulting on changes to its administration of the UK’s financial promotions regime that would require persons who approve a financial promotion to continue to monitor whether the promotion complies with the relevant rules.

The consultation follows the FCA’s previous discussion paper on the topic.

For general background on the financial promotions regime, see the previous item in this update.

The proposed changes affect persons who approve financial promotions (such as financial advisers, sponsors and nominated advisers), rather than the person who communicates a promotion (such as a company offering securities).

Under current FCA rules, an authorised firm that communicates a financial promotion must ensure that the promotion continues to comply with the financial promotion rules for the lifetime of the promotion. However, a firm that approves a communication by an unauthorised person is merely required to withdraw their approval if they become aware that the promotion no longer complies with the rules (a right typically expressly reserved in the relevant engagement letter).

The FCA is proposing to strengthen its rules in two respects:

Ongoing monitoring. A firm that approves a financial promotion would need to take “reasonable steps” to monitor the promotion’s continuing compliance with the rules. This would include considering whether there have been any changes to the promotion that render it non-compliant or cause it to cease being “clear, fair and not misleading”. The consultation paper lists more specific expectations as to how approving firms should conduct themselves.
“No material change” attestations. An approving firm would be required to collect an attestation of “no material change” from the client whose promotion it has approved. This would need to happen every three months during the entire lifetime of the promotion.

The consultation also proposes new rules to require persons who approve financial promotions to self-assess whether they have the necessary competence and expertise (C&E) to do so. Firms are already required to assess their C&E before approving a financial promotion, but the FCA wishes to focus attention on whether firms have the in-house skills, knowledge and experience to understand the product to which the promotion relates.

If these changes are enacted, we anticipate that we are likely to see additions to engagement letters to provide protections to approvers (for example, against the provision of inaccurate information during the lifetime of a promotion).

The FCA has requested comments by 23 March 2022.

Other items

FRC publishes draft 3-year plan. The Financial Reporting Council (FRC) has published its draft three-year plan and budget. Among other things, the plan sets out the FRC’s proposed priorities for 2022/2023, including how it intends to approach the transition from the FRC to the new Audit, Reporting and Governance Authority (ARGA).
Update on Companies House Direct and WebCHeck. Companies House has confirmed that it still intends to close its Companies House Direct (CHD) and WebCHeck services in 2022. It states that it is continuously reviewing its position and will contact users when a closure date has been set. CHD and WebCHeck have now largely been replaced by Companies House’s free “Find and update company information” service (previously known as Companies House Beta).