Corporate Law Update
- The Law Society publishes new guidance on complying with the extended Trust Registration Service (TRS)
- The first draft international sustainability standards are published
- ESMA publishes updated Q&A on ESG-linked alternative performance measures (APMs)
- The FRC publishes its three-year plan, with details on progress towards its transition to ARGA
The Law Society of England and Wales has published new guidance to help lawyers with complying with the extended Trust Registration Service (TRS) regime.
What is the TRS?
The TRS is a central database of taxable trusts and (from 10 March 2022) certain non-taxable trusts maintained by HM Revenue & Customs (HMRC).
The database contains details of each trust’s beneficiaries, settlor, trustees and certain other persons (such as any protector), as well as (in certain cases) details of the trust’s assets. The regime implements the Fifth European Union Money Laundering Directive and is designed to create transparency over the ownership of assets held in trust.
Trusts that fall within the regime are required by law to provide information to HMRC to store on the register. In certain circumstances, select information will be available to public bodies, supervised persons (such as financial institutions and regulated professions) and members of the general public who can demonstrate a “legitimate interest” in the information.
Separately, the trustees of a trust within the scope of the TRS must keep their own internal records of a trust’s beneficial owners.
Which trusts need to register?
Previously, only express trusts that incurred a mainstream tax liability in the UK (taxable trusts) needed to register under the TRS. However, from 10 March 2022, the regime applies to certain express trusts that are not liable to pay tax in the UK (non-taxable trusts). These are:
- Type A trusts. A trust whose trustees are all resident in the UK. This also includes a trust with at least one UK-resident trustee if the settlor was resident and domiciled in the UK when the trust was set up or the settlor added funds to the trust.
- Type B trusts. A trust which has at least one UK-resident trustee and which, on or after 6 October 2020, enters into a business relationship with a “relevant person” (such as a bank or a solicitor in the UK) or acquires an interest in land in the UK.
- Type C trusts. A trust which has no UK-resident trustees and which, on or after 6 October 2020, acquires an interest in land in the UK.
The legislation contains numerous exemptions from registration (set out in Schedule 3A to the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017). A non-taxable trust that falls within an exemption does not need to register with the TRS, but the trustees will still need to keep records of the trust’s beneficiaries.
What is the new guidance?
The Law Society has published a new guidance note on the use of trusts on corporate and commercial transactions. Among other things, the guidance provides commentary on:
- the exclusions from registration that are most likely to be relevant on a mainstream corporate or commercial transaction; and
- circumstances in which express trusts will typically be encountered in a corporate or commercial context, and which exclusions from registration are likely to apply in each circumstance.
The guidance was produced by a working group of the Law Society, including Dominic Sedghi (Head of Knowledge) and Edward Reed (Partner) at Macfarlanes.
The note will be of use not only to lawyers (whether in-house or in private practice), but also to other internal and external advisers, such as risk and compliance officers, company secretaries, tax advisers and specialists, and accountants.
The Law Society has also published a separate note containing guidance for practitioners who carry out private client work.
What should I do now?
If you are setting up a new express trust with the assistance of a professional adviser, they should advise you on whether the trust needs to register with the TRS, but it is worth asking the question.
If you are a trustee of an existing express trust or you are acting as a nominee in relation to a client’s assets or shares, you should seek advice on whether your trust is within the scope of the extended regime (if you have not already done so).
Finally, if you have been involved in a transaction that utilised an express trust of any kind, you may wish to consider whether the trust has become registrable under the extended TRS. This may well involve taking legal advice and, ultimately, informing the trustees.
In November last year, we reported that the IFRS Foundation had formally established the new International Sustainability Standards Board (ISSB).
The ISSB’s primary purpose is to deliver a comprehensive global baseline of sustainability-related disclosure standards to provide investors and other capital market participants with information about companies’ sustainability-related risks and opportunities.
The ISSB has now published exposure drafts of two IFRS Sustainability Disclosure Standards.
- IFRS S1 sets out general requirements for the disclosure of sustainability-related financial information. S1 would integrate into a company’s general financial reporting, so that disclosures on sustainability-related risks and opportunities would be presented alongside other information.
- IFRS S2 sets out climate-related disclosures. These draw heavily on the recommendations and recommended disclosures in the final report of the Task Force on Climate-related Financial Disclosures (the TCFD).
The standards would not automatically form part of the UK financial reporting framework. Once finalised, the relevant UK authorities (principally, the Financial Reporting Council) will need to decide whether to mandate disclosure against the standards.
The IFRS Foundation has asked for comments by 29 July 2022.
The European Securities and Markets Authority (ESMA) has published an updated Q&A document on alternative performance measures (APMs), which includes two new questions on ESG-linked APMs.
APMs are measures of a company’s financial performance or position that are not defined by a financial reporting framework. They are commonly linked either to profitability or to the balance sheet.
Common profit-based APMs include EBITDA, PBT, operating profit and EPS, as well as “adjusted” or “normalised” versions of these measures. Common asset-based APMs include net debt, net cash, capital expenditure and free cash flow.
The Q&A supplement ESMA’s Guidelines on APMs. The Guidelines apply in relation to APMs disclosed in prospectuses and other regulated information published by issuers.
In the updated document, ESMA confirms the following.
- Financial measures that use ESG labels (such as green turnover and sustainable CAPEX) are covered by the APM Guidelines, unless they are determined in accordance with EU legislation (such as the Taxonomy Regulation or the Sustainable Finance Disclosure Regulation (SFDR)). ESMA encourages issuers to reconcile ESG-linked APMs not only to the issuer’s financial statements, but also to KPIs or measures required by the Taxonomy Regulation or SFDR.
- ESMA asks issuers to use caution when using APMs with ESG labels to avoid the misperception that they comply with the Taxonomy Regulation or SFDR. Issuers should clarify whether a specific ESG financial measure is determined in accordance with the Taxonomy Regulation or SFDR. ESMA suggests methods issuers may use to achieve this.
The ESMA Q&A do not have force in the UK. However, they are relevant to UK issuers with securities admitted to an EU market and are in any event useful guidance for issuers on UK markets.
The Financial Reporting Council (FRC) has published its three-year plan for 2022 to 2025.
The plan sets out risks and challenges for the FRC, key outputs and KPIs, and detailed expenditure and funding for 2022/2023.
The plan also sets out the FRC’s progress towards its transition into the new Audit, Reporting and Governance Authority (ARGA). It notes that the transition is expected to take place in 2023/2024 and will require further growth in headcount and overall costs.
In this respect, key FRC priorities for 2022/2023 will include preparing for the new role of ARGA as the local audit systems leader and developing a statutory funding model for ARGA.
In particular, the plan notes that the new funding model may involve allocating costs proportionately across parties who benefit from ARGA’s regulatory activities. Subject to consultation, this may extend funding to groups who have not previously contributed and reset the basis of calculating funding.