Corporate Law Update

• The UK’s new Register of Overseas Entities has now gone live
• The FCA and the FRC publish separate reviews of TCFD reporting by premium-listed companies
• The Law Commission consults on creating a new type of property in English law, called “digital assets”
• The FCA confirms new rules to strengthen the UK’s financial promotions regime
• Companies House publishes its corporate plan for 2022/2023

Register of Overseas Entities goes live

The UK’s Register of Overseas Entities has now gone live.

Under the regime, an overseas entity that holds certain types of real estate in the UK will need to register with Companies House and provide details of its “beneficial owners” and (in some cases) managing officers and any trusts that sit within its corporate structure.

Overseas entities that already hold a qualifying estate in England and Wales (namely, a freehold estate or a lease granted for a term of more than seven years from the date of grant) now have until 31 January 2023 (inclusive) to register under the regime. Failure to register by that date is an offence.

From 5 September 2022, an overseas entity will not be able to acquire a qualifying estate in England and Wales unless it has first registered under the regime.

Before an overseas entity can apply to register with Companies House, the information it is required to provide must be verified by a regulated person.

For more information on the regime, see this explainer from Companies House or speak to your Macfarlanes contact.

FCA and FRC review TCFD disclosures by listed companies

The Financial Conduct Authority (FCA) and the Financial Reporting Council (FRC) have both published the results of reviews they have undertaken into disclosures by premium-listed companies against the recommendations of Financial Stability Board’s Taskforce on Climate-related Financial Disclosures (the TCFD Recommendations).

The TCFD was created in 2015 to develop recommendations for climate-related disclosures. In June 2017, it published its Final Report, setting out four recommendations and eleven supporting recommended disclosures (the TCFD Recommendations). These have quickly become a globally recognised framework for developing consistency in climate change reporting.

Under the FCA’s Listing Rules, for financial years beginning on or after 1 January 2021, premium-listed commercial companies must state, in their annual report, whether they have made disclosures consistent with the TCFD Recommendations.

If a company does not disclose against a particular TCFD Recommendation, it must explain why and set out the steps it plans to take to do so in the future.

When deciding whether it has disclosed properly against the TCFD Recommendations, a company must take into account the guidance annexed to the TCFD Recommendations.

What did the FCA find?

The FCA’s review involved a preliminary quantitative analysis of disclosures by all 171 premium-listed commercial companies with a December 2021 year-end that had published their annual report by the end of April 2022. The FCA then conducted a more detailed analysis of 31 of those companies, including a comparison with any disclosures they made in the previous reporting period.

The key findings from the FCA’s review as set out below.

• Over 90% of companies self-reported that they had made disclosures consistent with the TCFD’s Governance and Risk Management pillars, but this dropped to below 90% for the Strategy and Metrics and Targets pillars. 81% of companies indicated that they had made disclosures consistent with all recommended disclosures.
• In some cases, companies indicated that they had made disclosures consistent with the recommended disclosures, but the disclosures themselves were “very limited in content”. The FCA is considering these in more detail and may take action as appropriate.
• The number of companies making disclosures that were either partially or mostly consistent with the TCFD framework increased significantly compared with 2020.
• The most common reporting gaps were in respect of the more quantitative elements of the TCFD’s recommendations, such as scenario analysis and metrics and targets.
• Details and consistency of disclosures often correlated with sector, size and risk assessment, including the extent to which that company had identified climate change as among principal risks.
• Most companies (76%) sited their disclosures in their strategic report, with a significant minority (18%) referring to disclosures published outside the annual report framework.
• 80% of companies made a “net zero” statement in their report, with target dates for achieving net zero ranging from between 2035 to 2060 (with 2040 and 2050 the most common targets).
• 64% of companies identified climate change as a “principal risk”, with a further 19% identifying it as an “emerging risk”.

The FCA has said it is “encouraged” by an overall improvement in disclosures against the TCFD framework. However, it has provided guidance to companies of its expectations surrounding disclosures and reminded standard-listed companies that the regime now applies to them too.

What did the FRC find?

The FRC’s review was more limited and covered the financial statements of 25 premium-listed companies. It is more narrative and focusses more on the link between TCFD disclosures and a company’s financial disclosures.

The key findings from the FRC’s review are set out below.

• The FRC encountered some high-level, generic information about climate change that did not adequately explain the potential impact on different businesses, sectors and geographies. It expects the granularity of disclosures to improve as companies embed their processes to manage climate-related risks and opportunities more fully into governance and management structures.
• Some disclosures failed to specify the expected size of climate-related opportunities relative to existing, more carbon-intensive, businesses, or to identify dependencies on new technology. the FRC expects companies to present a balanced view and consider linking the description of climate-related opportunities to any technological dependencies.
• Some TCFD disclosures were not well integrated with other elements of narrative reporting. The FRC expects companies to consider including interlinkages. This might include integrating scenario analysis output with business model and strategy or explaining how climate-related risks have been prioritised compared with other risks.
• Companies did not always explain how they had applied materiality to their TCFD disclosures nor make it clear how, or whether, they had taken TCFD guidance into account. The FRC expects companies to clearly articulate how they have considered materiality when making disclosures and may challenge companies that claim consistency without reference to the TCFD guidance.
• Sometimes discussion of the impact of climate on the financial statements was generic and unhelpful in understanding the relationship between climate risks and amounts in the financial statements. The FRC expects companies to consider whether the emphasis placed on climate risks in their narrative reporting is consistent with how those risks are reflected in judgements and estimates applied in the financial statements.
• The FRC also expects companies to ensure emissions reduction commitments and strategies described in their narrative reporting are appropriately reflected in the financial statements.

Law Commission consults on reform to recognise digital assets

The Law Commission has published a consultation on proposed changes to the law relating to digital assets, such as crypto-tokens.

The consultation runs to over 500 pages, so the Commission has also published a useful summary of its proposals and findings.

The consultation notes that, currently, English law recognises two types of personal property (that is, properly which is not land and buildings):

• Things in possession. These are physical items which can be moved and delivered to other persons. The summary gives the example of a bag of gold, but other examples might include a car, a mobile phone, clothing or food.
• Things in action. These are rights or property that can only be enforced by bringing legal proceedings. The summary cites debts (for example, receivables), contractual rights and shares in a company as examples. Other examples include intellectual property, money in the bank and rent due under a lease.

Among other things, the Law Commission is recommending the creation of a third kind of personal property in law called “data objects”, which would cover crypto-tokens, non-fungible tokens (NFTs), but also other forms of digital asset, including digital records, email accounts, in-game digital assets, domain names and carbon emission scheme credits.

The consultation sets out certain conditions an asset would need to meet to fall within this third category, as well as how data objects could be transferred and control over them asserted.

The Commission has asked for responses to the consultation by 4 November 2022.

FCA to strengthen financial promotions regime

The Financial Conduct Authority (FCA) has published a policy statement (PS22/10) confirming that it intends to proceed with proposals for strengthening the UK’s financial promotions regime on which it consulted in January (see our previous Corporate Law 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 not required to withdraw their approval unless they become aware that the promotion no longer complies with the rules (a right typically expressly reserved in the relevant engagement letter).

The FCA has confirmed it will strengthen its rules in three respects:

• Ongoing monitoring. A firm that approves a financial promotion will need to take “reasonable steps” to monitor the promotion’s continuing compliance for the lifetime of the promotion.
• “No material change” attestations. Every three months during the entire lifetime of the promotion, the firm will need to collect an attestation of “no material change” from the client whose promotion it has approved.
• Competence and experience (C&E). Persons who approve financial promotions will need to self-assess whether they have the necessary C&E in relation to the investment product to which the promotion relates.

The changes take effect from 1 February 2023.

Companies House publishes 2022/2023 corporate plan

Companies House has published its corporate plan for 2022/2023. The plan contains information on the structure of Companies House, as well as initiatives it intends to work on in the forthcoming year.

Matters on which Companies House intends to focus include implementing the Register of Overseas Entities (see item above), preparing for the new Companies House transformation project (including new identity verification and powers to query information submitted to it), and moving away from legacy systems and developing new services.