Included in this issue of our Governance & Compliance Update: Government implements Shareholders' Rights Directive Remuneration aspects; CMA publishes final report on UK audit industry; FCA publishes Primary Market Bulletin 23 and more...

Government implements Shareholders' Rights Directive Remuneration aspects

The Companies (Directors’ Remuneration Policy and Directors’ Remuneration Report) Regulations 2019 (2019 Regs) have been published. They amend the regulations and legislation governing the disclosure of directors' remuneration and are being implemented to enact (in part) Directive 2017/828/EU, otherwise known as the Shareholders' Rights Directive. The main changes made by the 2019 Regs are to:

  • extend the reach of the current regime which governs directors' remuneration in quoted companies to include unquoted traded companies. This means that companies whose securities are admitted to trading on IPSX, The London Metal Exchange, ICE Futures Europe, Euronext, NEX Exchange and Cboe Europe Equities Regulated Market will be required, for example, to hold an annual advisory shareholder vote on their Directors' Remuneration Report and to put their Directors' Remuneration Policy to a binding shareholder vote at least every three years. Application: An unquoted traded company without a Directors' Remuneration Policy will be required to bring forward a Remuneration Policy which complies with these new provisions for a shareholder vote during 2020. If an unquoted traded company, despite not being subject to the legal requirements before 10 June 2019, had in fact been fully compliant with the provisions relating to a quoted company under existing legislation, it can continue to operate under that Remuneration Policy  until it is required to put forward a new Remuneration Policy for approval under its existing three-year cycle. The new Remuneration Policy will then need to comply with these new provisions.
  • augment the Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008 (as amended) (2008 Regs) to require that the remuneration of the chief executive officer and any deputy chief executive officer must be reported in the Directors' Remuneration Report even if they are not a Board director. Application: Remuneration Reports which relate to financial years beginning on or after 10 June 2019;
  • amend the format of the single total figure table in the Directors' Remuneration Report to provide for two additional columns which set out the total fixed remuneration and the total variable remuneration paid to each director on whom the company is required to report. Application: Remuneration Reports which relate to financial years beginning on or after 10 June 2019;
  • extend the current 2008 Regs requirement for the Directors' Remuneration Report to set out the percentage change in CEO pay between the financial year being reported on and the previous financial year, along with the average percentage change for employees in the company over the same period, to all directors' pay over a rolling five year disclosure period. Application: Remuneration Reports which relate to financial years beginning on or after 10 June 2019; and
  • provide that payments outside of a Directors' Remuneration Policy which take effect on or after 10 June 2019 require shareholder approval by way of an amendment to the policy, rather than (as currently) by authorisation as a separate payment outside of the existing policy.

In addition, the 2019 Regs require Directors' Remuneration Reports to be made available free of charge on the company's website for 10 years and for the date and results of the shareholder vote on the Directors' Remuneration Policy to be put on the company's website and to remain there for the life of the policy. These publication provisions apply to all Directors' Remuneration Reports and Policies voted on by shareholders on or after 10 June 2019.

CMA publishes final report on UK audit industry

The Competition and Markets Authority (CMA) has published its final report with recommendations to address competition concerns in the UK audit industry. This takes into account the recommendations of the review of the Financial Reporting Council (FRC), led by Sir John Kingman. The CMA has also published a summary alongside the full report.

The CMA’s key recommendations are:

  • Audit committee scrutiny - audit committees should come under greater scrutiny by the new Audit, Reporting and Governance Authority (ARGA), the proposed successor to the FRC. This should increase accountability of audit committees and focus their selection and oversight of auditors on audit quality, while also mitigating any bias against non-Big Four firms. The CMA recommends that the Government legislate to give ARGA the power to:
    • mandate minimum standards for both the appointment and oversight of auditors;
    • request information from audit committees;
    • place observers on audit committees; and
    • issue public reprimands and make public statements to shareholders in circumstances where it is unsatisfied with an audit committee.
  • Mandatory joint audits – the CMA recommends the introduction of legislation to give ARGA "flexible powers to implement a joint audit regime", to increase the capacity of challenger firms, to increase choice in the market and to drive up audit quality. Most FTSE 350 companies should be required to appoint joint auditors – subject to exemptions for the largest and most complex companies and, at the other end of the scale, companies with very simple, single-entity accounts. Where a joint audit is required, at least one joint auditor should be a non-Big Four firm with the relevant audit committee ensuring that the work of each of the joint auditors is substantial and relatively equal, starting with each audit firm ordinarily receiving at least 30% of the audit fee. In order to help to drive up the quality of challenger firms, ARGA should have the ability to appoint peer reviewers for a selection of companies that are not included in the joint audit regime.
  • An operational split of audit and non-audit practices of the Big Four – the CMA is, at this stage, recommending an operational – as opposed to a full structural - split of the Big Four’s UK audit work. This is intended to increase the focus on audit quality, with a reduction in the "distracting interest" of non-audit work; it will also "create transparency around audit practices, allowing the regulator to monitor their performance and resilience". This will require:
    • no profit-sharing between audit and non-audit practices;
    • separate financial statements for the audit practice;
    • transparent transfer pricing, checked by ARGA;
    • a separate CEO and board, populated by a majority of independent non-executive directors, who should be answerable to investors in audited companies, and to the public via ARGA; and
    • remuneration and career progression within the audit practice to be "strongly linked to audit quality".   
  • A five year progress review by ARGA to examine the effectiveness of the new regime.

The Secretary of State has been urged to take these recommendations forward as soon as possible.

The CMA has also outlined further measures that may merit consideration in the future. These include audit partner remuneration deferral and clawback, liberalising the ownership rules of audit firms, measures to improve information for shareholders, a reduction in notice periods for partners and senior staff in Big Four firms, and possible (shorter) fixed term rotation periods.

FCA publishes Primary Market Bulletin 23

The Financial Conduct Authority (FCA) has published Primary Market Bulletin 23 in which it concludes the consultation it launched in June 2018 on its Technical Note dealing with the ability of issuers to delay the publication of inside information under the Market Abuse Regulation (MAR) whilst producing periodic financial information. A summary of the proposals was contained in our Governance & Compliance update issued at the time. In short, few changes of note have been made to the consultation draft other than to add a clarification that for an issuer to delay the disclosure of inside information in line with Article 17 of MAR, it must be able to ensure the confidentiality of the information in question. The final Technical Note can be found here.

The Bulletin also provides an update on the implementation of the Prospectus Regulation which is due to come into full effect on 21 July 2019, assuming the UK leaves the European Union with a deal.

L&G publishes latest Corporate Governance report

Legal & General (L&G) has published its annual report on its corporate governance activity in 2018. Headlines include:

  • an increase of 37% in its votes against directors globally;
  • 100 UK chairs voted against due to concerns over gender diversity; and
  • 14 funds launched with ESG-related objectives.

The report also discusses:

  • the impact of L&G's Climate Impact Pledge and its view that the we are facing a "climate catastrophe";
  • L&G's focus on executive pension contribution differentials; and
  • its desire to see diversity advisory committees constituted at the top of organisations.


Key Contacts

Richard Preston

Richard Preston

Managing Associate, Corporate Finance
London, UK

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