Included in this update: LSE public censure and fine for AIM company for breaches of AIM Rules; Latest Primary Market Bulletin published; High Pay Centre and CIPD publish report on FTSE 100 CEO remuneration and more...

Regulatory enforcement: LSE public censure and fine for AIM company for breaches of AIM Rules

The London Stock Exchange (LSE) has published details of the public censure and £300,000 fine imposed on AIM-quoted Yü Group plc (Company) for breaches of Rules 10 (Principles of disclosure) and 31 (AIM company and directors' responsibility for compliance) of the AIM Rules for Companies (AIM Rules). The LSE has, in fact, waived the fine given "the potential financial challenges for the Company" arising from COVID-19.


The Company had made a number of forecasts in the first half of its 2018 financial year that its full year profits before tax would exceed market expectations. The forecasts were made during a period of exponential growth and based on internally generated management information. However, further internal assurance work in October 2018 identified errors in the Company's underlying information relating to recognised accrued income, receivables and potential recoveries, such that the Company discovered that it was, in fact, likely to make a significant loss. A trading update released to the market in October 2018 confirmed the likely negative adjustment in pre-tax profitability, outlined the reasons for it, and led to a significant decrease in the Company's share price. 

The Company's review identified a number of weaknesses in its financial control environment. The quality and accuracy of aspects of its financial and management information had not kept pace with the Company's growth trajectory and changes to the profile of its business. In response, the Company immediately implemented a remediation programme to enhance its procedures, systems and controls and increased resourcing and investment in its internal finance function. The Company also enhanced its governance through the appointment of non-executive directors with expertise in financial governance, audit and risk management.

Breaches of the AIM Rules

The LSE determined that, in breach of its AIM Rule 31 obligations, the Company had failed to ensure that it had in place sufficient procedures, resources and controls to comply with the AIM Rules. Whilst the Company was focused on rapid expansion, there was no commensurate development of its financial control environment. 

The failure to have in place effective financial reporting systems and controls meant that, during the relevant period, the Company could not sufficiently rely on the integrity of its internal financial data for the purpose of assessing its profitability against forecasts or disclosing a fully accurate half year balance sheet. As a consequence, the Company's disclosure was inaccurate, resulting in the Company breaching its AIM Rule 10 obligations.

Expected standards for companies on AIM

The LSE believes that the facts illustrate the fundamental importance of a company maintaining effective controls to enable compliance with the AIM Rules on a continuous basis, something which goes beyond ensuring that it has in place documented procedures and protocols. These need to be "appropriately reviewed and developed so that they are effective in practice and are adapted to adequately address changes to the business, planned growth or other operational needs. Boards should also be appropriately engaged in respect of evaluating the effectiveness of a company’s financial control environment and the framework for assuring the integrity of internal management information upon which it relies for making its disclosure judgments".

The LSE stated that the level of the fine reflected the Company's prompt announcement of the negative adjustment when discovered, its full cooperation with the LSE investigation and the subsequent remedial action taken. 

Listed company regulation: Latest Primary Market Bulletin published

The Financial Conduct Authority (FCA) has published the 30th edition of Primary Market Bulletin in which it issues an overview and reminder of importance of the PDMR transaction notification regime under the EU Market Abuse Regulation, and in particular the recent enforcement action taken against Kevin Gorman for his failure to notify relevant transactions to the market.

The Bulletin also:

  • sets out the latest changes made or proposed to be made to the FCA's Knowledge Base;
  • provides updates on recent changes to the Prospectus Regulation, including as regards exemptions from the requirement to produce a prospectus and on changes made to various disclosure annexes; 
  • confirms that the FCA's approach to Global Depository Receipts remains unchanged; 
  • sets out details of new technical notes consulted on in the 24th edition which have now been finalised, including in relation to class testing changes to investment management agreements where there are unquantifiable benefits (TN/403.2); 
  • consults on a new technical note which deals with prospectus requirements where securities are issued pursuant to a scheme of arrangement (TN 606.1); and
  • highlights further technical notes which have been updated in light of the Prospectus Regulation, including the note which deals with Block Listings (TN/907.3).

Exec Rem: High Pay Centre and CIPD publish report on FTSE 100 CEO remuneration 

The High Pay Centre and the Chartered Institute of Personnel and Development (CIPD) have published their annual assessment of FTSE 100 remuneration packages, revealing that median CEO pay fell by 0.5% between 2018 and 2019 to stand at £3.61m compared to £3.63m a year ago. They point out that this is still 119 times that of the average UK full-time worker earning £30,353.

The report argues that very high CEO pay risks undermining the "spirit of solidarity" that many companies are trying to protect as they deal with the impact of COVID-19. It also states that the "current economic uncertainty should encourage companies to consider whether the scale of pay awards reflect good business sense and the CEO’s individual contribution to the company’s success. The relatively small cuts to pay that CEOs have made to date suggest this is not yet happening".

Sustainability: European Commission publishes roadmap on taxonomy-related non-financial information disclosures   

The European Commission (Commission) has published for consultation a "roadmap" on a delegated regulation on taxonomy-related disclosures by undertakings reporting non-financial information supplementing the Taxonomy Regulation. Commission roadmaps describe a specific problem to be tackled and objectives to be met, explain why EU action is needed, outline policy options and describe the main features of the consultation strategy. 

By way of reminder, the EU has created a classification system (‘taxonomy’) for environmentally sustainable economic activities, including investments. This new initiative will require large listed companies (those with more than 500 employees), banks and insurance companies to publish information on how, and to what extent, their activities align with those considered environmentally sustainable in the EU taxonomy. This is intended to enable investors to make informed choices and encourage private investment in sustainable activities.

The Taxonomy Regulation mandates the Commission to adopt by 1 June 2021 a delegated act specifying the content and presentation of the information that needs to be disclosed, including the methodology to be used in doing so. It remains to be seen the practical effect that this will have in the UK. Responses to the roadmap should be submitted by 8 September 2020. 

Audit: FRC publishes second Annual Enforcement Review 

The Financial Reporting Council (FRC) has published its Annual Enforcement Review of the audit profession. The review is intended to provide a baseline for measuring future enforcement performance and highlights issues identified in enforcement cases and the actions taken to address them. 

The report notes that 88 cases were opened in the last year, a 90% increase on the previous year, with 31 cases successfully resolved through constructive engagement. The FRC also carried out a detailed analysis of concluded enforcement cases from the last six years, with the aim of identifying recurring themes. While audit cases where the FRC took enforcement action involved breaches of a number of auditing and ethical standards, the overwhelming majority of cases involved a failure by auditors either to exercise professional scepticism when assessing the decisions and judgements made by management or to obtain sufficient audit evidence.

Of interest to audit committees (among others) will also be the six key themes which the FRC identified in the context of recurring audit failures, being:

  • insufficient involvement of the audit partner and over-delegation to junior team members;
  • disorganised audit work;
  • a failure to step back and take an overall look at the bigger financial picture;
  • an auditor being too close to management;
  • a failure to involve the audit quality assurance partner; and
  • a lack of proper communication with expert or specialist teams who were consulted as part of the audit process and a tendency to accept their work unquestioningly.

The FCA has also written to the senior partners and directors of audit firms, reminding them of their firms' regulatory reporting obligations. In particular, the FCA emphasises the importance of assurance reports and disclosures, especially during the COVID-19 pandemic, noting that historically this information has not always been provided in a 'timely manner'.

Financial Promotions: HM Treasury consults on proposed changes to regime 

HM Treasury has published a consultation proposing reforms to the process for the approval of financial promotions communicated by unauthorised firms. The consultation seeks views on two options for a 'regulatory gateway' to strengthen the FCA's ability to ensure financial promotion approvals operate effectively. The first option would require authorised firms to obtain the FCA's consent in order to be able to provide approval of financial promotions of unauthorised firms. The second option would see the approval of unauthorised firms' financial promotions constitute a regulated activity, meaning that only firms with a Part 4A permission from the FCA would be able to undertake them. 

In a second consultation, the government is proposing to bring certain cryptoassets within the scope of financial promotions regulation. To achieve this, certain unregulated cryptoassets would be included in the list of controlled investments, and a number of the current controlled activities detailed in the Financial Promotions Order would be increased.

The deadline for responses to the consultations is 25 October 2020. 

Companies House developments

Registrar’s Upload Service Rules published 

The Registrar's Coronavirus Easements (Upload Service) Rules 2020 have been published on the Companies House website and are now in force. The rules are intended to support the interim upload service introduced to enable paperless filing as a result of COVID-19. The service allows users to file online certain documents that would usually be sent to Companies House in hard copy. 

Compulsory strike off policy to resume in October

Companies House has announced that the temporary measure it introduced in April to suspend compulsory strike off action will be lifted from 10 October 2020. From that date, Companies House will resume the process of removing companies from the register if there is reasonable cause to believe they are no longer carrying on business or are in operation.

Accounting: FCA and FRC permit temporarily reliance on amended IFRS 16 

In May 2020, the International Accounting Standards Board (IASB) published an amendment to International Financial Reporting Standard (IFRS) 16 (Covid-19-related rent concessions – Amendment to IFRS 16) which was intended to provide practical relief to lessees in accounting for rent concessions granted due to COVID-19. This amendment is effective for reporting periods beginning on or after 1 June 2020 in relation to COVID-19-related rent concessions that reduce lease payments due on or before 30 June 2021.

However, the amendment has not yet been formally adopted in line with the necessary EU endorsement procedure. In strict terms, it is therefore not available for use by any issuers required by the Transparency Directive to use EU-adopted IFRS in their annual or interim financial statements.

Following the lead of the European Securities and Markets Authority, the FCA will permit issuers to use the modified IFRS 16 rather than the IFRS 16 as currently adopted by the EU. This temporary relief is subject to two conditions:

  • issuers must apply the accounting treatment to those transactions as foreseen in the IFRS 16 amendment, and
  • issuers must disclose their use of the amendment as issued by the IASB in the notes to their financial statements.

The FCA has stated that, while it will keep its policy under review, it intends for it to remain in place until the amendment to the accounting standard is formally adopted. If the European Parliament or Council object to the adoption of the IFRS 16 amendment before the end of the Brexit implementation period, the FCA will end this temporary relief. The FCA's statement confirms that the temporary relief applies to all listed companies required to comply with DTR 4.1 and DTR 4.2 (including as a result of various Listing Rules – LR 9.2.6BR, LR 14.3.23R, LR 18.4.2R and 18.4.3R) and which are required to prepare their accounts in accordance with EU-adopted IFRS. The relief does not extend to issuers with securities admitted only to markets which are not regulated markets, for example AIM and the NEX Growth market, or to those for whom the UK is not their Home Member State.

The FRC has also confirmed that it will not pursue regulatory action where issuers take advantage of the reliefs permitted by the amendment to IFRS 16 in both annual and interim accounts before its adoption by the EU. Like the FCA, should endorsement of the amendment not proceed as expected, the FRC will review this position.

In this context, the FRC has issued a reminder to directors of the need to consider carefully the impact of applying this amendment, prior to EU adoption, on the lawfulness of any distributions. 

Reminder: Shareholders' rights to voting confirmations - Requirements in force on 3 September 2020

By way of reminder, the new Companies Act 2006 obligations as regards voting confirmations come into force on 3 September 2020. For more detail, please read the second item in our Governance & Compliance update – Issue 170.

Key Contacts

Richard Preston

Richard Preston

Managing Associate, Corporate Finance
London, UK

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Jack Edwards

Jack Edwards

Managing Associate, Corporate Finance
London, UK

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