Our event at the FRC on 21 November, when the FRC will explain what they do and listen to members’ feedback, is a sellout and we are now operating a waiting list. Below is a roundup of recent FRC and FCA developments, to inform attendees and help guide questioning.
FRC says corporate reporting could still be improved
In its annual review of corporate reporting, the FRC said disclosures by large listed UK companies are generally good but detailed explanations and clarity could still be better. Improvements in recent years have been achieved following the introduction of the strategic report in 2013 and the FRC said these had got better again this year.
The FRC reviewed 203 annual and interim report and accounts, informing 60 companies in advance that a certain aspect of their next report and accounts would be subject to review. The regulator said it was pleased that many of these firms took the opportunity of reviewing the relevant disclosures and publishing reports and accounts that included an improvement in the quality of information provided.
The report includes nine factors which the FRC said if disclosed would improve corporate reporting this includes providing a single story that is reflected in the narrative and financial reporting; providing a strategic report that gives a clear and balanced account which includes an explanation of the company’s business model and the salient features of the company’s performance and position, good and bad and disclosing the risks and opportunities in the business that are of concern to the company board.
As the report notes the expectations of corporate reporting are changing. There are calls for more information about how a company has thought about its long-term success, how directors have discharged their Section 172 duties to stakeholders, along with a better explanation of how a company creates value and the extent to which that value is dependent on relationships with stakeholders.
Paul George, FRC’s executive director for corporate governance and Reporting, said: “Whilst reporting is generally good, there is no room for complacency. Most companies seek to meet members’ needs through fair, balanced and understandable reporting. Our report provides important information to those involved in the preparation of Annual Report and Accounts. It highlights aspects of good practice, common areas for improvement and changing expectations of stakeholders. High quality and transparent reporting are fundamental to building trust and to the long-term success of UK companies and the wider economy.”
FCA announces improvement to disclosures required for UK IPOs
Following a review into the effectiveness of the UK’s primary capital markets by the Financial Conduct Authority (FCA) that began in 2015, the regulator has published new policies improving the disclosures required for initial public offerings (IPO) and enhancing aspects of the Listing Rules.
The FCA said there was broad consensus among respondents to its earlier consultation paper that measures should be taken to restore the centrality of the prospectus in the IPO process, creating the necessary conditions for unconnected IPO research to be produced, and addressing the underlying conflicts of interest that can arise in the production and distribution of connected research.
The regulator said that ultimately it wants to see an IPO process with enhanced standards of conduct during the production and distribution of connected research; where a prospectus document plays a more central role and where the necessary conditions exist for the emergence of unconnected IPO research.
In its other policy statement, the FCA said it had made some enhancements to the Listing Regime including changing its approach to the suspension of listing for reverse takeovers, updating how premium listed issuers may classify transactions, and enabling property companies to better take into account asset values when seeking a premium listing. These proposals received overwhelming support from market participants in earlier consultations, the FCA said.
The FCA also announced it would soon be consulting further on other areas including the relative positioning of standard versus premium listing, the provision of patient capital to companies that require long-term investment and retail access to debt markets.
Merrill Lynch fined after admitting to disclosure failures
The Financial Conduct Authority (FCA) has fined asset management company Merrill Lynch £34.5 million for failing to report 68.5 million exchange-traded derivative transactions between 12 February 2014 and 6 February 2016. The FCA said this was the first enforcement action against a firm for failing to report details of trading in exchange-traded derivatives, under the European Markets Infrastructure Regulation (EMIR).
The FCA said this reporting helps authorities assess and address the risk inherent in financial systems caused by a lack of transparency. The reporting requirement was a reform introduced following the financial crisis in 2008 to improve transparency within financial markets. While Merrill Lynch was co-operative in assisting in the FCA’s investigation and quickly took steps to remediate the breach, the FCA said the fund manager was the subject of two earlier and related transaction reporting cases.
Mark Steward, FCA Executive Director of Enforcement and Market Oversight said: “It is vital that reporting firms ensure their transaction reporting systems are tested as fit for purpose, adequately resourced and perform properly. There needs to be a line in the sand. We will continue to take appropriate action against any firm that fails to meet requirements.”