EQ Bulletin - November 2022

The Economic Crime and Transparency Bill 2022

The Economic Crime and Corporate Transparency Bill 2022 has been published. In brief, for companies and limited partnerships, the Bill:  

• Broadens the Registrar of Companies powers so that the Registrar becomes a more active gatekeeper over company creation and custodian of more reliable data concerning companies and other UK registered entities such as LLPs and LPs, including new powers to check, remove and decline information submitted to, or already on, the register this includes.
• Requiring companies to have their registered office at a place where it can acknowledge and receive documents (clause 28);
• Requiring all directors, People with Significant Control, and those delivering documents to have their identities verified (clauses 39, 61 and 69);
• Abolishing the requirement for companies to maintain their own registers of directors, directors’ residential addresses, secretaries and People with Significant Control, providing instead that such information is only held centrally (clause 50 and Schedule 2);
• Requiring all companies to file a profit and loss account, showing their turnover and profit. Currently, most companies are exempt from this requirement by virtue of being classified as “small” (clauses 52 and 53);
• Giving the registrar greater powers to share information and reject documents with inaccuracies (clauses 76 and 90); and
• Tackles the abuse of limited partnerships (including Scottish limited partnerships), by strengthening transparency requirements and enabling them to be deregistered.

Read More: Economic Crime and Corporate Transparency Bill

At the time of writing this report the Bill has received its second reading in the House of Commons and is  currently subject to a line by line scrutiny by the Public Bill Committee who have issued a call for evidence from any interested parties to comment on the Bill (Call for written evidence: Economic Crime and Corporate Transparency Bill). This Committee is due to report no later than 24 November 2022.

Regulatory exemptions for smaller businesses

On 2 October 2022, the then Prime Minister announced plans to widen the exemptions for small businesses from certain regulations and reporting requirements to capture businesses with fewer than 500 employees. 

Read More: Red tape cut for thousands of growing businesses.

The governments starting assumption when developing policy has been that businesses with less than 50 employees should be exempt from specific regulations. The government is now revising the threshold, which applies to companies with less than 500 employees. The announcement indicates that this is not a blanket exemption, and it can be overridden in appropriate cases due to the policy development process, including any consultations that may be undertaken, if there is a justifiable reason for doing so. It is intended that the small business exemption will be applied in a proportionate way to ensure standards are protected while at the same time reducing the burden for growing businesses.

The announcement confirms that the revised threshold applies from 3 October 2022 to all new regulations under development as well as those under current and future review, including retained EU laws. The government also plans to consult in the future on potentially extending the threshold to businesses with 1,000 employees once the impact of the current extension is known.

There was no indication in the announcement as to the effect this would have on limited companies. However, this could potentially mean a re-definition of companies, which qualify as small and medium-sized. Additionally, some other reporting requirements could be changed, such as the obligation that UK-incorporated companies with an average of 250 employees in a financial year must include a statement in their directors' report describing employee engagement. Concerning gender pay gap reporting, large employers with 250 or more employees must also publish online information to show whether there are differences in the hourly pay and bonus pay of male and female employees.

Structured Digital Reporting

The FRC Lab (Lab) has published a report that identifies lessons learnt from the first year of mandatory structured digital reporting under the UK Transparency Directive European Single Electronic Format (UK TD ESEF) Regulation for annual reports by companies admitted to trading on UK regulated markets under DTR 4.1.14R.  The Lab’s review found many companies have risen to the challenge of producing an annual financial report in the new digital format. However, there is still much to be done as data quality and usability remain below the level expected for companies in a leading capital market.  The report sets out some actions to improve companies’ processes, the usability and design of the reports and XBRL tagging. 

Areas highlighted for improvement and better practice, include:

• Better naming and structure of the files submitted to the NSM, as this caused many rejected filings. The report provides practical tips for those authorised to submit documents via the FCA's ESS (such as the company secretary).
• Further engagement and education at management and board level. The structured report should be subject to appropriate review and governance processes, as it is the official version for the DTR. The report suggests companies develop a review process that is suitable for a non-technical audience and draws the board's attention to the most important aspects for their review.
• Making the validated report available on the company's website with an inline viewer.
• For the selection of tags focusing on the accounting meaning of their disclosures, as well as improving the selection of anchors. The report notes that while external assurance over tagging is not required, disclosure on this point is valuable.
• The report highlights upcoming changes regarding timetables and tagging. Given the deadline is reverting to four months for year ends on or after 28 June 2022, companies may need to speed up their processes from this year. Also while companies currently have a choice between the ESEF or UKSEF taxonomy under UK TD ESEF, as BEIS proposes to move mandatory digital filings to Companies House more companies may use UKSEF The report notes that for financial years starting on or after 1 January 2022, companies are also required to tag the notes, including accounting policies, with different requirements which are set out in Annex II of UK TD ESEF.

Read More: FRC Structured Digital Reporting_September 2022.

Net Zero Disclosures

The FRC Lab (Lab) has produced a report to assist companies in preparing disclosures relating to net zero and other Green House Gas (GHG) emission reduction commitments. The report identified three elements of net zero commitments that investors want to understand from disclosures:

Commitments: the level of ambition, scope, nature and timing, and what is included and excluded. This also includes considering whether the commitment will be updated and framing the risks and opportunities of the commitment in a balanced way.

Impacts: how the commitment impacts strategy and business model, including information on transition plans, assumptions, uncertainties, and risks and opportunities. An explanation should be given on the uncertainties and assumptions used in reaching the commitment in a manner consistent with financial statements and that links to issues such as resilience and viability. Updated views on impact and financing requirements should be provided.

Performance: how performance is being measured in the short, medium, and long term. How high-quality data and accountability will be ensured, and what actions management is taking in response to changes. Progress to date should be disclosed with an indication as to whether performance is in line with expectations. Consideration should be given as to whether any external assurance would be appropriate and, were obtained, whether to disclose this.

Read More: Net Zero Disclosure

Read More: Net zero disclosure - example bank

Read More: Net zero disclosures - Summary of findings

Board Diversity

The Financial Reporting Council (FRC) in conjunction with Cranfield University and Delta Alpha Psi Services has published a report.

Read More: Navigating barriers to senior leadership for people from minority ethnic groups in FTSE 100 and FTSE 250 companies

The aim of the report was to provide evidence on the challenges and opportunities that black and minority ethnic individuals may experience in progressing to the boards of FTSE 100 and FTSE 250 companies, executive committee roles (the pipeline to board positions), and the direct reports of members of the executive committee (also part of the pipeline). A second overarching aim was to identify good practice and assess its effectiveness in increasing the ethnic diversity of FTSE boards and ensuring a sustainable pipeline of talent from a range of ethnic backgrounds. The report followed interviews conducted with 54 individuals in senior positions in FTSE350 companies and a review of the annual reports of 25 FTSE100 and 38 FTSE250 companies. Challenges included being overlooked for promotion, overt and covert racism, and having to demonstrate higher standards, compared with colleagues from majority backgrounds, to progress or have the same development opportunities.

The recommendations made following the review of annual reports included:

• Reporting on targeted programmes should be linked to specific diversity objectives with expected outcomes and include data showing evidence of impact.
• Reporting on diversity and inclusion (D&I) governance should provide information on the structure, composition and specific function of D&I focused committees and taskforces and should explain how they will provide the data required to understand their effectiveness in diversifying senior leadership and the best design and approach to achieve this.
• Specific objectives and the rationale for the race action plan – and an evaluation of actions and initiatives already conducted as part of the plan – could be included in the annual report to assess effectiveness of such interventions. undertaking as part of the commitments outlined in the charter(s) they have signed up to.
• The quality of reporting would be enhanced by describing the process by which other initiatives can support the company to meet specific diversity objectives. For example, when reporting on training, reporting could be enhanced by including information on the design, content, or impact of the training in helping to diversify senior leadership.

The State of the Small and Mid-Cap Sector

The Quoted Companies Alliance (QCA) has published a research report into the State of the Small and Mid-Cap Sector.

Read More: Quoted Companies Alliance

The report, which is divided into four sections covers:

• a quantitative analysis of the state of the UK’s primary and secondary markets and a look at the social benefits of public equity. Findings included small and mid-cap companies represented 91% of companies quoted on the London Stock Exchange and employ more than 2.1 million workers The Main Market has decreased by 50% since 2001 and AIM has decreased by 49% since 2007, Nearly 80%  of companies have a market capitalisation of below £1bn which is considered to be small-cap with over a quarter of companies having a market capitalisation of under £25m;
• a qualitative examination of the key issues relevant to companies, investors and other stakeholders. This section found among other matters that only 3 in 10 companies think that the market has improved in attractiveness in the last year, whereas 5 in 10 investors think it has improved. Companies and investors typically believe that the quality of corporate governance has not improved in the last 12 months. Investors have a more positive attitude than companies towards the impact that ESG funds will have on the attractiveness of the markets;
• a broad summary of the key regulatory changes and developments within the sector and our commentary on those changes and developments. Findings here included the UK Prospectus Regime Review, Wholesale Markets Review, UK Secondary Capital Raising Review, Future Regulatory Framework Review, Primary Markets Effectiveness Review have significant potential to create positive change to markets. However, a note of caution is sounded in that given the number of reviews being performed by many different bodies, the decision-making process needs to be nimble enough to implement proper change and positive reform. There is a danger that the layering of responsibility adds to the complexity and time being taken to achieve true change.; and
• suggestions for the further improvement and enhancement of public markets to attract small and mid-cap companies which include in relation to the supply-side establishing a new UK Listed Growth Market and prospectus reform. Demand-side suggestions include reforming pension fund investment and enhancing liquidity. There are also suggestions that an independent, overarching figure to be appointed to have responsibility for the overall vision and direction of travel of regulatory reform and that the civil service and regulators to be required to appoint, on secondment or otherwise, market participants and industry figures to help guide their work.