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BIS: The Kay Review of UK equity markets and long-term decision making - Final Report
The Kay Review was established in June 2011 to review activity in the UK equity markets and its impact on the long-term performance and governance of UK quoted companies. A call for evidence was launched in September 2011 and an Interim Report was published in February 2012. The principal concern of the Kay Review has been to see how well the equity markets are achieving their core purposes which, according to the Kay Review, are to enhance the performance of UK companies and to enable savers to benefit from the activity of those businesses through returns to direct and indirect ownership of shares in UK companies. Professor Kay published his Final Report, containing recommendations, on 23 July 2012.
Findings of the Final Report
Overall the Kay Review has concluded that short-termism is a problem in UK equity markets, and that the principal causes are the decline of trust and the misalignment of incentives throughout the equity investment chain. The Final Report sets out principles designed to provide a foundation for a long-term perspective in UK equity markets and it describes the directions in which regulatory policy and market practice should move. Its specific recommendations are aimed at providing the first steps towards the re-establishment of equity markets that work well for their users. Chapters 1-5 of the Final Report present the Kay Review’s assessment of the main problems in the equity markets and Chapters 6-12 describe the reforms the Kay Review believes are needed to ensure that equity markets support long-term corporate performance.
The Final Report makes 17 recommendations. These include the following:
- The Stewardship Code published by the Financial Reporting Council should be developed to incorporate a more expansive form of stewardship, focusing on strategic issues as well as questions of corporate governance.
- Company directors, asset managers and asset holders should adopt good practice statements (included in the Final Report) that promote stewardship and long-term decision-making. Regulators in industry groups should take steps to align existing standards, guidance and codes of practice with these good practice statements.
- An investors’ forum should be established to facilitate collective engagement by investors in UK companies.
- The scale and effectiveness of merger activity of and by UK companies should be kept under careful review by the Government and by companies themselves.
Companies should consult their major long-term investors over major board appointments.
- Companies should seek to disengage from the process of managing short-term earnings expectations and announcements.
- Regulatory authorities at EU and domestic level should apply fiduciary standards to all relationships in the investment chain which involve discretion over the investment of others, or advice on investment decisions.
- Mandatory quarterly reporting obligations should be removed.
- Companies should structure directors’ remuneration to relate incentives to sustainable long term business performance. Long-term performance incentives should be provided only in the form of company shares to be held at least until after the director has retired from the business.
- Asset management firms should similarly structure managers’ remuneration so as to align the interests of asset managers with the interests and timescales of their clients.
- The Government should explore the most cost-effective means for individual investors to hold shares directly on an electronic register.
The recommendations in the Final Report are aimed at key players in the UK equity markets as well as at regulators and the Government. The Business Secretary, Vince Cable, has announced that he will consider the recommendations made by Professor Kay in depth and will respond in detail later in 2012.
(BIS, The Kay Review of UK equity markets and long-term decision-making - Final Report, 23.07.12)
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Defra: Consultation on greenhouse gas emissions reporting - Draft regulations for quoted companies
On 25 July 2012, the Department for Environment, Food and Rural Affairs (Defra) published a consultation document seeking views on draft regulations requiring quoted companies (UK incorporated companies whose equity share capital is listed on the Main Market, is officially listed in an EEA State or is admitted to dealing on the New York Stock Exchange or Nasdaq) to report on their greenhouse gas emissions within their directors’ report. This follows an announcement by the Government on 20 June 2012 that regulations would be introduced requiring reporting of greenhouse gas emissions by UK quoted companies. The Government is to review the first two years of reporting by quoted companies in 2015 and will then take a further decision in 2016 on whether to extend the reporting requirements to all large companies.
It is proposed that the regulations will come into force for reporting years ending after 6 April 2013 so that annual reports published after that time will have to include greenhouse gas information. However, since proposed changes to the narrative reporting framework are likely to come into effect for reporting years ending after 1 October 2013, Defra seeks views as to whether implementation of the regulations for reporting greenhouse gas emissions should be deferred and come into effect at the same time as the new narrative reporting framework.
The Greenhouse Gas Emissions (Directors’ Report) Regulations 2013 which were published with the consultation paper propose the following:
- The greenhouse gases required to be reported on will be carbon dioxide, methane, hydrofluorocarbons, nitrous oxide, perfluorocarbons and sulphur hexafluoride.
- The directors’ report will need to state the annual quantity of emissions in tonnes of carbon dioxide equivalent resulting directly from any of the specified activities undertaken by the company. The annual quantity stated must include the leakage or other escape of emissions resulting directly or indirectly from any of the specified activities.
- The directors’ report must state the methodology used to calculate the tonnes of carbon dioxide emissions.
- The directors’ report must state if information included in the report was obtained as a result of the company’s compliance with certain schemes, including the CRC Energy Efficiency Scheme.
- The directors’ report must state a ratio (the carbon intensity ratio) which expresses a company’s annual emissions in relation to a quantifiable factor associated with the company’s activities.
- The information from the first reporting year will need to be included in subsequent directors’ reports to allow progress in emissions management to be visible.
- Although the directors should report emissions for the company’s financial year, there is flexibility to report company emissions on a different reporting year providing the directors make this clear.
- Within five years, the Regulations will be reviewed and a report with conclusions put before Parliament.
The closing date for the consultation is 17 October 2012.
(Defra: Consultation on greenhouse gas emissions reporting - Draft regulations for quoted companies, 25.07.12)
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Defra: Consultation on reporting guidance for business on environmental key performance indicators
On 25 July 2012, the Department for Environment, Food and Rural Affairs (Defra) published a consultation document seeking views on revised guidance for how UK organisations should measure and report on their environmental impacts. This guidance is intended to replace earlier guidance published by Defra in January 2006 since it is felt that that is in need of updating to reflect developments over recent years. The revised guidance is intended to complement guidance published by Defra in 2009 on measuring and reporting greenhouse gas emissions.
The aim of the revised guidance is to provide clear advice to companies on how to measure and report on their environmental performance using environmental key performance indicators (KPIs), help determine which KPIs are most relevant to an organisation and set out the rationale for managing environmental performance using KPIs.
The revised guidance replaces the original 22 KPIs and focuses on five key environmental categories covering air pollution and other emissions, water, biodiversity and ecosystem services, materials and waste. It is aimed primarily at UK incorporated quoted companies who are required to provide information in their business review about environmental matters to the extent necessary for an understanding of the development, performance or position of the company’s business, and it looks to explain how to go beyond basic reporting of impacts to set targets, normalise data and consider supply chain impacts.
The closing date for the consultation is 17 October 2012. The consultation document has been published at the same time as a consultation paper on new regulations requiring all UK incorporated quoted companies to report on their greenhouse gas emissions in their directors’ report.
(Defra, Consultation on reporting guidance for business on environmental key performance indicators, 25.07.12)
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European Commission: Amendments to proposed market abuse legislation to fight rate fixing
On 25 July 2012, the European Commission published amendments to its October 2011 proposals for a regulation on insider dealing and market manipulation (Market Abuse Regulation) and for a directive on criminal sanctions for market abuse (Market Abuse Directive). The move follows investigations into the possible manipulation of the Euro Interbank Offered Rate (EURIBOR) and the London Interbank Offered Rate (LIBOR) benchmarks for interbank lending rates by a number of banks. The European Commission argues that this has undermined the integrity of rates that are used as references for the pricing of many financial instruments, such as interest rate swaps, and resulted in misleading information being published by individual contributor banks.
As benchmarks are not explicitly covered by the existing legislative proposals, the European Commission is proposing to amend its proposals for a Market Abuse Regulation and a Market Abuse Directive in order to ensure that manipulation of benchmarks becomes a criminal offence. The changes to the proposed Market Abuse Regulation are as follows:
- amendment to the scope of the proposed regulation (Article 2) to include benchmarks;
- amendment to the definitions (Article 5) to include a definition of benchmarks, based on an expanded version of the definition used in the proposal for a Regulation on Markets in Financial Instruments (MiFIR);
- amendments to the definition of the offence of market manipulation (Article 8) to capture manipulation of benchmarks and attempts at such manipulation; and
- addition of a recital to clarify that the extension of the scope of the Regulation and the market manipulation offence include benchmarks.
The changes to the proposed Market Abuse Directive are as follows:
- amendment to the definitions (Article 2) to include a definition of benchmarks (this is defined “as any commercial index or published figure calculated by the application of a formula to the value of one or more underlying assets or prices, including estimated prices, interest rates or other values, or surveys by reference to which the amount payable under a financial instrument is determined”);
- amendment of the offence of market manipulation (Article 4) to capture manipulation of benchmarks themselves (this involves transmitting false or misleading information, providing false or misleading inputs or, any other equivalent activity); and
- amendment of the offence of "inciting, aiding and abetting and attempt" (Article 5) to include these behaviours in relation to the manipulation of benchmarks.
The amended proposals are to be considered by the European Parliament and the Council of the European Union before the adoption, in the autumn of 2012, of a Committee report (as regards the European Parliament) and a general approach (as regards the Council of the European Union) regarding the European Commission’s original proposals for a Market Abuse Regulation and a Market Abuse Directive.
(European Commission, Amended proposal for a directive on criminal sanctions for insider dealing and market manipulation (2011/0297 (COD)), 25.07.12)
(European Commission, Amended proposal for a regulation on insider dealing and market manipulation (market abuse) (2011/0295 (COD)), 25.07.12)
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ESMA: Version 16 of FAQs in relation to prospectuses published
On 23 July 2012, the European Securities and Markets Authority (ESMA) published the 16th version of its Frequently Asked Questions (FAQs) in relation to prospectuses. The FAQs, last published in early July 2012, provide responses to common questions on the Prospectus Directive and the Prospectus Regulation.
The key change since the 15th version is the addition of a new question 81 (and deletion of question 56), which provides guidance on consent given in retail cascades. ESMA refers to the draft Delegated Regulation amending Regulation No 809/2004 as regards information on the consent to use of the prospectus, information on underlying indices and the requirement for a report prepared by independent accountants or auditors in relation to profit forecasts and estimates, which was published by the European Commission in June 2012. ESMA strongly recommends that in order to ensure maximum consistency with the application of the Prospectus Directive, as amended by the draft Delegated Regulation (pending its official publication and entry into force), prospectuses granting their use in the subsequent resale of securities or the final placement of securities through financial intermediaries should anticipate the requirements of the draft Delegated Regulation. ESMA also recommends that, in complying with Article 3(2) subparagraph 3 of the amended Prospectus Directive, the issuer, the offeror or person seeking admission to trading on a regulated market should, as far as is possible, apply the requirements of the draft Delegated Regulation when drawing up prospectuses to be used in retail cascades and that these steps should be taken immediately.
(ESMA, Version 16 of FAQs in relation to prospectuses published, 23.07.12)
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