FRC calls for better governance and reporting, with a heightened emphasis on corporate sustainability and trust

The Financial Reporting Council (FRC) has published its annual review of the UK Corporate Governance Code. In doing so, it urged firms to enhance their governance practices and reporting in order to demonstrate their positive impact on the economy and wider society.

What have firms been told to do?

The independent regulator said that while the bar had been raised ‘considerably’ by alterations to the 2018 UK Corporate Governance Code leading to some high-quality reporting, there was a need for more emphasis to be placed on longer-term sustainability.

Such a sustainability focus, the body said, needed to encompass such matters as stakeholder engagement, diversity and the importance of corporate culture, and that it expected these changes to ‘take time to bed in’.

The UK Corporate Governance Code was updated to aid in building trust in business by forging strong relationships with key stakeholders. It urged firms to align purpose, strategy and culture in addition to promoting integrity and valuing diversity as part of a focus on long-term sustainability.

The FRC’s annual review looked into reporting against the 2016 Corporate Governance Code and assessed FTSE 100 ‘early adopters’ of the modified 2018 Code. This revised Code came into force in 2019, with all premium listed companies set to report against it in 2020.

Some eye-catching highlights in the FRC’s analysis  

The regulator said it had found some good examples of reporting by firms that were increasingly using incentives relating to non-financial matters and embracing a longer-term strategic perspective.

Many companies, however, were evidently grappling with defining purpose, and what an effective culture means, the body criticising some firms for ‘substituting slogans or marketing lines for a clear purpose’.

The FRC added that the companies it examined were still insufficiently considering the importance of culture and strategy and the views of stakeholders. It said that in the wake of the regulator’s 2016 report on culture, organisations should be commenting on culture, in addition to outlining how they are monitoring and assessing it.

A lack of reporting on diversity also disappointed the regulator, which nonetheless said that “those companies that did report well had clear plans to meet targets – beyond just gender – and understood the long-term value of diversity”.

It was noted, too, that many firms described the use of engagement surveys as an effective means of gaining insight into employee engagement and culture. However, while the FRC said such surveys can be useful, it warned against the use of them in isolation, explaining that “companies must be able to demonstrate that the engagement methods used are effective in identifying issues that can be elevated to the board, and how this affects company decisions.”

Companies urged not to pay mere ‘lip service’ to the Code 

Chief executive of the FRC, Sir Jon Thompson, said of the review’s findings: “While there are examples of high quality governance reporting from ‘early adopters’, looking ahead, we expect to see much greater insight into governance practices and outcomes reporting on a range of key issues from diversity to climate change.”

“Concentrating on achieving box-ticking compliance, at the expense of effective governance and reporting, is paying lip service to the spirit of the Code and does a disservice to the interests of shareholders and wider stakeholders, including the public.”

Are all aspects of your own organisation’s governance and reporting well aligned with the principles of the latest UK Corporate Governance Code, or would you possibly benefit considerably from the know-how in this area of our own experienced professionals here at London Registrars?

Either way, we would be delighted to talk to you about our wealth of company compliance services, to help to ensure that the most specific and demanding aspects of corporate governance are not a cause of headache to you and other stakeholders in your organisation in 2020. Simply email [email protected] or call 020 7608011 for further information.  

 

23 January 2020

 

 

QCA publishes updated Audit Committee Guide

On 12 September 2019, the Quoted Company Alliance (QCA) released a new and updated version of its Audit Committee Guide. This updated version of the guide, which is designed to help audit committee members, and especially the audit committee chair, to be more effective in their roles, succeeds the version dated November 2014.

The Guide outlines what the QCA regards to be best practice and is intended to accompany the organisation’s Corporate Governance Code.

How does the Guide differ from the 2014 version?

There are various respects in which the newly published Guide has been altered compared to its predecessor – including on such subjects as audit committee effectiveness, roles and responsibilities, risk management and internal control.

The new Guide, for instance, states that audit committees are most effective when they consist of a minimum of two independent non-executive directors. It underlines the importance of an adequate balance of skills, as well as the need for ongoing improvement.

Meanwhile, the updated Guide has also expanded the roles of the audit committee, its chair, the finance director and the company secretary. In this section, which will be of interest to those considering or drawing upon London Registrars’company secretarial expertise, the document states that the company secretary is not normally, and should not be, a committee member. Nor, unless this is impractical, should the company secretary be the finance director.

The parts of the document dedicated to risk management and internal control has also undergone significant expansion. It recognises, among other things, the dynamic and evolving risk landscape and the requirement for companies to think about risks in their extended business.

Building on this subject, it is advised in the Guide that the audit committee obtains a clear understanding of threats and opportunities, their potential impact and monitoring. Every committee meeting should also consider any new risks and any changes to the impact of risks.

The 2019 version lacks the anti-bribery and anti-corruption section that was contained in its 2014 counterpart, and the whistle-blowing section has also been reduced.

But those are not the only notable changes 

Looking elsewhere in the Guide, a new section has been introduced on the subject of the audit committee’s relationship with external auditors, largely incorporating guidance from other sections of the 2014 version. New provisions are outlined here on tendering.

The annual cycle is also addressed in the latest document, this section’s guidance largely resembling that of the previous version. Further guidance does appear, however, in relation to new accounting policies, the payment of dividends and the audit opinion.

There is also a section on the audit committee report, covering additional features of the report. These features are with regard to auditor rotation, appointment, tendering, the risk and control framework and processes, and the internal assurance or audit function.

Finally, changes can also be found in the appendices: Appendix A (Work programme for the audit committee), which includes additional agenda items for the sixth month of the financial year in relation to approving audit fees and non-audit service provision policy, and Appendix B (Induction framework information pack). The information in Appendix B was previously included in the body of the Guide.

Contact London Registrars for further related guidance and know-how

There is much in the Guide that is of relevance to non-listed companies and we would advise you to consult London Registrars who can also give you the benefit of more comprehensive assistance and advice in respect of any of the points contained in the document.

Call our experienced professionals today on 020 7608 0011, to discuss the far-reaching company secretarial support that we can provide to free you up to focus more closely on your core business.

13 January 2020

Revised UK Stewardship Code published for 2020

Late October saw the Financial Reporting Council (FRC) publish the final draft of the UK Stewardship Code 2020, with various notable changes having been made to the consultation draft that will be of interest to organisations making use of London Registrars’ company secretarial services.

What changes have been made?

Among the alterations made to the previous draft are amendments to the definition of stewardship, to clarify that the purpose is to create value for clients and beneficiaries as opposed to the beneficiaries, the economy and society as the previous draft stated.

Indeed, the Code now defines stewardship as “the responsible allocation, management and oversight of capital to create long-term value for clients and beneficiaries leading to sustainable benefits for the economy, the environment and the society”.

The 2012 Code had 10 ‘comply and explain’ principles with supporting provisions, supported by detailed guidance.

The new Code has been substantially restructured, so that it now consists of 12 ‘apply and explain’ principles for asset owners and six ‘apply and explain’ principles for service providers, with reporting obligations for both.

But these are not the only significant edits

The final draft of the 2020 Code also incorporates an introductory statement that reporting should be fair, balanced and understandable, with examples of successful and unsuccessful outcomes.

Removed from this draft, meanwhile, is the requirements for a separate policy and practice statement on signing up to the Code.

Another significant change is the addition of a further reporting expectation that asset owners and managers must disclose the proportion of shares voted in the past year, and why.

As for the FRC’s proposed mechanism for investors to escalate concerns about an investee company in confidence, the FRC said it had shared responses to this consultation question with the Department for Business, Energy and Industrial Strategy (BEIS) for their consideration.

With regard to enforcement, the FRC stated that it would grow its stewardship team and work with BEIS to keep enforcement and regulatory powers under review.

The new version of the Code will take effect from 1 January 2020.

Ask London Registrars about their company secretarial support services

If you are seeking to position your company advantageously for success in the months and years ahead, do not hesitate to talk to the London Registrars team today.

We will provide the company secretarial services and expertise necessary to ensure your firm benefits from the highest standards of compliance and governance throughout 2020.

13 January 2020

Potential implications of the Digital Services Tax for companies

Many of those who set up a company with the assistance of London Registrars may be interested to learn more about the UK’s coming Digital Services Tax (DST), which – while not yet in force – is expected to apply from 1 April 2020 to profitable high-tech businesses making sales in Britain.

What is the Digital Services Tax?

First announced in the 2018 Budget, the DST is a new 2% tax that will be levied on the revenues of search engines, social media platforms and online marketplaces that derive value from UK users.

While the obvious targets for such a tax are American tech giants like Amazon, Apple, Google and Airbnb, examples have been found of other companies that are likely to be subject to the DST.

The European Commission was the first entity to propose a DST in response to the increasing digitalisation of the economies of the European Union (EU). However, the UK is set to become one of the first territories to implement the tax in its domestic legislation.

France has already approved a temporary DST, levying a tax of 3% on the turnover of companies with digital business in the country that have digital business models and revenues exceeding €750 million globally and €25 million in France.

Meanwhile, in the UK, DST will apply to qualifying firms for which a double threshold has been reached, of £25 million annual UK turnover and £500 million annual turnover worldwide. A 2% charge will be imposed on the UK revenues of the aforementioned ‘specific digital business models’ of search engines, social media platforms and online marketplaces.

Is your own company likely to be subject to this tax?

Those who have set up a company and are curious as to whether they may be affected by DST should note that it is applicable to revenues rather than profits. This differs from corporation tax protocols, where tax is charged on profits instead of turnover.

Put simply, a digital business that generates more than £500 million turnover worldwide is likely to find that its UK trade is within the scope of the DST; however, the first £25 million of its UK sales will be tax-exempt.

Will non-UK incorporated and/or non-UK resident companies be affected?

The UK’s approach to the new tax is narrower than that applied in France, with the provision of a social media platform, search engine and online marketplace being regarded as a taxable business activity for the purposes of DST.

A non-UK resident company providing digital services to its UK customers who use the company’s services online from the UK will therefore be within the DST’s scope in the same way as a UK-resident firm.

How are gambling businesses impacted?

In principle, it is thought that DST should apply to gambling businesses. This is in light of the European Commission specifically clarifying that neither online gambling nor gambling companies should be excluded from the legislative framework for DST.

Then, there is the matter of the UK, EU and US

The British government has said that it will only apply DST when an appropriate long-term solution – for example, an international agreement – is in place. However, it is far from certain as to when this may happen.

Finally, the strong opposition to the French DST voiced by US trade representative Robert Lighthizer – who complained that the tax unfairly targeted American firms – could also have very serious implications for the UK DST, perhaps even ultimately leading to the tax being abandoned altogether.

With the UK set to depart from the EU, hostility from Washington would seem especially pertinent as it is Lighthizer who the UK would need to negotiate with for a future trade deal.

Are you looking to set up  a company and benefit from the highest standard of business support services now and into the 2020s? If so, the London Registrars team would be happy to receive your enquiry about any area of our wide-ranging expertise.

9 September 2019

A quick guide to the ‘three lines of defence’ risk governance framework

As a user of company compliance and business address services like those provided by us here at London Registrars, you may have previously encountered references to the ‘three lines of defence’ model. This is a well-established governance framework for risk management and will help your organisation to set out clear roles and responsibilities in this vital area.

The ‘three lines of defence’ model was developed as a result of concerns about the potentially greater risk of accidents in organisations where additional layers of redundancy and safeguards are added.

It was feared that such extra layers could make systems unduly complex, thereby increasing the inevitability of failure. Firms implementing the ‘three lines of defence’ model therefore do so with the aim of defining clear roles and responsibilities, and maintaining separation between those roles, to help prevent accidents.

Defining the three lines of defence

The model sets out three distinct groups within an organisation that are necessary if risk is to be effectively managed. The aim is to provide a simple and effective way to enhance risk management communication through the clarification of essential roles and duties.

The roles and responsibilities are spread across first, second and third lines of defence. The first line of defence concerns functions that own and manage risk.  The second line of defence relates to functions that monitor risk and compliance. Finally, the functions that  make up the third line of defence are those that provide independent assurance on risk management.

The board and senior managers are the primary stakeholders served by these lines. Crucially, the three lines are closely aligned in their work, partnering with each other to ensure the strongest possible risk management.

How can your company ensure the success of this model?

The ‘three lines of defence’ model is as much about the wider system as it is about the individual lines. To implement this risk management model successfully within your own firm, it is vital to freely share information, coordinate activities and keep stakeholders informed.

Information must flow dynamically across the three lines if your organisation is to achieve the best possible results from this model. However, the exact way each line of defence works will depend on what suits your organisation.

For more comprehensive corporate governance, risk and compliance support, and business address services, do not hesitate to contact the London Registrars team.

16 August 2019

 

Risk Coalition – Draft Principles and Guidance

Consultation draft principles and guidance set out by the Risk Coalition

In early July, the Risk Coalition published consultation draft principles and guidance for board risk committees and risk functions in the UK’s financial services sector, a development that may be of interest to many of those using our UK company formation services here at London Registrars.

The Risk Coalition is a network of not-for-profit professional bodies and membership organisations seeking to raise the standards of UK risk governance and risk management.

What purposes is the draft guidance meant to serve? 

It is intended that the draft guidance will provide coherent and authoritative principles-based guidance on good practice for board risk committees and risk functions.

Other aims of the draft guidance include the development of a common understanding of the purpose and remit of board risk committees and risk functions, as well as the provision of a benchmark against which board risk committees and risk functions can be objectively assessed.

What is contained within the guidance?

The guidance consists of two parts, and assumes that organisations operate a risk management model based on three lines of defence.

The first part of the guidance concentrates on setting out reasonable expectations for a mature board risk committee, by defining eight key principles, alongside supporting guidance on how they may be met. These principles cover such areas as the role of the board risk committee and board accountability, board risk committee composition and membership, risk culture and remuneration, risk management and internal control systems and risk information and reporting.

The second part of the guidance, meanwhile, addresses the role and responsibilities of the chief risk officer and second line risk function.

A consultation of relevance well beyond financial services firms

While the draft guidance’s scope is limited to financial services, the Risk Coalition hopes the principles it establishes will be regarded as pertinent to other sectors, with consultation responses welcomed from those outside financial services.

The consultation will close on 20 September 2019, and the Risk Coalition expects to publish a final version of the guidance in December 2019.

If are you presently seeking out the most appropriate UK company formation services for your own business, simply email, call or fax us today and our company incorporation experts would be pleased to discuss your requirements.

15 August 2019

First prison sentence arising from the GDPR should remind firms of their responsibilities

In the first case of its kind, prosecution by the Information Commissioner’s Office (ICO) has led to an employee being handed a jail term due to their misuse of customers’ personal information. It is the latest story that should highlight to organisations the importance of paying heed to the new data protection regime under the much-publicised General Data Protection Regulation (GDPR).

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