Newsletter for primary market participants
March 2023 / Number 44
1. Diversity and inclusion on company boards and executive management
In light of concerns that there was a lack of standardised and mandatory transparency about diversity on listed company boards, we recently introduced new Listing Rules in PS22/3 to require in-scope companies to disclose in their annual financial report whether they meet specific board diversity targets relating to sex or gender and ethnicity on a 'comply or explain' basis. Alongside this, we have also introduced a requirement for in-scope companies to publish standardised data on the composition of their board and most senior level of executive management by sex or gender and ethnic background.
To encourage a broader consideration of diversity at board level, we also introduced an amendment to the corporate governance rules within our disclosure guidance and transparency rules (DTRs) to indicate that, pursuant to existing reporting requirements on board diversity policies by in-scope companies, consideration should be given to wider diversity characteristics. This includes ethnicity, sexual orientation, disability, and socio-economic background.
The new rules are intended to increase transparency with better, more comparable information on the diversity of companies’ boards and executive management. This should in turn provide improved data for companies and investors to assess progress in this area, and inform shareholder engagement and investment decisions, enhancing market integrity and promoting greater diversity and inclusion.
1.2. Who’s in scope of the new rules
The companies in scope of our new Listing Rules are UK and overseas issuers with equity shares, or certificates representing equity shares, admitted to the premium or standard segment of the FCA’s Official List, excluding open-ended investment companies and shell companies, but including closed-ended investment funds and sovereign controlled companies
We are not applying the new Listing Rules to issuers of listed debt and debt-like securities, securitised derivatives, or miscellaneous securities.
DTR 7.2.8A R applies to certain UK issuers with securities admitted to UK regulated markets and to certain overseas listed companies, subject to existing exemptions for small and medium companies (see DTR 1B.1.7 R for full guidance on which companies are exempt).
1.3. Building capabilities to make relevant disclosures
The new Listing Rules and amended DTR came into force for accounting periods beginning on or after 1 April 2022. The first annual financial reports including disclosures subject to this rule will be published from April 2023.
To help listed companies, their directors and advisers, we are taking the opportunity to remind companies of our rules, guidance and expectations, including by providing some steps to help companies get ready for making the relevant disclosures. We also set out our supervisory strategy for monitoring and enforcing compliance with the new rules.
1.4. Our disclosure expectations
LR 9.8.6 R (9) and LR 14.3.33 R (1) require companies in-scope to provide a statement in their annual financial report on a ‘comply or explain’ basis, setting out:
a. Whether the listed company has met the following targets on board diversity as at a chosen reference date within its accounting period:
(i) at least 40% of the individuals on its board of directors are women
(ii) at least one of the following senior positions on its board of directors is held by a woman:
(A) the chair
(B) the chief executive
(C) the senior independent director
(D) the chief financial officer
(iii) at least one individual on its board of directors is from a minority ethnic background
b. In cases where the listed company has not met some or all of the targets in (a):
i. the targets it has not met
ii. the reasons for not meeting those targets
c. The reference date used for the purposes of (a) and, where this is different from the reference date used for the purposes of reporting this information in respect of the previous accounting period, an explanation as to why.
d. Any changes to the board that have occurred between the reference date used for the purposes of (a) and the date on which the annual financial report is approved that have affected the listed company’s ability to meet one or more of the targets in (a).
LR 9.8.6 R (10) and LR 14.3.33 R (2) require companies in-scope to also disclose in their annual financial report numerical data on the ethnic background and the gender identity or sex of the individuals on the listed company’s board and in its executive management as at the reference date used for the purposes of LR 9.8.6 R (9)(a) and LR 14.3.33 R (1)(a), which should be set out in the format of the tables contained in LR 9 Annex 2 and LR 14 Annex 1 and contain the information prescribed by those tables.
LR 9.8.6 R (11) and LR 14.3.33 R (3) require companies in-scope to provide an explanation of their approach to collecting the data used for the purposes of making the disclosures in LR 9.8.6 R (9) and (10) and LR 14.3.33 R (1) and (2). LR 9.8.6 I G and LR 14.3.36 G provide guidance on our expectations of what this should cover.
LR 9.8.6G (R) and LR 14.3.34 R state that where individuals on a listed company’s board or in its executive management are situated overseas, and data protection laws in that jurisdiction prevent the collection or publication of some or all of the personal data required to be disclosed under LR 9.8.6 R (10) and LR 14.3.33 R (2), then a listed company may instead explain the extent to which it is unable to make the relevant disclosures.
The scope of DTR 7.2.8A R is extended so that:
a. The company's disclosure on its diversity policy must include the diversity policy applied to its remuneration, audit, and nominations committees.
b. The policy must cover aspects such as ethnicity, sexual orientation, disability, and socio-economic background (in addition to the aspects of age, gender, or educational and professional backgrounds).
c. If the company does not apply a diversity policy, the corporate governance statement must contain an explanation as to why this is the case.
1.5. Providing reasons for not meeting targets and explanations about providing personal data
In the case where a listed company has not met the targets under LR 9.8.6 R (9)(a) and LR 14.3.33 R (1)(a), there are requirements under LR 9.8.6 R (9)(b) and LR 14.3.33 R (1)(b) to set out the targets not met and provide the ‘reasons’ for not doing so. Companies should provide clear and meaningful explanations as to why they have not met targets.
You are reminded of the guidance contained in LR 9.8.6H G, LR 9.8.6I G, LR 9.8.6J G and LR 14.3.35 G, LR 14.3.36 G, LR 14.3.37 G in relation to the requirements under LR 9.8.6 R (9) to LR 9.8.6 R (11) and LR 14.3.33 R.
In instances where individuals on a listed company’s board or in its executive management are situated overseas, and are not able to provide personal data required to be disclosed under LR 9.8.6 R (10) and LR 14.3.33 R (2) due to data protection laws in that jurisdiction, LR 9.8.6G R and LR 14.3.34 R state that a listed company may instead explain the extent to which it is unable to make the relevant disclosures.
Companies should provide clear and meaningful explanations as to the extent they are not able to make the relevant disclosures.
1.6. Supervisory approach
The FCA is responsible for monitoring, and where necessary, enforcing compliance with the new Listing Rules and amended DTR which cover diversity related disclosures, and for determining an appropriate supervisory approach.
The UK Corporate Governance Code (the Code) applies to all companies with a premium listing, whether incorporated in the UK or elsewhere, on a comply and explain basis, through LR 9.8.6 R (5), and LR 9.8.6 R (6). The Code refers to diversity in board composition and senior management in some of its Principles and Provisions.
The Financial Reporting Council (the FRC) which is responsible for setting and maintaining the Code, regularly reviews how premium listed companies have reported in line with the Code with a view to improving the quality of disclosures. As part of this, the FRC publishes periodic reports about board diversity and diversity related reporting by listed companies. This may extend to requirements covered by DTR 7.2.8A R.
1.7. Our approach to monitoring compliance
The supervisory approach extends to identifying cases where regulatory intervention may be needed to make sure listed companies comply with the new requirements and improve the quality of their disclosures so that they are providing sufficient, decision-useful diversity and inclusion information for investors.
As part of our supervisory work, we intend to conduct periodic reviews of annual financial reports to determine whether listed companies are meeting their disclosure requirements under the new Listing Rules and amended DTR. If a listed company’s disclosures do not appear to meet the requirements, we may ask the company to take corrective action, for instance enhancing their disclosures in subsequent annual financial reports.
Recognising that many listed companies will be applying these requirements for the first time, we also aim to identify areas of concern and disseminate examples of good practice through our periodic review work. Over time, we will also assess how far our regulatory intervention has resulted in a material improvement in both the completeness of diversity-related reporting and whether the targets have been met or exceeded.
1.9. Getting ready for the new D&I disclosures
We would like to remind premium and standard listed companies in scope of the Listing Rules:
- That Listing Principle 1 (which requires a listed company must take reasonable steps to establish and maintain adequate procedures, systems and controls to enable them to comply with their obligations (LR 7.2.1 R)) extends to establishing and embedding D&I reporting procedures, systems and controls in order to meet your obligations under the Listing Rules and DTRs.
- There is an expectation that listed companies retain records to support both the statement and numerical data disclosed in their annual financial reports.
We set out below the steps we would expect listed companies to have considered in preparation for making the relevant D&I disclosures on a comply or explain basis:
1. Review your governance arrangements for oversight of diversity and inclusion targets and reporting, including the roles of the board, sub-committees, and senior management.
2. Know your compliance framework including both new and existing rules and regulations.
3. Assess your existing public narrative reporting of diversity and inclusion.
4. Establish or enhance your procedures, systems and controls over data collection and reporting, including for choosing an appropriate reference date for data collected.
5. Where it appears you may not meet the targets or have the relevant data:
a. Ensure you can provide clear and meaningful explanations (which could include possible action plans) as to why you have not met the targets or do not have the relevant data.
b. You may wish to review the effectiveness of your existing board succession and recruitment plans.
6. Identify any legal restrictions which may prevent collection or publication of the required data.
1.10. Our future approach
We aim to have a data-driven and outcomes-based approach towards both monitoring compliance and policy evaluation. Periodic reviews and stakeholder engagement will be key to assessing the ongoing effectiveness of this policy intervention.
In line with this, we intend to review this policy in 3 years to assess the impact of our rules on promoting transparency on key diversity metrics and supporting market integrity. We will review the data to see if there is evidence to support enhancing our rules.
2. When a prospectus is required where securities are issued pursuant to Schemes of Arrangement
In PMB 30 we consulted on a proposed new Technical Note to be added to the Knowledge Base relating to the requirement to publish a public offer prospectus where securities are issued pursuant to a scheme of arrangement (Primary Market/TN/606.1 – When a prospectus is required where securities are issued pursuant to Schemes of Arrangement).
Having considered the consultation responses, we are proposing not to publish the proposed Technical Note.
We received 4 responses to the consultation. All respondents to the consultation were of the view that where securities are allotted under a scheme of arrangement there is no 'offer to the public' for the purposes of section 102B(1) of FSMA and therefore no public offer prospectus is required.
Respondents disagreed with our view that where a shareholder is being asked to make a choice between different forms of consideration (such as a mix and match), it is reasonable to conclude that a prospectus should be produced because an investor is deciding to buy or subscribe for the securities in question. This is because, in the view of respondents, the reference in the definition of 'offer to the public' to a decision to 'buy or subscribe for' securities envisages that there is an underlying contractual offer of securities which is capable of acceptance by the investor.
In the view of respondents, a scheme does not involve acceptance of an offer and therefore cannot result in a bilateral contract to buy or subscribe for securities: rather, the investor is expressing a preference and the securities are issued pursuant to the scheme. In the absence of a bilateral contract, respondents argue that there is no offer to the public within the meaning of the Prospectus Regulation.
While our own analysis remains unchanged, we recognise that the question of whether a prospectus is required is a question of law and ultimately is for the courts to decide. We also note that there is an ongoing legislative process to reform the UK prospectus regime. Under the draft Financial Services and Markets Act 2000 (Public Offers and Admissions to Trading) Regulations 2023 (the Statutory Instrument) published by The Treasury on 9 December 2022, securities allotted under a scheme of arrangement are excluded from the definition of public offer.
In light of the above, we are therefore not proceeding with the proposed Technical Note 606.1 at this time.
We remind issuers and their advisers that they are able to request individual guidance from us in the usual way if they have a query about a particular transaction.
3. Regulatory news announcements with multimedia content – DTR 6.3.5 R, DTR 8.4.22 R and MAR 17(1)
Issuers must use a Primary Information Provider (PIP) (also referred to as a Regulatory Information Service or RIS) whenever they are required to disclose regulated information as required by DTR 6.3.3 R (2).
Regulated information includes all information which an issuer, or any other person, who has applied for the admission of financial instruments to trading on a regulated market without the issuer’s consent, is required to disclose under DTR, articles 17 to 19 of the UK Market Abuse Regulation (MAR) or LR. Examples of regulated information are financial results or disclosure of trading in own shares, etc.
We are aware of a new practice in the market where some PIPs are offering the ability for issuers to include multimedia content, including audio and video content, in regulatory news announcements.
While we appreciate that this new functionality could help enhance the value of corporate communication, we want to flag some potential risks around the use of multimedia content and set out our expectations for mitigating these risks. In particular, multimedia content should not form part of any regulated information submitted for dissemination.
We believe the inclusion of multimedia content in regulatory announcements creates a risk of harm to market users through a potential reduction in clarity, particularly if it makes it less clear to the reader what is regulated information, including inside information, and what is not. There is also a risk that regulatory announcements containing multimedia content could breach certain requirements in the DTRs and the MAR.
MAR 17(1) states that 'issuers shall not combine the disclosure of inside information with the marketing of its activities'. There is a risk that the inclusion of multimedia content in announcements containing inside information could breach this requirement, if the information being communicated within the multimedia content constitutes promotion or publication of the issuer’s operations.
Whilst this risk already exists for regulatory announcements published in text format, we believe the risk is heightened when using multimedia content which may not be subject to the same level of due diligence as text information before being published in a regulatory news announcement. We would expect issuers to ensure that any announcements containing multimedia content is compliant with MAR in this regard.
In addition, DTR 6.3.5 R requires an issuer to 'communicate regulated information to the media in unedited full text'. Whilst we have not yet observed any cases of regulated information being disclosed in a multimedia format, such as an embedded video clip, we believe there is a risk this could occur.
MAR 17(1) and DTR 6.3.5 R exist to help ensure issuers disclose regulated information, including inside information, to the public as soon as possible and in a way that enables investors to identify, access and evaluate the information to support informed investment decisions. Any detriment to these outcomes creates a risk of harm for investors.
In a worst-case scenario, there is a risk that splitting the information being disclosed in a regulatory announcement between text format and multimedia content could mislead market users. For example, if it leads to the regulated information being communicated becoming misrepresented or distorted.
We expect issuers to comply with their obligations under MAR 17(1) and DTR 6.3.5 R, which require issuers not to combine the disclosure of inside information with the marketing of their activities and communicate regulated information to the media in unedited full text respectively.
We also expect PIPs to comply with their obligation under DTR 8.4.22 R which requires PIPs to disseminate regulated information in unedited full text as submitted to the PIP and in an industry standard format.
On the basis that by providing this facility, PIPs are exposing their customers to a new risk that they may disseminate regulated information in a non-compliant format, PIPs should consider this risk and what steps they can reasonably take to reduce the probability of this risk crystallising. Examples of how PIPs could go about mitigating this risk include providing guidance on their website on the proper use of this option, warnings to customers around DTR 6.3.5 R and MAR 17(1) or checkboxes if multimedia formats are selected.
We will continue to monitor the use of multimedia content in regulatory news announcements, particularly the inclusion of embedded video content, to assess any developments in the identified risks.