EY UK Governance and Regulatory Spotlight - March edition

Welcome to the March edition of our Regulatory and Governance Spotlight. With the March 2024 Spring Budget badged as a "Budget for long term growth", the attractiveness of the UK as a place to do business featured prominently. A British ISA to encourage investment in UK companies and the Private Intermittent Securities and Capital Exchange System (PISCES) which explores the possibility of creating a platform for controlled trading of securities by private companies, were proposed. Watch this space, as on 18 March, the Prime Minister also announced plans to legislate on a series of deregulatory measures to make the UK’s corporate reporting framework smarter, simpler, and better for business. The government proposes to:  

• Increase the monetary thresholds that determine company size by 50%.
• Remove several low-value, obsolete or overlapping requirements in Directors’ Reports and Directors’ Remuneration Reports.  
• Consult on exempting medium-sized companies from producing strategic reports. 

A pragmatic approach to implementing the changes to the 2024 UK Corporate Governance Code is important to maintaining the attractiveness of the UK. Click here to register for the EY UK Centre for Board Matters webcast on Tuesday, 23rd April 9:00 a.m. British Summer Time (BST) - Reporting or Re-thinking? Tackling the internal control changes. 

Diversity and Inclusion

Boardroom and senior leadership diversity has been in the spotlight over recent weeks. Positively, per the 2024 FTSE Women Leaders Review, the representation of women on FTSE 350 boards has increased beyond the 40% target, ahead of the December 2025 deadline. FTSE 100 and FTSE 250 companies have also made reasonable progress with the number of women in the senior roles (the two layers below board) — increasing to 35.2% (2023: 34.3%) and to 33.9% (2023: 32.8%) respectively. However, to meet the 40% target by December 2025, a woman would have to be appointed into every other senior leadership position. Given the wealth of female talent this should not be an insurmountable challenge; however, one thing that needs to be tackled is the gender pay gap.

Pay gap reporting, along with having an effective action plan, can identify and help tackle the causes of gender inequality. It is therefore disappointing that, according to the Chartered Institute of Personnel and Development report, 17% of large employers (250+ employees) admitted they haven't conducted gender pay gap reporting despite being legally required to do so.

The 2024 Parker Review report, a key benchmark to encourage the fair representation of ethnic diversity in UK businesses, was also published in March. The target of having at least one ethnic minority director on the board has been met by 96% of FTSE 100 companies and 70% of FTSE 250 companies (against the December 2024 target deadline) and positively, across the FTSE 350, there are now 15 board chairs and 26 Chief Executive Officers from an ethnic minority background. However, the number of Black directors on boards (compared to Asian) continues to lag behind their proportion in the UK population and more progress will be needed on improving the ethnic representation of senior management teams to meet company-specific targets for the end of 2027. To help, the 2024 Report contains a toolkit on race fluency and another one on running inclusive executive search recruitment processes to mitigate cognitive bias.

Governance and reporting updates

Private Company Reporting Trends

In January, the Financial Reporting Council (FRC) published a review of Reporting by the UK’s largest private companies the quality of reporting to be mixed, especially with regard to the clarity with which companies articulated material matters that were complex or judgemental. The FRC concluded that many identified issues could have been avoided through a sufficiently critical review of the annual report, ensuring it is concise, clear and excludes immaterial information while maintaining internal consistency.

Fraud

The Association of Certified Fraud Examiners and SAS Institute issued a benchmarking report which details how data analytics and other technologies are currently used in anti-fraud initiatives, along with challenges associated with implementing new anti-fraud technology. These insights are relevant in the context of the failure to prevent (FTP) fraud offence introduced by the Economic Crime and Corporate Transparency Act (ECCTA) 2023 which will come into force later this year, after the Government publishes guidance on what constitutes reasonable procedures to prevent fraud. The underlying principles for the guidance are expected to be similar to those underpinning other FTP offences. As such, in assessing readiness for the new fraud offence, companies may find the Financial Conduct Authority’s (FCA’s) recent letter to CEOs useful. It highlights common weaknesses observed in certain firms’ anti-money laundering and financial crime frameworks and it is worth companies use these as lessons learnt when preparing for the FTP fraud offence. There are however much broader implications of the FTP fraud offence that companies will need to consider. For example, a recent EY article explains why greenwashing will likely be captured by the definition of fraud.

Green Spotlight

There has been slower than expected progress on several actions within the Government’s 2023 Green Finance Strategy, with little to no status updates - assessing the International Sustainability Standards Board (ISSB) standards for adoption in the UK; exploring how to incorporate the Taskforce on Nature-related Financial Disclosures (TNFD) into UK policy architecture; and consulting on the UK green taxonomy and disclosure of transition plans by UK’s largest companies.

This slowdown in momentum has been noted by the House of Commons Environmental Audit Committee and in response, the UK Government recently confirmed that it will soon publish these two consultations, the latter of which will consider the role of the Transition Plan Taskforce (TPT) Disclosure Framework and will contribute to the UK's assessment and endorsement of the ISSB standards. However, no specific timeframes are disclosed for these consultations.

It will be interesting to see whether/how the general malaise in the UK around regulatory and reporting burden, and the pressures and backlash noted below in other jurisdictions, will impact the UK’s Government’s approach on introducing new requirements:  

• The definition of ‘large’ companies that fall within scope of the Corporate Sustainability Reporting Directive (CSRD) has changed, with turnover and asset thresholds increasing by 25%. Additionally, as discussed in the November 2023 edition of Spotlight and explained further in EY’s EU Sustainability Developments Issue 4, the sector-specific European Sustainability Reporting Standards (ESRS) and third country company ESRS have been delayed.   
• 6 March 2024, the US Securities and Exchange Commission (SEC) finalised its long awaited rule requiring public companies to disclose particular climate-related information in registration statements and annual reports. As explained in EY’s publication, the final requirements have been reduced compared to the SEC’s March 2022 proposals and notably exclude reporting on Scope 3 emissions. Scope 1 and 2 disclosures have also been narrowed only to emissions deemed “material” for larger SEC-registered businesses. 
• Whilst EU member states finally reached an agreement on the Corporate Sustainability Due Diligence Directive (CSDDD) on 15 March 2024, it was not without extensive negotiations and watering down. The number of the companies impacted has reduced by around two thirds (as compared to the original proposals) to around 5,000 companies as the employee threshold was increased to 1,000 and the turnover threshold to €450 million; the high-impact sectors approach has been scrapped; and it will be phased in over a longer-time period.  

Progress on global practices in sustainability disclosure and assurance is also mixed. According to the International Federation of Accountants’ (IFAC) 2024 State of Play report, developed in partnership with the American Institute of Certified Public Accountants (AICPA) and Chartered Institute of Management Accountants (CIMA), there has been an improvement in connectivity between sustainability reporting and financial statements, along with a sustained upward trend in businesses obtaining assurance on at least some ESG disclosures. The third year of the Flying Blind report series by Carbon Tracker on the other hand indicates that there is still a need for improvement, with only 37% of companies found to be providing insights into how they're integrating climate-related financial risks.

The IFAC report also emphasises that the use of varying sustainability standards and frameworks continues to make it difficult for stakeholders to find consistent and comparable sustainability information. This makes the UK Government’s decision on adoption and endorsement of the ISSB standards even more critical. For those who are looking to prepare ahead of this, EY’s recently published ISSB climate-related disclosure checklist provides a good starting point. At the same time, the Investor Forum’s recent initiative – 'Shaping Tomorrow’s Dialogues' – highlights that both companies and investors need to move beyond a sole emphasis on data reporting and collection, and prioritise a longer-term perspective, recognising that strategic investments are crucial for achieving meaningful transition.

Other regulatory updates

Regulations amending Companies Act to give effect to certain provisions of the ECCTA 2023 to radically transform Companies House and give it new quasi-regulator like powers have now started to take effect.  

• Effective 4 March 2024, new regulations provide it with greater ability to verify information and tackle inaccuracies; check company names and necessitate registered email addresses; share data with government bodies and law enforcement agencies; and annotate the public register if information is misleading or confusing.    
• Its fees will increase from 1 May 2024, to fund the additional work to enhance oversight over economic activities. 

Other significant ECCTA 2023 changes are yet to come into effect (dates currently unknown). These include providing a principles-based exception to the ban on corporate directors; identity verification requirements for new and existing company directors (and equivalents for other entities), persons with significant control and those filing information with Companies House; and the aforementioned FTP fraud offence.

Continuing in the vein of enhanced regulatory scrutiny and powers, the FCA is adopting a new approach to enforcement, and is consulting on plans to announce and publish the initiation and progress of its investigations, even when no enforcement action results. Proposed disclosures may include the subject of investigation, related industry sector and a summary of the suspected misconduct. Whilst the FCA proposes to give a company under investigation ‘appropriate advance notice’ before making an announcement or publishing an update, this will usually be no more than one business day.

Please get in touch for help with governance or narrative reporting matters. If your colleagues would like to subscribe to this e-bulletin, please share this form. Best wishes,

Mala and Maria

EY Corporate Governance Team

Contacts

Mala Shah-Coulon Associate Partner Ernst and Young LLP +44 (0)20 7951 0355 mshahcoulon@uk.ey.com

 Maria Kepa Director Ernst and Young LLP

+44 (0)20 7951 8164

mkepa@uk.ey.com