Developments in the UK Market
Structure of Financial Services Regulation
On June 16, 2010, the UK government announced major changes to the UK's financial services regulatory structure that will result in the UK Financial Services Authority (FSA) ceasing to exist in its current form. The government intends to establish the following bodies by the end of 2012:
- Prudential Regulation Authority;
- Consumer Protection and Markets Authority;
- Financial Policy Committee;
- Serious Economic Crime Agency.
The government will publish a consultation on its proposals before Parliament's summer recess.
On May 28, 2010, the Financial Reporting Council (FRC) published the final version of the UK Corporate Governance Code together with a report on the Code consultation and revisions made to the Code. In the final version of the Code, the FRC has maintained the approach set out in its consultation and focused on changing the Code’s "tone" by making limited but significant changes, including:
- A new introduction that focuses on what a board does, how it sets the values of the company, and how it needs to take responsibility for ensuring good governance and Code-compliant operations.
- A new section at the start of the Code setting out the revised main principles, which are designed to guide board behaviours.
- To "increase accountability," a requirement that all directors of FTSE 350 companies be proposed for annual re-election.
- To "promote proper debate," new principles on leadership by the chairperson, the responsibility of non-executive directors to provide constructive challenge, and the time commitment expected of all directors.
- To "enhance the board's performance," a requirement that the chairperson regularly review directors’ development needs and that board evaluation of FTSE 350 companies be externally facilitated every three years.
- To encourage boards to be "well-balanced," a new principle on board appointments with due regard for the benefits of diversity on the board, including gender.
- To improve "risk management," provisions that the board should be responsible for determining the nature and extent of the significant risks it is willing to take, and that the company's business model should be explained in the annual report.
- A requirement that performance-related pay should be designed to promote the long-term success of the company.
The Code will apply to all companies with a Premium Listing, regardless of whether they are incorporated in the UK or elsewhere, for reporting years beginning on or after June 29, 2010. The next review of the Code is set for 2013.
Office of Fair Trading Market Study on Equity Underwriting
On June 10, 2010, the UK Office of Fair Trading (OFT) announced its intention to launch a market study into equity underwriting and associated services in the summer of 2010. It is proposed that the report will focus on rights issues and other types of equity-raising by large public companies. The main activities to be covered are providing advice to companies, arranging issues, and underwriting. The OFT is considering whether to also cover capital raisings by AIM companies and IPOs, and whether there are any other related services or activities to include. Three key areas have been identified for assessment: (i) how underwriting and related services are provided; (ii) how underwriting services are purchased; and (iii) how the regulatory environment affects the provision of these services.
CESR Recommendations on Competent Persons Reports (CPRs)The Committee of European Securities Regulators (CESR) has been consulting on the matter of mineral resource reports to be included in certain prospectuses and transaction circulars in respect of companies listed on the Official List of the FSA and other European-regulated markets. It has identified a number of issues with the current guidelines, which provide that the listed company must agree with the regulator (in the UK, the FSA) the form and content requirements and applicable industry standards in relation to the CPR, stating that, relative to other markets with significant mineral sectors, the existing European provisions are "slight." It also notes that allowing European Economic Association (EEA) member states to specify the content and the reporting standard of the CPR creates practical difficulties because there is no certainty as to which reserve reporting codes are acceptable and which content requirements should apply in European prospectuses and circulars. Finally, the current guidelines draw distinctions between producing- and exploration-stage companies, and specify transactions that require the publication of a CPR, which do not accord in a number of respects with European and international market practice. The consultation closed on July 15, 2010.
The key proposed amendments to the existing approach include:
- The scope of the guidelines is amended to include both producing- and exploration-only mineral companies.
- There are additional disclosure requirements where the proceeds are to fund exploration and/or development costs, including an explanation of any inconsistency between these disclosures and information already in the public domain.
- A CPR is required when a company is first admitted to trading but not, in normal circumstances, thereafter (provided the issuer has continued to report and publish details of its resources, reserves and results / prospects annually in accordance with one of the specified reporting standards). The new guidelines envisage the possibility of "passporting" CPRs and updating materials published by issuers listed on the Toronto Stock Exchange, although market practice will need to develop in this area.
- Detailed requirements for the preparation and content of the CPR are provided, including requirements as to the qualification of the person providing the report, the age of the report, and acceptable reporting and valuation standards.