Corporate governance key updates | July – October 2024

In the first King’s Speech since the General Election, the Labour Government announced its intention to introduce a draft Audit and Governance Reform Bill (the Draft Bill).

The Draft Bill builds on the former Conservative Government’s published responses in May 2022 to its March 2021 consultation paper Restoring Trust in Audit and Corporate Governance. In its response, the previous Government confirmed intentions to implement and/or modify several reforms proposed in the consultation but did not achieve the reforms during its term in office.

The recently announced Draft Bill aims to formalise the following measures (some of which remain unchanged from the former Government’s published response):

• the creation of a new statutory regulator to be known as the Audit, Reporting and Governance Authority (the ARGA) to replace the Financial Reporting Council (FRC);
• the amendment of the definition and status of Public Interest Entity (PIE) to include the largest private companies, bringing them into the scope of the ARGA’s new and expanded powers to ensure that the auditors of such companies are of high quality and rigorously scrutinised to identify early warnings of financial instability;
• the extension of the scope of accountability of company directors regarding incorrect financial statements, as the Draft Bill will grant and expand the ARGA’s powers to investigate, tackle and sanction company directors for serious failures in relation to their financial reporting and audit responsibilities, as currently directors of a company making incorrect financial statements can only be held accountable by the regulator if they are members of an accounting body; and
• the creation of a regime to oversee the audit market and protect against conflicts of interest at audit firms.

The FRC emphasised its support for the proposed legislation, stating that the new legislation will enable a regulator to act fully in the public interest, support economic growth, and assist the ability of companies to attract capital.

The proposed legislation highlights the Government’s commitment to address gaps exposed by high-profile corporate failures, aiming to protect stakeholders by rebuilding public trust and confidence in the corporate sector, its health, and its longevity. The reform would have a direct impact and increase accountability for officers, directors and auditors of companies by establishing stricter oversights through a potential new regulator and strengthening risk management; in turn, it would have an impact on lending and investment decisions, which could enhance the UK’s competitiveness by ensuring higher standards of transparency in audit and corporate governance.

Following the FRC’s launch of the Stewardship Code (the Code) in February 2024, it announced significant changes to the Code on 22 July 2024.

The new update applies to the Code’s application process. The immediate interim changes made relating to the application process within the update were designed to significantly reduce the reporting burden on existing signatories by:

• removing the requirement to annually disclose all ‘Context’ reporting expectations for all existing signatories, except for new reports or where there are material changes to previous reports and disclosures;
• removing the requirement for Asset Managers and Assets Owners to annually disclose against ‘Activity’ and ‘Outcome’ reporting expectations for Principles 1, 2, 5, and 6;
• explicitly allowing the use of content from previous reporting and cross-referencing of such reports in an existing signatory’s most recent report with no need to repeat in the new report, where there have been no material changes;
• setting clear expectations of what is considered an ‘outcome’ for stewardship purposes; and
• emphasising the ability to exercise reporting against Principle 10, collaborative engagement, and Principle 11, escalation ‘where necessary’.

These interim changes will apply for the next application window from 31 October 2024, until the formal implementation of a new Code in 2026.

In addition to immediate changes to the application process, the FRC set out five priority themes that it will focus on in its review of the Code after extensive engagement with over 1,500 stakeholders during early 2024.

The five themes are:

• Purpose: The FRC will consider all stakeholder views and set out its expectation of what defines effective stewardship, what this looks like in practice, and how reporting against the Code can help to deliver this.
• Principles: The FRC is considering what reporting will be necessary to deliver on a renewed purpose of the Code.
• Proxy Advisors: The FRC will carefully consider how the Code might support greater transparency of their activities.
• Process: The FRC will take forward proposals to reduce the reporting burden currently associated with being a Code signatory and ensure that information included in reports is useful and accessible to all underlying investors and other stakeholders.
• Positioning: The FRC is working closely with other regulators, such as the DWP, TPR, and FCA, to support clarity in understanding the revised Code and its successful implementation. The Code will continue to support the objectives of those other regulators to avoid any confusion and duplication that signatories may encounter.

The FRC held further focused engagement with stakeholders during August and September this year, encouraging stakeholder input and engagement on these topics throughout this initial process and during the formal consultation later this year.

The revised Code is expected to be published in 2025, with formal implementation of the new Code being planned for 2026.

According to the FRC, the changes are intended to ensure that the Code is supporting UK capital markets, reducing reporting requirements and driving better stewardship outcomes. The FRC continues to ensure its focus remains on ensuring the Code reflects high-quality stewardship and reporting standards for investors.

On 5 August 2024, the FRC published a consultation that sets out its proposals for revised Guidance on the Going Concern Basis of Accounting and Related Reporting, including Solvency and Liquidity Risks (the Guidance).

The Guidance is non-mandatory and aims to provide proportionate and practical guidance to all UK companies within its scope.

By combining the requirements and/or provision of company law, accounting standards, auditing standards, listing rules, the UK Corporate Governance Code (the Code), and other regulation relating to reporting on the going concern basis of accounting and solvency and liquidity risks, the Guidance also encourages directors to go beyond the specific requirements in accounting standards and take a wider view of the risks and uncertainties and only use the term ‘going concern’ when referring to the going concern basis of accounting for the preparation of financial statements.

The Guidance also acknowledges that companies have internal risk management and control processes in place that frame their assessment and that the amount of information disclosed should be proportionate to the uncertainties to which a specific company is exposed, and that the degree of formality of these processes may depend on the size, complexity, and particular circumstances of the company.

The key changes within the Guidance are that:

• it includes companies applying the Code within the scope of the Guidance;
• changes within accounting standards and auditing standards are carried over into the Guidance;
• it provides additional guidance on overarching disclosure requirements in accounting standards; and
• it provides additional guidance on the factors directors could consider when assessing the appropriateness of the going concern basis of accounting and solvency and liquidity risks, as well as techniques that could be used to support them during the process.

The FRC will consult with its stakeholders on the Guidance and looks forward to receiving responses to the proposals by the consultation closing date on 28 October 2024. Once finalised, the Guidance will replace the FRC’s existing guidance, issued in 2016, and expects to publish the final guidance in early 2025. The key matters on which the FRC seeks feedback are:

• whether the draft Guidance is sufficient for the different types of in-scope company, particularly Code companies;
• whether the additional guidance on overarching disclosure requirements is helpful, when applicable to going concern assessments; and
• whether the draft Guidance is sufficiently proportionate to all in-scope companies.

The FRC continues to emphasise the importance it places on the areas of accounting and reporting practices by ensuring it provides support to UK companies and works with industry in order to facilitate the delivery of high-quality reporting.

The Department of Business & Trade has updated its published guidance for reporting on payment practices and performance. The key amendments are:

• an update to the meaning of “balance sheet to determine whether a company/LLP exceeds two or all of the thresholds for qualifying as a medium-sized company under section 465(3) of the Companies Act 2006;
• further guidance in relation to the additional reporting requirements introduced by the Reporting on Payment Practices and Performance (Amendment) Regulations 2024;
• examples and further guidance on the phrase “receipt of invoice”; and
• further guidance on reporting statistics where supply-chain finance applies.

Organisations which are required to report on payment practices and performance should refer to the updated version available on the Department for Business & Trade website to benefit from the new guidance.

On 27 September 2024, Companies House published a new policy outlining its new and enhanced enforcement powers following the changes set out under the Economic Crime and Corporate Transparency Act 2023.

Companies House will continue to support companies to comply with their legal obligations, e.g. the requirement to file certain forms, such as an annual confirmation statement, but the aim of the publication is to provide guidance and warn registered companies to keep on top of their statutory obligations and requirements.

Companies that fail to comply with their legal obligation and/or ignore the warnings provided by Companies House for circumstances such as late filings and false statements will be held accountable.

The enforcement policy sets out the powers that Companies House will now use in order to administer several options regarding enforcement, including its approach to levying and imposing financial penalties, seeking court orders to secure compliance, launching criminal proceedings, and seeking director disqualification orders. Companies House will also work with enforcement partners, such as the Insolvency Service and the Department for Business & Trade, to share intelligence, refer cases, and promote enforcement action where appropriate.

Before imposing a penalty, Companies House will issue a “warning notice” flagging the suspected offence and give the recipient 28 days to make representations. The registrar will aim for enforcement action to be proportionate to the harm and the seriousness of the breach of law, having regard to economic growth of the companies and the impact that its actions could likely cause companies, i.e. reputational damage, when considering the enforcement options.

The policy outlines a series of examples as to how Companies House may apply its powers.

In the instance of companies that are generally compliant but occasionally fail to file on time, it contemplates engaging with the companies to provide support and guidance and limiting penalties to fines. For companies that tend to commit more frequent and inaccurate filings, Companies House anticipates using its querying powers, seeking court orders and prioritising prosecutions for false filings. In serious cases, this may escalate to seeking a director disqualification order, imposing financial penalties, or striking a company off. Additionally, when considering whether to bring criminal proceedings, Companies House will apply the public interest test set out in the Code for Crown Prosecutors.

The financial penalties guidance provides more detail on the process for imposing financial penalties. For example, it sets out how Companies House will calculate financial penalties using the “standard scale” of fines for summary criminal offences, varying between £250 per offence for less serious offences (for first-time offences) and £2,000 per offence for serious and/or repeated offences.

Management and companies can review the policy for further information on the registrar’s new enforcement powers, the different penalties that may apply for a breach of company law, how to pay a financial penalty and how to appeal a penalty.