Register of Overseas Entities (Verification and Provision of Information) (Amendment) Regulations 2022

On December 21, 2022, the Register of Overseas Entities (Verification and Provision of Information) (Amendment) Regulations 2022 were laid before Parliament and published, together with an Explanatory Memorandum (Amendment Regulations). The Amendment Regulations come into force on January 12, 2023 and amend the Register of Overseas Entities (Verification and Provision of Information) Regulations 2022 (SI 2022/725) (Verification Regulations). The Verification Regulations were implemented under section 16 Economic Crime (Transparency and Enforcement) Act 2022 to provide a regime for the verification of information submitted to Companies House by an overseas entity for entry on the Register of Overseas Entities (ROE) maintained by Companies House.

The Amendment Regulations address practical difficulties identified after commencement of the ROE by amending certain provisions relating to the verification of information in the Verification Regulations.

In outline, the Amendment Regulations provide as follows:

  • Regulation 2(2) (which substitutes a new Regulation 5(1) in the Verification Regulations) excludes certain information from being verified: where this relates to a government or public authority, the beneficiaries of certain pension trusts, and relating to updating and applications for removal where the information has already been verified.
  • Regulation 2(3) and (4) amend Regulation 6(6) of the Verification Regulations to allow a relevant person to verify information relating to beneficial ownership differently from other information.
  • Regulation 2(5) replaces "close business relations" in Regulation 7(4)(a) of the Verification Regulations with a more precise phrase.
  • Regulation 2(6) amends Regulation 8(1) of the Verification Regulations by expanding the scope of the information which must be retained by a relevant person.

(Register of Overseas Entities (Verification and Provision of Information) (Amendment) Regulations 2022, SI 2022/1389, 21.12.2022)

(Register of Overseas Entities (Verification and Provision of Information) (Amendment) Regulations 2022, Explanatory Memorandum, 21.12.2022)

FRC: Areas of supervisory focus for 2023/24 announced

On December 16, 2022 the Financial Reporting Council (FRC) announced its areas of supervisory focus for 2023/24, including priority sectors, for corporate reporting reviews and audit quality inspections.

Thematic reviews of corporate reporting for 2023/24

The FRC's Corporate Reporting Review team will conduct four thematic reviews during the next year:

  • Insurance contracts (IFRS 17): The new standard on insurance contracts will have a significant effect on corporate reporting in the insurance sector so the FRC will review a selection of insurers' 2023 interim accounts to identify compliance with IFRS 17 and examples of good disclosures.
  • Large private companies: The proposed change to the definition of a Public Interest Entity or PIE will bring an enhanced regulatory focus on the largest private companies. The Government's intended threshold is entities that exceed £750 million annual revenue and 750 employees. The FRC will review a selection of private companies' annual reports to identify whether and where there are areas of poor compliance with reporting requirements with a view to informing its monitoring activities going ahead.
  • Task Force on Climate-related financial Disclosures (TCFD) – metrics and targets: Climate-related metrics and targets, including companies' "net zero" plans, are seen as increasingly important by investors, and the TCFD's recommendations in this area were updated in 2021. Following the FRC's thematic review of TCFD disclosures in 2022 (carried out in collaboration with the FCA) which highlighted room for improvement in many companies' metrics and targets disclosures, the FRC will undertake a targeted follow-up in 2023, with a focus on the metrics and targets disclosures of companies from four relevant sectors. The FRC will also consider how adequately these companies' net zero commitments have been addressed in their financial statements.
  • Fair value measurement (IFRS 13): The FRC's review will focus on companies in the non-financial sector, and will provide an overview of the disclosure requirements of the standard, highlighting examples of better disclosure and common pitfalls.

Thematic reviews of audit

The FRC has selected the following topics to be covered in this inspection cycle:

  • Sampling;
  • Hot reviews;
  • Network resources and service providers; and
  • Root cause analysis.

Areas of focus for audit quality inspections

The FRC's programme of audit quality inspections will pay particular attention to the auditor's work in the following areas:

  • Going concern;
  • Fraud risks;
  • Climate-related risks, including the linkage between the audited financial statements and climate-related disclosures elsewhere in the Annual Report; and
  • The application of the revised Auditing Standard on risk identification and assessment (ISA (UK) 315).

Priority sectors

In selecting both corporate reports and audits for review, the FRC will give priority to the following sectors which the FRC considers to be higher risk, for corporate reporting and audit, by virtue of economic or other pressures:

  • Travel, Hospitality and Leisure;
  • Retail and Personal Goods;
  • Construction and Materials; and
  • Industrial Transportation.

(FRC, FRC announces areas of supervisory focus for 2023/24, 16.12.2022)

FRC: Draft 3 - Year Plan 2023-2026

On December 16, 2022 the Financial Reporting Council (FRC) published its 2023-2026 draft 3-Year Plan which sets out its priorities for the next three years and the resources it will need to achieve them.

So far as the FRC transitioning to the Audit, Reporting and Governance Authority (ARGA) is concerned, the FRC notes that its 2022-25 Plan was based on the planning assumption that ARGA would be created via legislation, with a start date of April 2023. After the publication of that plan, it became clear that the ARGA Bill would not receive Parliamentary time in the third session. In the continued absence of a firm legislative timetable, the FRC has therefore pushed its planning assumption back by one year to April 2024.

The 2023-2026 Plan continues to refer to revisions to the UK Corporate Governance Code in 2023.

(FRC, Draft 3-Year Plan 2023-2026, 16.12.2022)

FRC: ARGA funding consultation – Feedback Statement Draft

On December 19, 2022 the Financial Reporting Council (FRC) published a Feedback Statement summarising stakeholders' views on the proposed funding arrangements for the new Audit, Reporting and Governance Authority (ARGA) as set out in a consultation paper published by the FRC in July 2022. The Feedback Statement also sets out the FRC's responses, and notes those issues on which there will be further consultation.

Among other things, the FRC confirms the following in the Feedback Statement:

  • Fines will be returned to the Government in line with the procedure already in place for the Audit Enforcement Procedure. The FRC does not accept arguments for fines being returned to the professional bodies.
  • The FRC notes the concerns over the proposed power to impose in-year levies. It is not the intention that this should be a standard practice; it should only be used in exceptional circumstances and the power should be defined accordingly.
  • ARGA levies will be applied primarily based on the size of the entities in each funding group and the extent to which ARGA regulation applies to them: representing the fairest, and most proportionate and consistent approach.
  • Entities found to have fallen short in meeting required standards will have to cover the costs of action against them.
  • The auditors of Public Interest Entities (PIEs) should fund audit regulation, including standard-setting, supervision and enforcement.
  • Listed companies, large private companies and other entities falling within the definition of PIEs should fund the costs of regulating corporate reporting, including reporting and audit standard-setting, monitoring, and enforcement against directors.
  • Listed companies should fund ARGA's work in relation to corporate governance and audit committees.
  • For large private companies, and any other entity falling with the PIE definition (including LLPs) the FRC will consult further on whether it should calculate the annual levy on the basis of turnover disclosed in the company's previous years accounts (as at present), use an alternative measure of size, or set a fixed annual fee.

(FRC, ARGA funding consultation – Feedback Statement Draft, 19.12.2022)

FCA: Remuneration – Ratio between fixed and variable components of total remuneration (bonus cap) – Consultation

On December 19, 2022 the Financial Conduct Authority (FCA) published a consultation paper, CP 22/28, at the same time as the Prudential Regulation Authority (PRA) published it as CP15/22. This is a joint consultation on proposed changes to the current requirements concerning the ratio between fixed and variable components of total remuneration (the 'bonus cap').

The bonus cap is part of the regulators' remuneration rules, which transposed EU legislation in line with the UK's legal obligations as an EU member state at the time. The bonus cap was introduced in the regulators' rules in two tranches. Firstly in 2014, during the transposition of Capital Requirements Directive (CRD) IV, the regulators applied the cap to all large and systemically important CRD-regulated firms, choosing to disapply the cap for smaller firms on proportionality grounds. Secondly in December 2020, in line with the implementation of CRD V, the regulators extended their respective remuneration regimes, including the bonus cap, to a wider set of firms, exercising discretion where possible to exempt smaller firms in line with the UK's earlier approach. The rules were introduced during the transition period prior to the UK's withdrawal from the EU (during which time the UK remained subject to EU law).

The FCA and PRAs opposed the bonus cap during the EU negotiations. Since the bonus cap does not limit total remuneration, they consider it can place upward pressure on salaries and allowances that may not be linked to longer-term performance and cannot be reduced or clawed back in the event of later failure and/or previous misconduct coming to light. A larger element of remuneration that is fixed, rather than variable, can also reduce firms' flexibility to adjust to changes in conditions. Over recent years, the FCA and PRA consider that growing evidence has emerged of undesired consequences of the rules on firms' safety and soundness and UK competitiveness.

The FCA and PRA propose to remove limits on the ratio between fixed and variable pay and related provisions on shareholder approval and discount rates by:

  • Deleting Rule 15.9 (3) of the Remuneration Part of the PRA Rulebook, which sets out the limit on the maximum ratio between fixed and variable pay, and connected provisions in Rules 15.10, 15.11, 15.12 and 15.13 on shareholder approval and discount rates, as well as a consequential change to Rule 3.1(B).
  • Amending paragraph 1(d) of Article 450 (disclosure of remuneration policy) of the Disclosure (CRR) Part of the PRA Rulebook.
  • Amending paragraph (d) of Annex XXXIII Table UK UKREMA of the Disclosure (CRR) - Pillar 3 Templates and Instructions Part of the PRA Rulebook.
  • Amending paragraphs (3.16, 5.32 – 5.33, 5.39, 5.40 – 5.43) of PRA SS2/17, and an amendment to Table D: Disclosure requirements by proportionality level.
  • Deleting the following Rules in the FCA Handbook: SYSC 19D.1.3R(2), SYSC19D.3.48R(3), SYSC 19D.3.50R, SYSC 19D.3.51R, and SYSC 19D.3.52R.

Subject to the outcome of the consultation, the FCA and PRA also propose a transitional provision for remuneration awarded in relation to a performance year starting before the implementation date of the final policy being consulted on. In that situation, such remuneration would still be subject to the current requirements on the bonus cap.

Firms would still be subject to the remaining provisions in the respective regulators' rules under Rule 15(9) of the Remuneration Part of the PRA Rulebook and SYSC 19D.3.48R of the FCA Handbook. These require that 'A firm must set an appropriate ratio between the fixed and variable components of total remuneration and ensure that:

  • fixed and variable components of total remuneration are appropriately balanced; and
  • the level of the fixed component represents a sufficiently high proportion of the total remuneration to allow the operation of a fully flexible policy on variable remuneration components, including the possibility to pay no variable remuneration component.'

The proposed changes would come into force the next calendar day after the publication of the final policy – anticipated for Q2 2023 and would apply to firms' performance year starting after that (so for most firms that is likely to be performance years starting 2024).

The consultation closes on March 31, 2023.

(FCA, Remuneration – Ratio between fixed and variable components of total remuneration (bonus cap) – Consultation, CP 22/28, 19.12.2022)

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