EY UK Governance and Regulatory Spotlight - January edition

Welcome to the first issue of our Regulatory and Governance Spotlight in 2024. There hasn’t been much time to ease back into the swing of things as many are dealing not only with year-end reporting but also responding to the extensive and far-reaching Primary Markets Effectiveness Review consultation from the Financial Conduct Authority (FCA) which closes on 28 February.

Governance and reporting updates

On 22 January 2024, the Financial Reporting Council (FRC) published a revised version of its UK Corporate Governance Code (the Code). Compared to the 2018 version, at a high level: ?

• A material controls effectiveness declaration has been introduced, with amendments compared to the consultation.
• "Malus and claw back" provisions are now required in director contracts – these need to be discussed in the annual report and accounts (ARA). ?
• A small number of other minor changes to streamline and reduce duplication were made, including referencing the Audit Committees and the External Audit: Minimum Standard and reporting on Code non-compliance.

A large number of consultation proposals were dropped, e.g., role of audit committees on environmental and social matters, diversity, over-boarding, committee chairs engaging with shareholders, and reference to resilience statement and audit and assurance policy. The FRC published non-prescriptive, digitally accessible guidance associated with the Code on 29 January 2024.

We have produced a summary of the changes which highlights points of relevance from the guidance.?

It is worth noting that the aforementioned FCA proposals will remove the ‘premium’ and ‘standard’ segments. Instead, a number of new categories will be introduced – including a ‘commercial companies’ category for primary listings of equity shares. Companies included in this category will be required to uphold most of the current premium listing annual reporting disclosures and also apply the Code. Therefore, this latest update to the Code might be relevant to companies with standard listed equities that don’t presently apply it. The Code will be applicable for periods beginning on or after 1 January 2025, with a further year for the internal controls declaration. Nevertheless, companies may wish to consider whether to make any initial enhancements to the narrative in the annual report and accounts (ARA) on the review of risk management and internal controls systems. This was also highlighted in the FRC’s latest Review of Corporate Governance Reporting (see December edition of Spotlight) which, recommended providing a higher level of specificity about what such a review entailed and the resulting outcomes and actions.

Companies may also want to consider the World Economic Forum (WEF) Global Risk Report 2024 when drafting their year-end risk disclosures. The report indicates that handling transnational risks will be increasingly difficult due to eroding global cooperation. With two-thirds of respondents forecasting a multipolar order to dominate the next decade, this will require increased risk preparedness. These themes are echoed in the 2024 Geostrategic Outlook published by EY, which underscores the significance of political risks for businesses, advocating for the integration of geopolitical insights into business strategy.

Societal polarisation features among the top three risks over both the current and two-year time horizons in the WEF report. Alongside economic downturn, it is one of the most central risks in the interconnected ‘risks network’. Such ideological and cultural divisions within and across communities are already manifesting in growing divisions within companies' workforce. Management and directors will need to be looking carefully at the impact that this trend is having on company culture and how to ensure that effective inclusion initiatives, that counteract and not drive divisiveness, are embedded. This resonates with the more minor changes to the Code – requiring that boards monitor and assess not only culture, but also how the desired culture is embedded, and that nomination committees look beyond policies to any initiatives on diversity and inclusion, linking these to strategy and setting out how they have been implemented.

In other year-end reminders, according to the FRC Lab insights, over a third of investors surveyed are now using XBRL-tagged reports as a source of company financial data. The report sets out some areas of focus for companies and suggestions to optimise reporting to meet the needs of investors and other users.?

Green Spotlight

Our readers with a listing in the US will be pleased to know that the U.S. Securities and Exchange Commission (SEC) has provided an update regarding the release of its final climate disclosure rule. Previously expected in October 2023, the SEC now expects that the final rule to be released in April 2024, as indicated by the Biden administration’s regulatory agenda for the year.

In the UK, the endorsement process for International Sustainability Standards Board (ISSB) sustainability disclosure standards S1 and S2 is ongoing, with the assessment and endorsement decision expected by June 2024 from the Department of Business and Trade, in line with previously announced timelines. In the meantime, companies wanting to prepare for the expected changes may be interested in this comprehensive EY guide which provides a detailed analysis of standards, as well as offering in-depth guidance on their application.

Given the growing focus of investors on nature and a number of organisations committing to the Taskforce on Nature-related Financial Disclosures (TNFD) as early adopters, companies may also be interested in the report detailing the key learnings and notable outcomes from a global pilot project implemented by the United Nations Environment Programme Finance Initiative (UNEP FI) in collaboration with 20 financial institutions, designed to assess the current needs and obstacles in following the TNFD framework.

Other regulatory updates

An industry-led working group under the International Capital Market Association (ICMA) has established a voluntary Code of Conduct for ESG (environmental, social and governance) Ratings and Data Products providers outlining key principles and practices aimed at ensuring integrity, transparency, quality and reliability in the expanding ESG marketplace. The FCA has commended this initiative, noting the crucial role of transparency and trust in the ESG data and ratings market and encouraging all providers to engage with and sign up to the code.

The UK’s National Cyber Security Centre (NCSC) has unveiled a new set of international guidelines titled ‘Guidelines for Secure AI System Development’, crafted to fortify AI (artificial intelligence) security. Developed in collaboration with the US's Cybersecurity and Infrastructure Security Agency (CISA) and endorsed by national cybersecurity and intelligence agencies from 16 other countries, including all G7 members, the guidance aims to help AI system developers incorporate cybersecurity by design at every developmental stage. Known as the Universal AI Principles, this comprehensive approach to AI system development includes using an 'AI Confidence Profile' to measure the system’s trustworthiness, and rests on four central components - understanding the technology, securing it, safe usage, and consistent learning and improvement.

The Money Laundering and Terrorist Financing (Amendment) Regulations 2023 have officially been published alongside an explanatory memorandum. This amendment, required by the provisions of the Financial Services and Markets Act 2023, has been largely driven by concerns surrounding the treatment of politically exposed persons by financial institutions. The Chancellor will deliver the UK Spring Budget on 6 March 2024 and speculation has already started around what potential tax cuts we may see and what this will also mean for the next general election. Sign up to our Budget alerts to receive details of our webcast taking place on 7 March.

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 for 2024,

Mala and Maria

EY Corporate Governance Team

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Contacts

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Mala Shah-Coulon Associate Partner Ernst and Young LLP +44 (0)20 7951 0355 [email protected]

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Maria Kepa Director Ernst and Young LLP

+44 (0)20 7951 8164

[email protected]

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