Investment Association guidance on long-term reporting

The Investment Association (the "IA") has issued new guidance to companies setting out the expectations of the IA's members on various aspects of long-term reporting in their annual reports. The guidance applies to companies with a premium listing, but companies with a standard listing and companies admitted to AIM or the High Growth Segment are also encouraged to adopt the guidance.

The guidance can be found here. The IA's key recommendations are as follows:

  • Companies should stop issuing quarterly reports and quarterly earnings guidance and instead give greater attention to longer-term performance and strategic issues. If a company continues to report on a quarterly basis, it should explain this position.
  • Companies should review business model disclosures against the FRC Reporting Lab's Business Model Reporting recommendations and position them towards the front of their strategic report.
  • Reporting should provide insight into significant strategic issues and principal risks facing the company over the next three to five years, and preferably longer where possible.
  • Companies should regularly assess business productivity and explain its impact on operations, using the Productivity Council's How good is your business really? tool as a starting point. The strategic report should include a narrative discussion on the company's productivity assessments.
  • Companies should adopt balanced capital management strategies that support long-term productive growth, explain those strategies and allocate capital efficiently and consistently with long-term value creation. The guidance gives detailed guidance in this respect in specific areas.
  • Annual reports should contain specific disclosures on material environmental and social risks consistent with the IA's Guidelines on Responsible Investment Disclosure.
  • Company disclosures should foster improved investor understanding of the role of the company's workforce in generating sustainable, long-term value creation. The strategic report should include a narrative discussion on various specific items set out in the guidance.

The IA will monitor compliance with the guidance through its IVIS system from 30 September 2017.

FMLC issues paper on uncertainties in the Market Abuse Regulation

The Financial Markets Law Committee (FMLC) was originally established to advance understanding of financial markets law. It identifies issues of legal uncertainty or misunderstanding in the wholesale financial markets framework and considers how those issues should be addressed.

The Committee has now issued a discussion paper on legal uncertainties arising from the EU Market Abuse Regulation ("MAR"). The paper, which can be found here, identifies the following issues.

Which instruments does MAR apply to?

MAR clearly applies to financial instruments traded on a regulated market (e.g. the LSE Main Market), a multilateral facility (MTF) (e.g. AIM) or (from January 2018) an organised trading facility (OTF). This includes both equity and debt securities, as well as EU emissions allowances. We can call these "primary securities" (although MAR does not use this terminology).

However, MAR also applies to financial instruments "the price or value of which depends on or has an effect on the price or value of" primary securities. This includes derivatives (such as options and forwards), but it might also include shares of the issuer listed on a separate, non-EU exchange. It also extends to all "referable instruments", whether they are publicly traded on an exchange or not.

The FMLC notes that the phrase "has an effect on" is vague. It is not clear whether this means that the price or value of the primary security needs to have a direct effect on the price or value of the referable instrument, or whether it is enough for the price or value of both to be affected by a common factor, such as the issuer's creditworthiness.

It is therefore difficult to pin down the full range of securities covered by MAR.

When does a "market sounding" occur?

MAR defines market soundings broadly as communications of information by an issuer (or certain other persons) before the announcement of a transaction in order to gauge the interest of potential investors in that possible transaction.

MAR imposes specific requirements on persons who make market soundings, including to assess whether the sounding contains inside information and to keep certain records for five years.

The Committee notes that the word "transaction" is unclear. Specifically, it is not clear whether it refers only to transactions in primary securities, or whether it includes transactions in referable instruments as well. If the latter, and communications gauging interest in referable instruments are market soundings, this significantly increases the scope of the market soundings regime.

The FMLC also acknowledges that, in consultation paper CP 17/5, the Financial Conduct Authority has suggested that the market soundings regime applies to all transactions by an issuer with instruments admitted to a trading venue (provided the elements of the definition of "market sounding" are met), and not just transactions involving the issuer's securities. This is the widest possible interpretation and would require an issuer to assess almost every communication it makes to investors and decide whether it is a market sounding.

Furthermore, the FMLC notes that the word "announcement" is vague, and it is not clear at what point communications cease to be market soundings under MAR. For example, on an IPO, the paper notes that "announcement" could refer to an announcement that an IPO is being explored, the intentionto-float announcement, or the publication of a pathfinder prospectus or a final pricing announcement.

Practical implications

The FMLC believes these issues have significant practical effects. At one end of the spectrum, if MAR applies to the widest possible range of financial instruments, if "transaction" includes any transaction by an issuer, and if an "announcement" occurs at the earliest stages of a deal, then issuers may be driven to follow the market sounding regime in relation to almost any non-public communication to investors.

The Committee is recommending further guidance on MAR, either in the form of Q&A published by the European Securities and Markets Authority (ESMA) or guidance from national regulators (in the UK, the FCA). The Committee has stopped short of making any recommendations of its own. However, it does provide some guidance and indicative recommendations for identifying when an "announcement" is likely to occur, noting that there is still clear potential for debate.

For now, given the level of uncertainty, the prudent course for issuers will likely be to follow the market soundings regime for any gauging of interest, in order to avoid any possibility of contravening MAR.

Other items

  • The London Stock Exchange has published revised Admission and Disclosure Standards. The standards take in minor amendments, including the introduction of the LSE's new International Securities Market for fixed-income securities. The revised Standards take effect from 8 May 2017.
  • The Financial Reporting Council (FRC) has amended Financial Reporting Standard 102 (FRS 102) with immediate effect. The amendment allows small entities to measure a loan from a director who is both a shareholder and a natural person on a simplified basis at its "transaction price", rather than at "present value" with a discount rate equal to a market rate of interest for a similar debt instrument. The amendment has been made in anticipation of a more permanent change to this effect, which is anticipated in December 2017. A copy of the press release can be found here.