In our August 2013 newsletter, we reported on the BIS Committee's third report of session which commented on the Government's response to the Kay Review (click here to see a copy of that article). As we noted, the BIS Committee was seeking far more clarity from the Government on timing and more detail on the steps to be taken in order to give effect to Professor Kay's recommendations. In October, the Government provided the BIS Committee with its response. BIS published the response at the beginning of November.
In its response, the Government acknowledges that it "must play an active role in ensuring continued progress", and sets out a summary of key areas of action, progress achieved to date and clear objectives for further progress to be achieved before summer 2014 when it will publish a more detailed progress report (to see the full response and summary of progress at Annex A, click here). However, given the nature of the BIS Committee's third report of session, the response seems to shy away from providing the level of detail about timing and implementation that the Committee was seeking and, in many areas, defers any meaningful update until the summer 2014 report.
In a number of areas, the Government points to legislative changes that have been implemented (or will be in the not too distant future) to address issues raised by the Kay review (executive remuneration and quarterly and narrative reporting), whilst in others (incentivising fund managers, the concept of fiduciary duty, stewardship and executive appointments) it appears to be delegating primary responsibility for moving things forward to others. In the remaining areas, there are some interesting points to note (most notably, perhaps, the request for comments on the concept of disenfranchising short-term shareholders in the event of a takeover). We consider these points below.
M&A: the role and rights of short terms shareholders - consultation
The Government supports the aim of ensuring that the interests of those seeking short-term returns from a merger or acquisition do not override the long-term interests of the companies involved, and notes that the proposal to disenfranchise short-term shareholders during a takeover bid initially appears attractive as a means of achieving this objective. However, it also notes that there are practical obstacles to achieving this.
In response to the BIS Committee’s recommendation, the Government has prepared a note setting out an analysis of such a policy measure, which includes a summary of the analysis undertaken by the Kay Review and by the Takeover Panel as part of its review of aspects of the UK regulation of takeovers in 2010 (see PCP 2010/2 and RS 2010/22). Click here to see a copy of the Government's note (at Annex B).
Importantly, the Government is asking for comments. In particular, it would welcome suggestions about how the issues identified, which prevent such a policy measure being workable, could be overcome. It intends to convene a roundtable of stakeholders before the end of 2013 as a means to test this analysis.
Financial transaction tax
As we noted in our August newsletter, the concept of an FTT was introduced in the BIS third report of session rather than by the Kay review itself. In its response, the Government notes that any broad-based FTT would need to be implemented globally, but international discussions have shown that such a consensus is not available. It goes on to state that the main risk of proceeding unilaterally with an FTT is that firms and activities relocate away from the taxing jurisdiction and that this would seem to apply to any foreseeable approach to implementing an FTT at a sub-global level. The Government therefore concludes that, on balance, it is not convinced there is a case for allocating resource to new research on these points at this time.
When proposed by Professor Kay, the Investor Forum concept generated a fair amount of comment, mainly surrounding the issues of composition and operation. Whilst the Government reiterates its commitment to the concept, it is taking a relatively hands-off approach. This is based on its belief that investors should establish the forum and define how it works because it considers that, if left to the Government, it would be less likely to attract the support of the investment community.
By way of noting the progress that is already being made in this area, the Government highlights the establishment of an independent Working Group championed by the Investment Management Association, the Association of British Insurers and the National Association of Pension Funds. It goes on to note that, whilst it is optimistic that the growing support for the Working Group will form the basis for the creation of an effective structure for improving collective engagement by the end of 2013, it is aware that there are challenges involved in designing a forum which will attract the critical mass of investors necessary for it to be effective. Therefore, the Government has stated that, if no such structure emerges following the report of the Working Group (which was due in November but has not appeared yet), it will convene a conference of senior representatives from major UK institutional investors early in 2014, to identify and resolve any outstanding barriers.
In addition, the Government notes that it will soon be commissioning a small group of respected senior figures from business and the investment industry to assess industry progress on shareholder engagement, both collectively and individually. Their views will complement the Government's Kay progress report due in summer 2014.
Stewardship: resourcing - consultation
In its third report of session, the BIS Committee recommended that the FCA should more clearly direct that, as is currently permitted, dealing commission be used to pay for long-term research. However, the Government notes that in the last 12 months the FCA (and its predecessor, the FSA) has expressed concerns about the existing model which allows asset managers to do this. In the wake of these concerns, the Investment Management Association (IMA) is currently examining the issues and is excepted to publish an interim report of options for reform by the end of the year with final proposals being published in the New Year. For these reasons, together with the potential for EU reforms in this area, the FCA has said that it is not minded to adopt the BIS recommendation, although it is expected to keep the matter under review. The Government would welcome comments on the issues involved.
Whilst the Government's response provides a useful summary of progress to date, it appears that we will have to wait until its summer 2014 progress report for any substantive comment. However, it is important to note the instances in which comments are invited, not least in respect of the proposals regarding the disenfranchisement of short-term shareholders during a takeover.