The Government has published its response to the Kay Review which we reported on in our August newsletter (click here to see the article). As we noted previously, given the review's emphasis on implementing change more through a cultural shift than by increased policy and regulation, it was going to be interesting to see how the Government would respond. It is, therefore, perhaps unsurprising that, whilst the response advocates the adoption of the ten key principles put forward by Professor Kay, the bulk of the points made in his report are to be addressed by further engagement, discussion and/or review. The Government will provide an update on progress in the summer of 2014. We consider the key points made by the response below. To see a full copy of the response click here.


Overall, the Government supports the findings of the Kay review. In particular it has adopted, with one change, the 10 principles which are designed to provide a long term perspective in UK equity markets and describe the direction in which regulatory policy and market practice should move. The one change is to principle 5 and replaces the use of the word "fiduciary" with more descriptive provisions, This is because the Government feels that the term fiduciary is interpreted differently by various people – some in a very precise, legal nature and others in a more general sense. Principle 5 does, perhaps, herald a fairly significant change in that it proposes applying fiduciary standards to people in the investment chain, including asset managers. The amended wording should be helpful in setting out more clearly what is expected of such persons. It has been re-worded as follows:

"All participants in the equity investment chain should act in good faith, in the best long-term interests of their clients or beneficiaries, and in line with generally prevailing standards of decent behaviour. This means ensuring that the direct and indirect costs of services provided are reasonable and disclosed, and that conflicts of interest are avoided wherever possible, or else disclosed or otherwise managed to the satisfaction of the client or beneficiary. These obligations should be independent of the classification of the client and should not be contractually overridden."

Nonetheless, as noted below, this may not be the end of the "fiduciary" debate as, in one of the more specific action points to come out of the response, the Government has requested the Law Commission, amongst others, to look in more detail at the application of this principle.

The implications of the Government adopting the principles are that it will:

  • have regard to them in future development of policy and regulation;
  • ask relevant regulatory authorities to consider how they inform the future development of regulatory policy; and
  • call upon market practitioners to have regard to them, including when developing good practice.

Directions – regulatory change

Alongside the specific recommendations made in the Kay report were a number of directions. The Government has categorised these into directions for market participants and those in respect of regulatory policy. It does not deal specifically with the directions in respect of market participants. As regards the directions for regulatory policy, it notes that, in a number of important areas, regulatory policy is already developing in ways which are consistent with them, such as the reforms to narrative reporting and the guidance from the Takeover Panel and the FSA that their rules are not intended to prevent collective engagement with the management of an investee company.

As regards future change, the Government notes that this will require further review by relevant government departments and independent regulators as well as at EU level where it will be important to consider how the findings of the Kay report should inform the UK’s position. The Government will report on progress, and how the Kay report is being used to inform future policy development, in the summer of 2014.


As we noted in our August newsletter, the recommendations broadly affect the three main areas of corporate governance, asset managers (and the investment chain) and information, although takeovers and individual share ownership also received specific mentions. We consider the key points of about Government's response in respect of each category below.

Corporate governance

  • Good practice statements

The Kay report published Good Practice Statements in relation to company directors, asset managers and asset holders. The Government is asking relevant business representative groups and investment industry trade associations to review these statements, to indicate to what extent they can endorse them and to suggest how good practice standards might be further developed.

In addition, the FSA (and its successor, the FCA), the FRC and the Pensions Regulator will consider to what extent existing regulatory requirements may prevent the adoption of standards of good practice as defined in the statements, and what steps might be appropriate to enhance existing regulatory guidance and codes of practice accordingly. The Government’s progress report in summer 2014 will include an update on these considerations.

  • Collective engagement

The Kay report advocated the use of investor forums to improve collective engagement. The Government intends to ask a small group of respected senior figures from business and the investment industry to review industry progress on this, and to assess companies’ perception of the extent and quality of this engagement. This review will complement the Government’s progress report due in summer 2014.

  • Directors' remuneration

The Kay report advocated that directors' remuneration should be structured to relate incentives to sustainable long-term business performance, and, in particular, that long term performance incentives should be provided only in the form of company shares to be held at least until after the executive has retired from the business. Despite this fairly bold recommendation, the Government is content to let the issue of executive remuneration rest largely with investor bodies, saying only that it will continue to encourage debate about how best to align directors’ pay with long-term performance, including by promoting consideration of the Good Practice Statement for company directors and of other good practice guidance produced by investors and companies.

Asset managers and the investment chain

  • Fiduciary standards

As noted above, the Government has amended principle 5 which relates to the application of fiduciary standards to those in the investment chain to remove the word "fiduciary". It has also asked the FSA/FCA to consider to what extent current regulatory rules in this area align with the principle, with particular reference to the issues raised in the Kay Report around conflicts of interest requirements and contractual mechanisms to limit the obligations of intermediaries, to determine what action might be desirable. It is noted, however, that the current regulatory rules in this area are substantially influenced by harmonised EU legislation and that changes to regulatory requirements at EU level may therefore be desirable.

In addition, and as recommended by Professor Kay, the Government has asked the Law Commission to undertake a review of the legal obligations arising from fiduciary duties (and more widely) that dictate what considerations are appropriate for trustees and other investment intermediaries seeking to act in their clients’ best interests. It also believes it would be helpful to seek clarification of whether the law allows for any differentiation of investment duties to reflect the different nature of particular classes of trustees.

  • Disclosure of costs and fees

The Kay report recommended that asset managers should make full disclosure of all costs and performance fees charged to the fund. The Government notes that there is some evidence of the investment and pensions industries responding to this and is optimistic that they represent progress towards an industry-led disclosure regime which provides comprehensive, clear and comparable information on costs and charges to all savers irrespective of their choice of investment vehicle.

Whilst it believes that this sort of collaborative, industry-led approach is likely to be best placed to resolve technical questions on disclosure, it notes Professor Kay's suggestion that the Government should consider regulatory measures if industry does not arrive at an appropriately comprehensive disclosure regime. The Government’s progress report in summer 2014 will assess to what extent the investment industry has responded to this recommendation and what further action might be appropriate.

  • Income from stock lending

The Kay report advocated that all income from stock lending should be disclosed and rebated to investors. The Government supports this approach and would like to see separate disclosure of stock lending costs and income endorsed by the industry in the context of the development of a more comprehensive industry-led disclosure regime, as discussed above. The Government’s progress report will again assess to what extent the investment industry has responded to this recommendation and what further action might be appropriate in the context of relevant EU policy developments in this area.

  • Remuneration

As with directors' remuneration, the report made some fairly bold recommendations in respect of asset managers' remuneration, saying that it should also be linked into long term performance. Again, however, the Government is happy to fall back on the matter being dealt with through principles of best practice which should be influenced by the Good Practice Statement for asset managers. It does, however, note that recent developments at EU level will introduce wider regulation of the remuneration of asset managers.


  • Metrics and models

The Government welcomes the Kay Report’s focus on ensuring that metrics and models used in the investment chain give information which is relevant to the creation of long-term value by companies and good, risk-adjusted returns to savers. Furthermore, it agrees that a greater understanding of the uses and limitations of different metrics and models would be beneficial both to market participants and to regulatory authorities. The Government does not, however, believe that that it is best placed to conduct or commission a review in this area, given the technical nature and broad scope of the issues involved.

The Government therefore intends to explore with market participants, regulators, academics and relevant representative and professional bodies how best to stimulate more debate and economic analysis in this area. Further proposals are expected early in the new year.

  • Valuation and risk assessment models

The Government believes that the recommendation in this area, that regulators should avoid the implicit or explicit prescription of a specific model in valuation or risk assessment and instead should encourage the exercise of informed judgment, potentially has wide-ranging implications for regulatory policy. It therefore considers that it should be considered in more detail by the relevant government departments and independent regulators, alongside the broader directions for regulatory policy. Progress will be reported in summer 2014. 


Given the fairly emotional response to the takeover of Cadbury by Kraft in 2010, which, at the time, included debate about the need to consider re-introducing a public interest test and/or other forms of protectionism, and led, at least in part, to the substantial amendments to the Takeover Code last September, it is interesting to note that the recommendation regarding takeovers receives one of the weaker responses from the Government.

It is keen to point out that it agrees with Professor Kay's arguments against a general hostility to foreign ownership and that it is committed to open markets, believing that direct investment by foreign companies can bring in new ideas, technologies and skills to the UK, stimulating productivity and growth in UK firms and opening up new markets for trade. Moreover, whilst Professor Kay suggested that that the Government and regulatory authorities could be more active in their approach to mergers and acquisitions, in particular by using existing powers and informal authority to discourage acquisitions, or to seek assurances from the parties involved, where they identified significant risks to the effective management of the company or to its operations in the UK, all the Government says on the point is that it believes it would be appropriate for it to take a greater interest in mergers and acquisitions, and that it will engage with companies and their investors, including in the context of its Industrial Strategy, to promote investment which benefits the UK. 

Individual share ownership

The Kay report recommended that the Government should explore the most cost effective means for individual investors to hold shares directly on an electronic register. The Government believes it is necessary to address this recommendation in the context of policy proposals relating to central securities depositories and securities law in the EU. This will include consideration of future arrangements for how investors can hold shares in a way that increases shareholder transparency and facilitates them exercising their shareholder rights, under the requirements set out in any final EU legislation.


Whilst the response is a useful indication of the impact which the principles and recommendations of the Kay review may have on UK business, there is clearly a long way to go before there is any tangible change. However, as the very ethos of the review was that its impact should be more cultural and value led than creating more policy and regulation, this Is not all together unexpected. When the Government issues its update in summer 2014, it will be interesting to see just how much the Kay report has influenced the way in which the UK equity markets operate.