Included in this issue: FCA fine – ARM fined for inadequate procedures, systems and controls | FCA - Proposed changes to the Listing Rules published | ESMA – Proposed review of Best Practice Principles for Proxy Voting | NAPF - Call for meaningful reporting on company workforces
FCA fine – ARM fined for inadequate procedures, systems and controls
The Financial Conduct Authority has fined Asia Resource Minerals plc (ARM), formerly Bumi plc, £4,651,200 for having inadequate systems and controls to comply with its obligations as a listed company, breaching various rules applicable to listed companies and failing to identify related party transactions that had been entered into by an overseas subsidiary.
In particular, the FCA found ARM to be in breach of:
Listing Principle 2 (now 1) – 'a listed company must take reasonable steps to establish and maintain adequate procedures, systems and controls to enable it to comply with its obligations'
Although ARM had a policy in relation to the treatment of related party transactions, its systems and procedures were considered inadequate in their failure to:
- take reasonable steps to manage the increased risk of the occurrence of related party transactions given ARM's structure and its subsidary director relationships;
- establish adequate management oversight and control over its subsidiary in a timely manner; and
- implement properly the related party transactions policy at topco and subsidiary level.
Listing Rule 11 – Rules relating to smaller related party transactions and aggregation
Through the inadequacy of its systems and procedures, ARM breached the requirements of LR 11.1.10 R (as it was) requiring the provision of certain confirmations to the FCA before entering into smaller related party transactions. The company also failed to comply with LR 11.1.11 R on the basis it did not aggregate its transactions with the same related party within a 12 month period as required.
Listing Rule 8 – Rules relating to when a premium listed company must seek sponsor's guidance
ARM also failed to obtain guidance from its sponsor, prior to entering into related party transactions, to assess the application of its obligations under the FCA's Handbook as required by LR 8.2.3 R.
DTR 4 – Rules relating to periodic financial reporting
As a result of its internal review of the integrity of a number of items on the balance sheet of its subsidiary and of historic related party transactions, ARM was unable to publish its annual financial report within 4 months of its financial year end as required by DTR 4.1.3.
As with the FCA's recent fine of Reckitt Benckiser (in relation to share dealing and inside information), the ARM decision provides further general observations on the adequacy of systems, procedures and controls. In particular, the following conclusions can be drawn:
- Policy and implementation: the mere existence of a related party transaction policy is not in itself sufficient to comply with the LR. All policies require effective implementation;
- Responsibility for the policy: transactions with related parties should be carefully and consistently monitored through effective oversight;
- Training on the policy: a policy should be supported by a robust training process for key individuals throughout the Group (including at senior management level) which tracks and follows up non-attendance and maintains clear records of training undertaken;
- Communication of the policy: the policy should be effectively communicated throughout the Group in a timely manner;
- Related party lists: lists recording related parties should be comprehensive and regularly maintained; and
- Subsidiary oversight: there should be effective management oversight of subsidiaries (particularly if there is a lack of familiarity with UK listing obligations) and implemention of policies at subsidiary level.
FCA - Proposed changes to the Listing Rules published
The Financial Conduct Authority has proposed several relatively minor amendments to the Listing Rules as part of its most recent Quarterly Consultation. The changes:
- update the rules to take account of the publication of the 2014 UK Corporate Governance Code which applies to companies with accounting periods beginning on or after 1 October 2014. In particular, the proposed amendments to Chapter 9 of the Listing Rules reflect the Code's requirement that directors make disclosures relating both to the going concern basis of accounting and to the long-term viability of the entity in annual reports;
- reflect the implementation of the EU Central Securities Depositories Regulation which requires – at Article 3.2 - relevant securities to be capable of being settled in dematerialised (uncertificated) form for both premium and standard listed entities by removing the equivalent provisions from the Listing Rules (which only applies to premium listed entities); and
- introduce new and amended announcement headline codes in DTR 8, Annex 2 to be used when disseminating regulated information.
ESMA – Proposed review of Best Practice Principles for Proxy Voting
The European Securities and Markets Authority (ESMA) has outlined its plans to conduct a review of the Best Practice Principles for Providers of Shareholder Voting Research and Analysis (Principles). This was first published in March 2014 – click here.
ESMA intends to gather information on how stakeholders view the most recent AGM seasons and consider any new trends or changes in the approach of proxy advisors. The review will also examine how many proxy advisers have signed up to the Principles and the extent of changes brought about by them.
Responses are required by 27 July 2015 with the aim being to publish the final results at the end of 2015. The role of proxy voting agencies in the current AGM season was the subject of some heated debate at our recent Company Secretaries' Fora. It is an area of stewardship at which the Financial Reporting Council is also actively looking.
NAPF - Call for meaningful reporting on company workforces
The National Association of Pension Funds (NAPF) has published a discussion paper entitled "Where's the workforce in corporate reporting?". The paper seeks to highlight the lack of clear, consistent and meaningful reporting by companies on how they manage their workforces despite the frequently repeated statements that "our people are our greatest asset", and the widely accepted view that human capital is one of the four pillars which underpin corporate and economic growth.
The NAPF identifies four areas for development in corporate reporting. These focus on the workforce's:
- skills and capability; and
- motivation and engagement.
A full copy of the NAPF paper can be found on the NAPF website – click here. The NAPF intends to host a series of roundtable discussions during the remainder of 2015 to bring together investors, analysts, companies, standard setters and policy makers to develop expectations further with conclusions reached being incorporated in the next iteration of the NAPF's Corporate Governance Policy and Voting Guidelines.