How the new s.172(1) Statement will apply to financial services companies and what other new reporting obligations may apply to them.
The Companies (Miscellaneous Reporting) Regulations 2018 (Reporting Regulations) are intended to strengthen the corporate governance framework for private companies.
The majority of the reporting requirements apply to financial years starting on or after 01 January 2019. This timing is in line with implementation of the 2018 UK Corporate Governance Code, which also applies for financial periods commencing on or after 01 January 2019.
In this article, we analyse how the new s.172(1) Statement will apply to financial services companies and what other new reporting obligations may apply to them. Strong and effective corporate governance is treated by the Government as an intrinsic element of a regulated firm's fitness to perform regulated activities under the Financial Services and Markets Act 2000 (FSMA).
Detailed analysis on the new reporting requirements can be found on elexica here.
What is the s.172(1) Statement?
Certain large companies are required to include, in their strategic report, a statement describing how directors have had regard to the matters set out in section 172(1)(a) to (f) of the Companies Act 2006 when performing their duties under section 172 (s.172(1) Statement).
The s.172(1) Statement must be in a separately identifiable statement in the strategic report and must also be published on the company’s website (being one maintained by or on behalf of the company).
Government guidance states that the content of this statement will depend on the individual circumstances of each company, but companies will probably want to include information on some or all of the following:
- the issues, factors and stakeholders the directors consider relevant in complying with section 172(1)(a) to (f) and how they have formed that opinion
- the main methods the directors have used to engage with stakeholders and understand the issues to which they must have regard, and
- information on the effect of that regard on the company’s decisions and strategies during the financial year.
When are financial services companies in scope?
The s.172(1) Statement only applies to certain large companies: it does not apply if a company qualifies as medium-sized for a financial year.
A medium-sized company is one which qualifies as medium-sized under s.465-467 CA 2006. This includes one which meets two or more of the following criteria:
- turnover not more than £36m
- balance sheet not more than £18m, and
- less than 250 employees.
Excluded medium-sized company - but, even if a financial services company meets two of these criteria, it may still be treated as a large company if it is an excluded medium-sized company (as set out in s.467) - for example, if the company is a public company, has permission under the Part 4A FSMA to carry on a regulated activity; carries on insurance market activity, is an e-money issuer or is a member of an ineligible group.
Ineligible group - a financial services company will be part of an ineligible group for these purposes if any member of the group falls within certain specified categories of company (set out in s.467), such as: a person (other than a small company) which has permission under Part 4A FSMA to carry on a regulated activity; or a small company that is an authorised insurance company, banking company, a MiFID investment firm or a UCITS management company; or a person who carries on insurance market activity. Other ineligible group companies include companies whose transferable securities are admitted to trading on a regulated market.
Do subsidiary companies have to comply with the s.172(1) Statement?
Yes. All large companies, including subsidiaries, will need to include the new s.172(1) Statement. This is because, under the Companies Act, the duty of directors is owed to their company.
Could there be additional reporting requirements?
The Reporting Regulations include additional reporting requirements for companies meeting other specified criteria. If a financial services company meets any of these criteria, which are summarised below, it will need to comply with these new reporting requirements for financial years beginning on or after 01 January 2019, as well as the s.172(1) Statement.
- UK incorporated companies which qualify as large for the s172(1) Statement - a new statement summarising how the directors had regard to the need to foster the company’s business relationships with suppliers, customers and others, and the effect of that regard, including on the principal decisions taken by the company.
- UK incorporated companies with more than 250 UK employees - a summary of how directors have engaged with their employees.
- UK incorporated quoted companies with more than 250 UK employees - the ratio of the CEO’s total remuneration to the median (50th), 25th and 75th percentile of the full time equivalent remuneration of the company’s UK employees, together with certain supporting information.
- All UK incorporated quoted companies - several new disclosures which describe the effect of future share price growth on executive pay outcomes.
- Very large private and public (unquoted) companies - a statement of which corporate governance code (if any) they have applied, how they have applied it and an explanation of any non-adherence to that code.
Our analysis of these additional reporting requirements can be found on elexica here.
Is help available?
Yes. We can review your group structure and help you identify which of the Reporting Regulations and other non-financial reporting rules apply to which entities in your group and when. Our review can either be in the form of an assurance report about past compliance or a forward-looking report to enable you to plan and prioritise in advance, or both.
The Government has also introduced regulations which require large UK companies and LLPs to publish a report on their payment practices, policies and performance for financial years beginning on or after 06 April 2017. Our guidance on the Reporting on Payment Practices and Performance Regulations 2017 can be found on elexica here.
This document (and any information accessed through links in this document) is provided for information purposes only and does not constitute legal advice. Professional legal advice should be obtained before taking or refraining from any action as a result of the contents of this document.