UK Corporate Update. Competition & Markets Authority publishes final order on

9 October 2014
UK Corporate Update.
Competition & Markets Authority publishes final order on
mandatory tendering of audit contracts
In this issue
The Competition & Markets Authority has published a final order to require
FTSE 350 companies to put their audit contracts out to tender every 10 years
and to give more powers to audit committees in relation to auditor
appointments. The order takes effect on 1 January 2015 and applies to
financial years commencing on or after 1 January 2015.
Competition & Markets
Authority publishes final
order on mandatory
tendering of audit contracts
.......................................... 1
Background
European Commission
consultation on impact of
international accounting
standards in the EU .......... 2
The order implements the remedies set out in the final report on the supply of
statutory audit services by the CMA's predecessor, the Competition
Commission. The report was published in October 2013 following a two year
review by the Competition Commission. The implementation of the remedies
was, however, delayed pending adoption of the EU statutory audit package in
the form of Directive 2014/56/EU (the "Statutory Audit Directive") and
Regulation 537/2014 (the "Statutory Audit Regulation") in June 2014.
Final order
The final order is substantially the same as the draft on which the CMA
consulted in July 2014. The main changes are to permit audit committee
disclosures to be included in the annual report if there is no audit committee
report, to bring forward the start date for the transitional provisions to 16 June
2014 to tie in with the date the Statutory Audit Regulation came into force and
to amend the definition of "Competitive Tender Process" so that it is deemed
to be completed before the start of the financial year to which the audit
appointment relates.
Main provisions
The main provisions of the final order are as follows:
> a FTSE 350 company must not enter into an agreement for statutory audit
services unless the company has made an auditor appointment pursuant
to a competitive tender process in relation to one or more of the preceding
nine years or has conducted a competitive tender process in relation to the
next financial year (the mandatory tender processes rule). A competitive
tender process must involve at least two auditors, one of which may be the
incumbent auditor, and must be initiated and supervised by the audit
committee;
> if a competitive tender process has not been completed for auditor
appointments in relation to five consecutive financial years, the audit
committee must state in the audit committee report (or in the annual report
if there is no audit committee report) when the company intends to put the
audit contract out to tender and why this is in the best interests of the
1
ESMA sets out detail of how
voting rights will be
calculated under revised
Transparency Directive ..... 3
ESMA consults on
regulatory technical
standards for prospectuses
.......................................... 4
company. The statement must be repeated in each subsequent report until
a competitive tender process is conducted;
> to the extent permitted by law or regulation, only the audit committee, on
behalf of the board, may negotiate and agree the audit fee and scope of
the audit, oversee a competitive tender process and make
recommendations on auditor appointments to the board; and
> the audit committee must also include a statement of compliance with the
CMA order in the audit committee report (or in the annual report if there is
no audit committee report).
The CMA has sought to align the transitional provisions in the order regarding
the mandatory use of competitive tender processes with the transitional
provisions in Article 41 of the Statutory Audit Regulation regarding the
mandatory rotation of auditors. This means that, as at 16 June 2014:
> where an auditor has been appointed for 20 or more consecutive financial
years, the mandatory use of tender processes rule applies to audit
appointments made on or after 17 June 2020;
> where the auditor has been appointed for 11 or more but less than 20
years, the rule applies to appointments made on or after 17 June 2023;
and
> where the auditor has been appointed for less than 11 years, the rule
applies to auditor appointments made on or after 17 June 2016.
The CMA notes that the Statutory Audit Regulation does not specify when the
period for calculating the duration of the audit engagement should begin.
Given the guidance so far (in particular the European Commission's letter to
national oversight bodies in September 2014), the CMA considers that the
duration should be calculated from the first appointment (that is from the first
financial year covered in the audit engagement letter for which the auditor has
been appointed for the first time to carry out consecutive statutory audits).
However, given the lack of clarity, the CMA has reserved the right to review
the operation of the order if "substantial guidance" is forthcoming which
differs from the CMA's interpretation.
The CMA's order, explanatory notes, response statement and press release
are available here.
European Commission consultation on impact of
international accounting standards in the EU
The Financial Reporting Council has published a reminder to encourage
interested parties to respond to a recent consultation by the European
Commission on the impact of IFRS in the EU.
The consultation was published in August 2014 and is part of an evaluation
by the Commission of whether the IAS Regulation has delivered the expected
benefits of comparability and transparency of financial reports. The
Regulation became effective in January 2005 and requires EU companies
listed on regulated markets to prepare their consolidated accounts on the
basis of IFRS adopted by the EU.
The consultation paper consists of 42 questions, including:
> whether company respondents use IFRS and, if not, the reasons why not;
> whether the scope of the IAS Regulation should be extended beyond
consolidated accounts of EU companies listed on regulated markets;
> whether applying IFRS in the EU has made financial statements more
transparent, altered the comparability of financial statements, increased
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UK Corporate Update
the protection for investors and/or increased confidence in financial
markets;
> whether IFRS has affected investors' ability to assess stewardship by
management;
> whether the differences between IFRS as issued by the International
Accounting Standards Board and IFRS as adopted by the EU cause
problems and whether the European Commission should have more
leeway to modify standards adopted by the IASB; and
> how IFRS compare with other GAAPs in terms of providing a true and fair
view and how often is was necessary to depart from IFRS to reflect the
reality of the company's financial performance and position.
The deadline for responses is 31 October 2014.
The FRC also refers interested parties to a recent staff paper published by
the IFRS Foundation (the oversight body of the IASB). This sets out the views
of staff on some of the main issues highlighted in the consultation
questionnaire.
The consultation questionnaire is available here. The staff paper is available
here.
ESMA sets out detail of how voting rights will be calculated
under revised Transparency Directive
The European Securities and Markets Authority has published draft
regulatory technical standards relating to the notification of major
shareholdings under the Transparency Directive. The draft standards set out
the detail of how shareholding levels should be calculated and what financial
instruments are covered by the notification obligations.
Background
The Transparency Directive was amended in November 2013 and the
changes have to be implemented by Member States by 26 November 2015.
The amendments included extending the requirements for companies to
notify interests in shares and related financial instruments such as contracts
for difference, to ensure greater consistency across the EU. This will bring the
EU rules broadly in line with the UK’s super-equivalent rules in DTR 5 which
already require notification of financial instruments which create a long
economic interest in a UK issuer’s shares. However, under the amended
Transparency Directive, non-UK incorporated issuers with the UK as their
Home Member State will also be subject to the requirement to disclose
related financial instruments. ESMA also confirms that the new rules only
relate to instruments relating to shares in issue, while the FCA’s rules capture
interests in shares that have not yet been issued.
ESMA standards
ESMA was required to publish regulatory technical standards to provide more
detailed rules implementing the directive. The draft standards cover:
> an indicative list of financial instruments subject to the notification
requirement;
> the calculation of voting rights in relation to financial instruments
referenced to a basket of shares or an index;
> a method for determining the delta for the purposes of calculating voting
rights in the case of financial instruments which provide exclusively for a
cash settlement; and
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UK Corporate Update
> the method of calculation of the 5% threshold exemption for trading books
and market makers, including when voting rights of different categories of
holdings should be aggregated.
What happens next?
The draft standards will be submitted to the European Commission by 27
November 2014 and the Commission has three months from that date to
decide whether to endorse them.
The draft standards can be found here.
ESMA consults on regulatory technical standards for
prospectuses
The European Securities and Markets Authority has published a consultation
paper seeking views on its proposed draft regulatory technical standards on
prospectus-related issues under the Omnibus II Directive.
Background
The Omnibus II Directive amends the Prospectus Directive in respect of the
powers of ESMA (amongst other things). It came into force on 23 May 2014,
must be transposed into national law by 31 March 2015 and applied from 1
January 2016.
In particular, the Omnibus II Directive replaces existing requirements for
ESMA to draft level 2 measures in certain areas. For each area ESMA is
required to prepare draft regulatory technical standards for submission to the
European Commission. The Commission may then adopt those standards by
way of a delegated regulation.
Consultation
The proposed draft includes standards in the following areas:
> Procedure for the approval of prospectuses. The draft standards outline
what must be submitted to national competent authorities alongside a
prospectus, how to submit a prospectus and other information, how to
present subsequent drafts and how the authority shall communicate its
decision.
> Information that may be incorporated into prospectuses by reference. The
draft standards set out an exhaustive list of information that complies with
the conditions for incorporation by reference set out in Article 11(1) of the
Prospectus Directive.
> Provisions relating to the publication of prospectuses. The draft standards
replace in near identical form Articles 30 to 32 of the Prospectus
Regulation on the publication of a prospectus. ESMA also lays down rules
for establishing easy access to prospectuses published electronically, how
final terms should be published and exactly how a competent authority is
to provide hyperlinks to prospectuses approved during the preceding 12
months.
> The dissemination of information relating to offers to the public and
admissions to trading on a regulated market. ESMA sets out four
categories of communication through which advertisements may be
disseminated. The draft standards also address how information
concerning the offer to the public or the admission to trading that is
disclosed in an oral or written form, even if not for advertising purposes,
will comply with the need to be consistent with that contained in the
prospectus.
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UK Corporate Update
What happens next?
The consultation closes on 19 December 2014. ESMA must submit draft
standards to the Commission by 1 July 2015.
The consultation can be found here.
Contacts
For further information
please contact:
Lucy Fergusson
Partner
(+44) 20 7456 3386
lucy.fergusson@linklaters.com
Lucy Reeve
Senior Associate
(+44) 20 7456 3459
lucy.reeve@linklaters.com
Author: Lucy Reeve
This publication is intended merely to highlight issues and not to be comprehensive, nor to provide legal advice. Should
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contact the editors.
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UK Corporate Update
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