On January 30, 2019, the FCA published a consultation paper setting out how parts of the Revised Shareholder Rights Directive (“SRD II”) will be implemented in the UK on June 10, 2019. The consultation is now closed. The FCA explained that, should the UK leave the EU without a deal, it will not proceed with its proposals to implement the SRD II requirements.
SRD II aims to promote effective stewardship and long-term investment decision-making by enhancing transparency of engagement policies and investment strategies across the institutional investment community. The following proposed new requirements will be of interest to UK asset managers (including MiFID portfolio managers, full-scope AIFMs and UCITS Management Companies):
- The FCA proposes to extend the SRD II requirements to shares traded on an EEA regulated market or a comparable market outside of the EEA. This is broader than the scope of the original Shareholders Directive (SRD I) which only concerns shares with a primary or secondary listing on an EEA market;
- Asset managers will be required to develop and publicly disclose a policy on shareholder engagement or to explain why they have chosen not to do so. The information to be included in the engagement policy is detailed in the new requirements. Where a firm decides not to comply with any of these requirements, it will have to provide a clear and well-reasoned explanation.
- Policies should state how a firm:
- Monitors investee companies on relevant matters, such as
- Financial and non-financial performance and risk
- Capital structure
- Social and environmental impact
- Corporate governance
- Engages in dialogue with companies it invests in
- Exercises voting rights and other rights attached to shares
- Cooperates with shareholders
- Communicates with relevant stakeholders of companies it invests in
- Manages actual and potential conflicts of interests
- Under the proposals, asset managers will be required to publicly disclose how they implemented their engagement policies and their voting activity for example:
- explaining the most significant shareholder votes they participated in
- how they use proxy advisors
- how they have cast significant votes at general meetings
There is no current regulatory requirement to do this.
- Conflicts of interest rules will also apply to an asset manager’s engagement activities; and
- The FCA also proposes that asset managers will be required to disclose specific information on an annual basis to asset owners they provide investment management services to. This disclosure must include information which enables asset owners to assess whether asset managers are acting in their best interests. For example, this would include:
- information on how the investment strategy contributes to the long-term performance of the assets
- the turnover and risks of the portfolios
- the use of proxy advisors and securities lending,
- how long-term performance is accounted for in investment decisions
- whether conflicts of interest have arisen as part of the engagement activity
The FCA explained that where this information is already provided to investors under other rules (for example in the AIF investors reports) it will not require it to be provided again. The FCA also clarified that it will not propose a standard under which to provide this information, which will not have to be disclosed in a single report.
Financial Reporting Council
The FCA does not propose at this stage to change the current requirement in COBS 2.2.3R which requires asset managers to disclose the nature of their commitment to the Financial Reporting Council (“FRC”) Stewardship Code. This is because the FRC is currently consulting on changes to its Code and the FCA does not wish to prejudge the outcome of FRC’s consultation.
The FCA has also published a discussion paper alongside its consultation, which has been co-authored by the FCA and FRC. This paper calls for input on how best to encourage the institutional investment community to engage more actively in stewardship of the assets in which they invest.
The current Stewardship Code was published in 2010 and was the first Stewardship Code introduced in any major market. The FRC’s proposed revisions take into account the recommendations in the FRC Review, which followed a number of high-profile corporate failures and criticisms of how stewardship is exercised.
SRD II will change the legislative landscape for stewardship in the UK. The proposed implementation of the Directive in the UK will establish a minimum regulatory baseline, with the proposed revised Stewardship Code promoting higher standards beyond this.
What do firms need to do?
- The FCA explained that for an initial period after the rules come into effect on June 10, 2019, it” would be possible for a firm to comply with the relevant rule by explaining what it is doing to develop an engagement policy. This may include, for example, explaining that it is in the process of developing one, or that it is considering whether to have one. This explanation would need to be added to a relevant webpage by 10 June”;
- Asset management firms are currently required to make a disclosure on how they comply, or why they do not comply, with the current Stewardship Code. We suggest that firms add the above-mentioned statement to the bottom of its current Stewardship Code disclosure by June 10, 2019. The Firm should review and revise the policy, and the disclosure on the policy, in accordance with the SRD II requirements, revised FCA rules and the revised Stewardship Code once published and as soon as practicable after June 10th.
- The timescales for making the first disclosures have not been specified by the FCA but it is expected that managers will have to make their first annual disclosures in 2020.