The Law Commission for England and Wales has published its annual report. With regard to the Commission's final report Company Security Interests, published in 2005 and which proposed major reforms, the annual report states:We were disappointed that the then Department of Trade and Industry was not able to include our recommendations within the Companies Act 2006. We await a formal decision on whether the Government accepts our recommendations and, if so, how it intends to implement them".
The Committee of European Securities Regulators has published a consultation paper containing a proposal for a pan-European short selling disclosure regime. The CESR's proposed disclosure regime is wider in scope than the FSA's current disclosure regime because it is not limited to the shares of financial institutions. The CESR's proposed regime is explained in the consultation paper as follows:It is based on a two-tier system for the disclosure of significant net short positions held in shares admitted to trading on an EEA regulated market or an MTF. When a short position reaches a specified initial threshold, the position holder (the ‘short seller’) would be obliged to make a private disclosure to the regulator of the most liquid market for the share in which the position was held. Further such disclosures would be required at specified subsequent increments. If the position reached a second-tier threshold, the short seller would then be required to make also a public disclosure for its position to the market as a whole. Further disclosures would be required if the short positions crossed subsequent incremental thresholds and would also be necessary if the positions fell below the any of the trigger thresholds, including the initial trigger thresholds".
CESR considers that improving the transparency of short selling would have distinct benefits which would outweigh the associated costs. Greater disclosure would both help deter market abuse and reduce the risks of disorderly markets posed by short selling. It would provide early warning signs of a build up of large short positions, thereby alerting regulators to potentially abusive behaviour and enabling them to monitor and take action more effectively. Also, facilitating ready access to information on short selling would provide informational benefits to the market, improving insight into market dynamics and making available important information to assist price discovery".
Marks and Spencer plc held its annual general meeting today. The company's corporate governance arrangements - in particular Sir Stuart Rose's position as executive chairman - were a central issue (as they were last year). A group of shareholders - under the authority of the Local Authority Pension Fund Forum - had requisitioned a resolution under Section 338 of the Companies Act (2006). The resolution recommended that the board bring forward the appointment of an independent chairman from July 2011 to July 2010.Given the scale of the vote ... LAPFF are looking forward to an immediate dialogue with the company about how it plans to respond. We will also be talking to other supporters of the resolution to listen to their views on the way forward. More broadly this is a significant day for shareholder engagement. Sometimes shareholders need to step up and be public with their concerns and use their voting rights effectively. We need to get past the idea that meetings behind closed doors are always the answer. We have filed this resolution on behalf of the market, in support of the integrity of the Combined Code. Therefore we hope the result is registered in boardrooms across the UK".
This afternoon the Chancellor of Exchequer delivered a statement before Parliament concerning the publication today of the white paper Reforming Financial Markets. The white paper does not propose significant change to the tripartite system of regulation although it does propose: [a] amending the FSA's statutory objectives to include financial stability and increasing the FSA's rule making and enforcement powers; [b] creating a new Council for Financial Stability. The white paper also endorses the findings of the Turner Review. It is also clear that there must be major changes to the way that bank boards function. Improved risk management at board level, changes to the balance of skills, experience and independence, and a better approach to audit, risk and remuneration are required. Institutional shareholders need to be more actively engaged in monitoring the board of the bank in which they have invested. The FSA has already taken action to vet potential board members of banks more thoroughly.
The FSA have proposed the incorporation of a Code of Practice on remuneration into the FSA's Handbook and to apply it to banks, building societies and broker dealers. The Code has a general requirement that ‘a firm must establish, implement and maintain remuneration policies, procedures and practices that are consistent with and promote effective risk management’. This is backed up by ten principles covering the key areas of governance, performance measurement and the composition of remuneration packages. The FSA will continue to play an active role in the remuneration discussion at the EU and international level.
The Chancellor has, furthermore, asked the FSA to provide an annual report on remuneration practices, including compliance by firms with the new Code. This report will assess whether remuneration practices are likely to lead to a build up of systemic risk, and make recommendations for action if this is thought to be the case.
The Chancellor has also asked Sir David Walker to conduct a review of the corporate governance of banks and other financial firms, to recommend how financial institutions can better equip themselves to respond to lessons learnt from the crisis. Sir David’s interim report is due shortly [next week] and the Government looks forward to responding".
Two items of interest. The Companies’ Remuneration Reports Bill reached the Committee stage in the House of Lords. However, no amendments were tabled and no member of the House of Lords indicated the wish to speak. The House therefore agreed that the order of commitment be discharged and the Bill will now proceed to the Third Reading stage on July 13.The independence of auditors has been the subject of increased regulation over the past 20 years. Indeed, the Treasury Select Committee recently recommended a consultation on the issue of auditors earning fees from non-audit work and the Financial Reporting Council is planning to consult later in the year. On the general point of where the auditors were during the financial crisis, there are lessons to be learnt for the accounting profession, just as there are for many different aspects of the financial services industry. As someone who worked in the industry, I know that auditors were involved in the risk governance and control side. We are not aware, however, of any evidence of an audit failure in one of the banks where the Government have had to intervene. Furthermore, the Audit Inspection Unit of the Financial Reporting Council, which reviews the audits of large firms, has concluded that audits are fundamentally sound".
