Coronavirus: UK regulators announce corporate reporting changes

The UK’s financial regulators have issued a set of joint statements and guidance aimed at ensuring information flows to investors are maintained and the capital markets continue to function during the coronavirus pandemic.

The Financial Conduct Authority (FCA) confirmed that listed companies willhave an extra two months to publish audited financial reports. Meanwhile the Financial Reporting Council (FRC) has issued guidancefor companies preparing financial statements, as well as foraudit firms that may face challenges obtaining audit evidence.

The Prudential Regulation Authority (PRC) published guidance for banks, building societies and PRC-regulated investment firms in assessingexpected loss provisions (11 page / 207KB PDF).

The regulators said previous market practices relating to the timing and content of financial information and the audit work that is done “must change” in the current crisis, with alterations to timetables for the publication of financial information which had been set before the full implications of coronavirus became clear. 

Auditors may have to limit the scope of their audit opinion if they have been unable to gather the necessary evidence to complete the audit in full, for example.

The regulators said they expected there to be more audited financial statements that include disclosures that management is aware of material uncertainties related to events or conditions that may cast significant doubt upon their business’s ability to continue as a going concern.

The FCA said although it was permitting a delay of two months in the publication of audited financial statements, from four months after year-end to six, listed companies still needed to observe other disclosure obligations. In particular, the regulator said disclosures concerning inside information under the Market Abuse Regulation (MAR) needed to be observed, as the pandemic could mean an alteration in the nature of information that was material to business prospects.

Financial services regulation expert David Hamilton of Pinsent Masons, the law firm behind Out-Law, said the volatility within the financial markets meant there was a heightened risk of individuals seeking to profit through abuse of their position and access to inside information.

Hamilton said authorised firms should be mindful of the broad definition of inside information under MAR, and ensure that their systems combating insider dealing and other forms of market abuse remain robust, particularly in light of recent market dislocation; a job not made any easier by remote working and heightened pressure on compliance functions.

“Clearly firms will need to innovate in order to maintain adequate compliance oversight, for example by implementing enhanced monitoring of staff activities through effective remote working arrangements,” Hamilton said.

Hamilton said the FCA had made it clear that firms were expected to keep appropriate records of transactions and submit them to the FCA when they could. However, he said firms should not adopt delayed reporting as a default position and should notify the FCA if a delay in reporting was expected to be significant.

“The FCA recognises that firms are having to deal with disruption on an unprecedented scale. However, it also expects all firms to have appropriate contingency plans in place to deal with major events, taking all reasonable steps to meet their regulatory obligations to protect consumers and maintain market integrity,” Hamilton said.

The FRC said it was encouraging boards to develop and implement mitigating processes to ensure they can continue to operate, for example by identifying key reporting and other controls on which they have placed reliance historically, but which may not prove effective in the current environment.

Boards should also consider how they will secure reliable and relevant information to manage future operations, including the flow of financial information from significant subsidiary, joint venture and associate group entities. Companies should also ensure that sufficient reserves would available when any dividend is made, not just proposed, said the FRC.

Corporate governance expert Martin Webster of Pinsent Masons said: “Two messages come loud and clear from the FRC.

“First, before you go ahead with a planned dividend, make absolutely sure you not only have the cash to pay it but also enough to meet other liabilities. And, second, on the same theme, what investors really want to know about is liquidity, viability and solvency. Make sure they can understand clearly how resilient the business is and the key assumptions you have made in making those judgements,” Webster said.