Select Committee on Treasury Minutes of Evidence

Annex A



SubjectRegulator Relevant rulesStatutory backing SanctionComment
Form, content and publicity of company accounts. DTI/Financial Reporting Review Panel.Companies Act 1985, Part VII. 4

Implements Fourth (78/660/EEC) and Seventh (83/349/EEC) Company Law Directives.
Companies Act 1985, section 245B, under which the Secretary of State has authorised the Financial Reporting Review Panel to apply to the court in respect of accounts of larger companies which fail to comply with the accounting requirements of the Act. Failure to comply with procedural provisions on preparation of accounts, and directors report, and laying before general meeting, are offences punishable by fine. Failure to deliver accounting documents to the Registrar is also punished by civil penalty. Accounts which fail to comply with the accounting requirements of the Companies Acts may be challenged in court by the Financial Reporting Review Panel (FRRP) or the DTI. If this succeeds, the company must publish revised accounts. Alternatively, subject to criminal sanctions (fine). The main provisions are those requiring the preparation of individual and group accounts; the form and content of such accounts; (including some on how assets and liabilities are to be measured); their approval by the directors; and their delivery to the Registrar and members. (For observance of accounting standards see below.)

Small and medium sized companies are exempt from some requirements on the content of accounts.

The FRRP always seeks to proceed by agreement with the company and has not yet needed to apply to the court.
Accounting Requirements.The Accounting Standards Board (ASB) sets standards; the FRRP and the DTI are responsible for enforcing them (see sanctions column). Companies Act 1985 and accounting standards. Regulations were made under section 256 of the Companies Act 1985, prescribing the ASB as the body to issue accounting standards. See also section 245B as above. Accounts which fail to comply with the requirements of the Companies Act may be challenged in court by the FRRP or the DTI as explained above. Within this framework, a main focus is material departures from accounting standards where such a departure results in the accounts not giving a true and fair view as required by the Act. Accounting standards are authoritative statements of how particular types of transaction and other events should be reflected in financial statements (see above). Such standards are not prescribed directly by law, but compliance with accounting standards will normally be necessary for financial statements to give a true and fair view.

The requirements on the content of accounts (see above) include a requirement to state in a note to the accounts whether they have been prepared in accordance with applicable accounting standards, and to explain any departures from them. Small and medium sized companies are exempt from this.
Regulation of auditorsRecognised Supervisory Bodies (RSBs) and Recognised Qualifying Bodies (RQBs). Rules of RSBs and RQBs.Companies Act 1989,5 under which the Secretary of State has recognised supervisory bodies (s 30(5)) and qualifying bodies (s 32(4)). Secretary of State also recognises overseas qualifications.

5Implements Eighth EC Company Law Directive (84/253/EEC).

Secretary of State can in extremis withdraw recognition from RSBs and RQBs. Auditors who contravene RSB rules are subject to sanction by their own RSB or, in serious cases, by the profession's Joint Disciplinary Scheme (JDS). Penalties can include withdrawal of registered auditor status. The Secretary of State approves the rules of the RSBs and RQBs; the RSB/RQB/JDS process is also subject to judicial review.

The new non statutory oversight arrangements for the accounting profession under the Accountancy Foundation also provide for the review of the regulatory activities of the accountancy bodies, including audit regulation.
Technical standards to be employed in audit work. Auditing Practices Board (APB).Statements of Auditing Standards. N/AThe APB has no sanctions. But failure to observe Auditing Standards may render an auditor liable to sanction as above. The APP is no longer.
Distribution of profits and assets. (Restrictions on distributions by reference to net assets apply to public companies only.) The court*Companies Act 1985, Part VIII.6

Implements Article 15 of the Second Directive.

A member of a company who receives a distribution he knows to be unlawful is liable to repay it.
Appointment and removal of Directors and Secretary. Company's registered office. DTI/The court*Companies Act 1985, Part IX. N/AProcedural defaults punishable by fines. The Combined (Hampel) code contains detailed provisions on the appointment and re-election of directors of listed companies, on their remuneration and on board srtucture and composition (see below).
Fair Dealing by directors.DTI/The court* Companies Act 1985, Part X.N/A Penalties include fines or imprisonment for offences involving dishonesty; fines for procedural defaults; avoidance of contracts in breach of statutory provisions, and personal liability of directors in some circumstances. Breaches of Part X may also constitute grounds for disaqualification (see below). Directors' duties also include common law duties of skill and care and proper purpose, enforceable by the company in civil actions.

The "softer" corporate governance obligations of directors are covered separately below. Voting guidelines adopted by institutitional shareholders on the re-election of directors may also constrain directors' conduct.
Supervision of competent authority for listing of securities. TreasuryFinancial Services and Markets Act 2000. 9

Implementing the Public Offers Directive (89/298/EEC) and the Consolidated Admissions and Reporting Directive (2001/34/EC).

N/AWithdrawal of designation.
Admission of securities to listing.United Kingdom Listings Authority (UKLA). The Listing Rules (the "Purple Book"), Chapters 3-8. Financial Services and Markets Act 2000. 10

Implementing the Consolidated Admissions and Reporting Directive (2001/34/EC), and Public Offer (89/298/EEC) Directives.

Refusal of listing.The main conditions for admission to full listing relate to availability of past accounts; minimum market capitalisation (£700,000 for shares); and minimum proportion (25 per cent) of shares in public hands.
Continuing obligations of listed companies. These include: UKLAThe Purple Book, Chapters 9-16. These are imposed by the UKLA. Financial Services and Markets Act 2000. 11

11Implementing the Consolidated Admissions and Reporting Directive (2001/34/EC).

Breaches of the Purple Book rules are punishable by public censure, or by unlimited fines against the company or individual directors, and ultimately by delisting. Censure can in some circumstances apply to an individual director.
—general disclosure obligation.

Chapter 9 Listing Rules impose obligations additional to those of the Companies Act on disclosure of interests in shares.
—announcement of major transactions (acquisitions and disposals).

Chapter 10 The Takeover Code (see below) is not incorporated into the Purple Book, but is supported by the UKLA.
—shareholder approval for the largest transactions.

Chapter 10
—shareholder approval of related party transactions.

Chapter 11 Related parties include directors and major shareholders; shareholder approval is required for transactions smaller than those covered by the Chapter 10 approval requirement.
—disclosure of financial information.

Chapter 12 Chapter 12 requires disclosures additional to those required by the Companies Act relating to:
—annual accounts;

—major shareholdings;

—directors' share dealings;

—directors' remuneration.

It also requires disclosures on matters not covered by the Companies Act, relating to:
—profit forecasts;

—preliminary statements of results;

—interim (half year) reports;

—summary financial statements;

—corporate governance (see below).

Also included are requirements for auditor verification of information, beyond those in the Companies Act.
—Approval of documents.

Chapter 13 Includes requirements, additional to those of the Companies Act, relating to the content of:
—memorandum and articles of association;

—trust deeds;

—documents of title;

—proxy forms;

—employees' shares schemes;

—discounted option arrangements.

In the last two cases prior shareholder approval is required.
CircularsChapter 14 Includes requirements relating to the content of circulars to shareholders in support of proposed resolutions on:
—authority to allot shares;

—increase in authorised share capital;

—reduction of capital;

—capitalisation issue;

—scrip dividend alternative;

—scrip dividend mandate scheme;

—purchase of own shares;

—early redemption.

Also covered are circulars on:

—notices of meetings;

—reminders of conversion rights.

—Purchase of own securities.

Chapter 15 This contains requirements relating to the public announcement of proposals to purchase own shares, and to the content of circulars to shareholders on such proposals. In some cases prior approval by holders of related securities is required. All of these requirements are additional to those of the Companies Act.
—DirectorsChapter 16 This covers:

—directors' responsibility for accuracy of listing information and generally for the company's compliance with the Yellow Book;

—public notification of board changes;

—publicity for directors' service contracts, beyond that required by the Companies Act;

—public notification of directors' dealings, beyond that required by the Companies Act;

—compliance with the "model code" on share dealings by directors and others. This supplements the provisions of the Companies Act, particularly in regard to dealings in the "closed period".

Overseas CompaniesChapter 17 Imposes obligations of disclosure, additional to the Companies Act, on overseas companies with a secondary listing on the Stock Exchange.
Offers of securities not falling under Listing Rules. UKLA.Public Offers of Securities Regulations. 12

Implementing the Public Offer Directive (89/298/EEC).

(Certain provisions of Part III of CA 1985 remain in force for offers of unlisted securities.)
Financial Services and Markets Act 2000. Ths issuer or offeror of the securities, and the directors of such persons, are liable to pay compensation to those suffering loss as a result of untrue or misleading statements in the prospectus or the omission of any matter required to be included.

An authorised person under the FSMA involved in any contravention of the regulations is treated as having breached the rules of his regulatory body and is therefore liable to be disciplined by that body.
The FSA may approve prospectuses for unlisted securities drawn up to listing standards for mutual recognition purposes. Other prospectuses are also approved by the FSA, whether or not covered by the Public Offers of Securities Regulations. The Treasury supervises the FSA, but does not itself have an active role in regulating prospectuses.
Failure of any other person to prepare and file a prospectus where required is a criminal offence punishable by imprisonment or a fine, and any such contravention is actionable at the suit of a person who suffers as a result.
Holding and transfer of securities in uncertificated form. UKLAUncertificated Securities Regulations. 13

Implementing the Settlement Finality Directive (98/26/EC).

Companies Act 1989, section 207. CREST, as operator of the system for uncertificated holding and transfer, is supervised by the FSA.
Insider dealingFSACriminal Justice Act 1993. 14

Implementing the Insider Dealing
Directive [reference not to
hand] and FSMA 2000.

Criminal penalties under CJA; civil penalties under FSMA. The scope of the insider dealing provisions goes considerably beyond the area of company law.
Good practice in the structure and operation of boards of directors of listed UK companies, including the setting of directors' pay and the relations between directors, shareholders and auditors. Among specific requirements is the inclusion in the annual report of:

—narrative on the application of governance principles;

—statement on compliance with code provisions, with auditor review of certain points;

The UK Listing Authority, a division of the Financial Services Authority (for those code provisions addressed to listed companies). The Combined (Hampel) Code.The listing rules, Chapter 12 (see above) and indirectly the Financial Services and Markets Act 2000. Failure by companies to comply with the disclosure provisions of the code is a breach of the listing rules. The sanctions available to the UKLA are public censure or the imposition of a financial penalty. (Monitoring of the quality of companies' compliance will be a matter for the shareholders).

Code provisions addressed to shareholders are not subject to formal sanction.
The Combined Code has superseded the Cadbury and Greenbury codes for company reports on periods ending on or after 31 December 1998.

The code provisions relating to directors, including directors' remuneration, complement Part X of the Companies Act and Chapter 16 of the listing rules. The voting guidelines of institutional investors relating to governance are also relevant here.
—remuneration report, including specified details of director remuneration.

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