Annex A: Summary of action to deliver
the Kay Review
1. Note: In the section the Kay Recommendations
are set out in thematic, rather than numerical order, under the
following headings:
· Specific
policy measures
· Areas
of further policy analysis
· Development
of industry good practice
· Ensuring
regulation is informed by and aligned with the Kay Review
| Specific policy measures:
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Development of the Stewardship Code to emphasise that stewardship
should focus on strategy as well as governance issues.
Kay Review Recommendation 1
Progress: Revisions made
by the FRC to 2012 edition of the code reflected the specific
recommendation in the Kay Review that the code should incorporate
a more expansive form of Stewardship, focussing on company strategy
as well as questions of corporate governance. Recommendation implemented.
Forward looking objectives:
The FRC will consider whether further amendments are needed to
reflect this recommendation in future editions of the Code. The
FRC is currently reviewing the implementation of the Stewardship
Code and any resulting changes will be subject to consultation
in the first half of 2014.
Removing Mandatory Quarterly Reporting
Kay Review Recommendation 11
Progress: Amendments to
the EU Transparency Directive to remove the requirement to publish
interim management statements or quarterly reports have been agreed.
Forward Looking Objective:
The Government intends to implement the relevant sections of the
revised directive in the UK as soon as is practical. This will
involve changes to the Financial Conduct Authority (FCA) Disclosure
and Transparency Rules following the FCA's statutory duties to
conduct cost benefit analysis and consult. The Government has
asked the FCA to set out the timetable for this consultation process
once the Directive comes into force.
Reforms to Narrative Reporting
Kay Review Recommendation 12 / Supports Kay
Review Recommendation 6
Progress: The Government
has introduced legislation to restructure the annual report to
help companies bring strategic messages to the fore. The FRC is
consulting on guidance which will encourage the development of
best practice by companies in the preparation of concise reports
which are relevant to users and form the basis of effective engagement
and dialogue between companies and shareholders.
Forward Looking Objective:
Regulations will come into force on 1 October 2013. We expect
the FRC guidance to be finalised in early 2014. The Government
will keep this policy area under review, and in any case will
complete a post implementation review on the regulations in accordance
with good practice.
Reforms to Governance of Executive Remuneration
Supports Kay Review Recommendation 15
Progress: Government has
recently introduced legislative reforms to the governance of directors'
remuneration which aim to increase companies' transparency and
accountability to shareholders, and to empower them through the
introduction of a binding vote. A key aim is to encourage companies
and their shareholders to agree simpler pay structures which are
more clearly linked to long-term performance.
Forward Looking Objective:
Regulations come into force on 1 October 2013. The Government
will continue to work with business and investors to ensure the
reforms have a lasting impact. The Government will keep this policy
area under review, and in any case will complete a post implementation
review on the regulations in accordance with good practice.
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Areas of further policy analysis:
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The scale and effectiveness of merger activity of and by UK
companies should be kept under review by BIS and companies themselves
Kay Review Recommendation 4
Progress: The Government
accepted the recommendation and in particular is focused on improving
engagement with companies and investors to promote investment
which benefits the UK economy - including via the Government's
Industrial Strategy. A key element of the UK's approach is the
Strategic Relationship Management Programme led by UK Trade and
Investment. This is helping to establish better relationships
with both foreign and domestic investors and key exporters. The
Government has doubled number of companies enrolled in the SRM
initiative since the autumn 2012, and will seek to double it again
by 2015. The new Competition and Markets Authority will also have
the objective of long-term growth built into its performance framework.
Recommendation implemented.
Law Commission review of fiduciary duties in investment
Kay Review Recommendation 9
Progress: The Law Commission
review is underway and progressing on track.
Forward Looking Objective:
The Law Commission will consult, as part of its review project,
by October 2013 and publish its report by June 2014. The Government
will respond to the report in its progress report on the Kay Review
in summer 2014.
Research on the uses and limitations of metrics
and models for long-term investors
Kay Review Recommendations 13 / Supports Kay
Review Recommendation 14
Progress: Professor Kay
recommended that the Government commission a further independent
review in this area. Given the technical nature and scope of the
issues involved, the Government decided to instead progress this
recommendation by commissioning a research project in this area.
This research project is now underway. The Government has appointed
an expert panel of academics and market practitioners to help
shape the research, monitor its progress and quality, and promote
wider engagement and debate.
Forward Looking Objective:
The research project will be completed by 1 April 2014. The Government's
objective is that it should:
· prompt
debate about what metrics and models best inform long-term investment
strategies for a range of different types of investor, setting
the direction for further research;
· enable
the development of Government and / or industry guidance for these
investors; and
· enable
the Government and regulators to identify where regulation may
be prompting the use of unhelpfully short-term metrics and models.
Enabling Individual Direct Electronic Shareholding
Kay Review Recommendation 17
Progress: The Government
committed to address this recommendation in the context of EU
policy proposals relating to central securities depositories and
securities law. Negotiations on these proposals are ongoing, and
the Government is involved in discussions with the FCA and key
stakeholders about practical options for direct electronic shareholding
which would promote transparency and allow individual shareholders
to exercise their rights.
Forward Looking Objective:
The Government will provide an update on the progress of these
discussions, and EU negotiations, in its progress report on the
Kay Review in summer 2014.
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Development of industry good practice:
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2. The Government Response to the Kay Review advocated the
development of good practice by companies and the investment industry
based on the Kay Review Principles, the directions for market
participants which follow from them, and the related Good Practice
Statements for company directors, asset managers, and asset holders.
3. Below we set out examples of industry led
initiatives which we hope will achieve the objectives of these
recommendations, and our expectations for further progress. This
is not intended to provide a comprehensive survey of the response
from business and the investment industry: the Government's progress
report in summer 2014 will provide a more detailed analysis of
progress. We welcome these initiatives, and continue to work with
market practitioners to encourage them to meet the challenge we
set in the Government Response to the Kay Review.
4. As the Government Response to the Kay Review
made clear, we will soon be commissioning a small group of respected
senior figures from business and the investment industry to assess
industry progress on shareholder engagement and stewardship, both
collectively and individually. Their views will complement the
Government's own progress report in summer 2014.
Promoting investor stewardship and meaningful
engagement between companies and their shareholders
Kay Recommendations 2, 5, and 6
Progress:
· The
Institute of Chartered Secretaries and Administrators (ICSA) published
new guidance in March 2013 designed to improve the quality of
engagement between investors and companies. This was produced
by a steering group which involved the IMA and representatives
of both institutional investors and companies, and reflected the
relevant aspects of the Kay Good Practice Statements.
· The
National Association of Pension Funds (NAPF) published a Stewardship
Policy, in November 2012, which reflects the Kay Good Practice
Statements and is designed to encourage and enable pension schemes
to understand and fulfil their responsibilities as investors and
to sign-up to the Stewardship Code.
· The
NAPF has also consulted on the development of a "Stewardship
Framework" against which asset managers will be encouraged
to self certify, indicating to pension funds and other clients
the extent to which they fulfil a number of different categories
of good practice in stewardship. The framework invites asset managers
to indicate the extent to which manager remuneration is linked
to long-term portfolio performance.
· The
Association of British Insurers (ABI) has recently published a
paper on Improving Corporate Governance and Shareholder Engagement,
which signalled support for the development of a "Stewardship
Mandate" along similar lines.
· The
Quoted Companies Alliance (QCA) has updated its Corporate Governance
Code for Small and Mid-Size Quoted Companies which adopts key
elements of the FRC's Corporate Governance Code and other relevant
guidance and applies these to the needs and circumstances of small
and mid-size quoted companies. It includes provisions to encourage
positive engagement between companies and their shareholders.
Forward Looking Objective:
The Government's progress report in summer 2014 will include analysis
of industry initiatives in this area.
Improving collective engagement / establishment
of an investors' forum
Kay Review Recommendation 3
Progress:
· As
the Committee's report notes, a working group has been established,
representing a range of perspectives within the investment industry,
to look at issues of collective engagement and the establishment
of an investors' forum.
· The
ABI, whose members are represented on the working group, has also
committed to expanding its existing collective engagement process
to include all significant shareholders - whether or not they
are ABI members. It is also setting up an "investor exchange"
mechanism, to enable any significant shareholder to raise a concern
on a particular UK listed company with other shareholders.
Forward Looking Objective:
The working group is expected to report in November 2013. The
Government will respond quickly to any issues it identifies for
Government. We expect the industry to also act quickly and positively
to take forward its recommendations as the basis for the creation
of an effective structure for improving collective engagement
by the end of 2013. If no such structure emerges, the Government
will convene a conference of senior representatives from major
UK institutional investors, early in 2014, to identify and resolve
any outstanding barriers to progress in this area.
Improving cost transparency in the investment
chain
Kay Review Recommendations 8 and 10
Progress:
· The
Investment Management Association (IMA) has consulted on the introduction
of a new Statement of Recommended Practice (SORP) for the financial
statements of UK authorised funds which will include more comprehensive
disclosure of fund performance and charges, including transaction
costs and stock lending charges. This is in line with Professor
Kay's recommendation and Good Practice Statement.
· Alongside
this good practice initiative, the European Securities and Markets
Authority has also issued guidelines for asset managers subject
to the Undertakings in Collective Investments in Transferable
Securities (UCITS) Directive. This requires transparent disclosure
of stock lending charges and income, with income rebated to the
client as the Kay Review recommends.
Forward Looking Objective:
The Government would like to see these developments (alongside
other cost transparency initiatives from the ABI and NAPF and
others) deliver significant further progress by 2014, towards
a comprehensive industry-led disclosure regime which provides
clear information on costs and charges to all savers and investors
throughout the investment chain, and irrespective of their choice
of investment vehicle. The Government's report in summer 2014
will provide an update on progress in this area. The Government
is prepared to consider further regulatory measures to improve
transparency on costs and charges if insufficient progress is
made.
Aligning company directors remuneration with business
long-term performance
Kay Review Recommendation 15
Progress:
· The
NAPF has also published a discussion document—jointly with
Hermes Equity Ownership Services, the BT Pension Scheme, the Universities
Superannuation Scheme and the Railways Pension Scheme—calling
for simpler executive pay schemes, properly aligned with long-term
success and a material investment by executives in the company.
· The
GC100 and Investor Group[7]
issued best practice guidance to accompany the Government's reforms
to the reporting of directors' remuneration in September 2013.
It encourages constructive and informed engagement between companies
and investors to support the long-term success of those companies.
Forward Looking Objective:
The Government has already seen encouraging signs that institutional
investors and companies are negotiating clearer expectations of
remuneration policies which are simpler and more effectively linked
to long-term performance, including through the use of long-term
share ownership as Professor Kay proposed. We expect this progress
to continue following the coming into force of our reforms this
October. As noted above, we will continue to work with business
and investors to promote good practice and ensure the reforms
have a lasting impact.
Aligning asset managers remuneration with clients'
investment objectives / timescales
Kay Review Recommendation 16
Progress:
· The
NAPF Stewardship Framework described above invites asset managers
to indicate the extent to which manager remuneration is linked
to long-term portfolio performance.
Forward Looking Objective:
The Government's progress report in summer 2014 will include analysis
of industry initiatives in this area.
| Ensuring regulation is informed by and aligned with the Kay Review:
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5. In the Government Response to the Kay Review:
· The
Government committed to work with relevant regulatory authorities
to explore to what extent the Kay Report's directions for regulatory
policy are practical, and what changes in the law or in regulation
might be therefore be appropriate.
· In response
to Kay Review Recommendation 2, the Financial Reporting
Council (FRC), the Pensions Regulator (TPR) and the Financial
Conduct Authority also committed to consider to what extent existing
regulatory requirements may prevent the adoption of standards
of good practice as defined in the Good Practice Statements, and
what steps might be appropriate to enhance existing regulatory
guidance and codes of practice accordingly.
· In response
to Kay Review Recommendation 7, the Government asked the
FCA and to consider to what extent regulatory rules align the
principle, set out in the Government Response to the Kay Review,
that sought to define minimum standards of behaviour for all investment
intermediaries.
6. We welcome further suggestions on possible
measures to ensure the regulatory framework supports long-term
investment in UK equities. Below we set out progress made to date:
· The
FRC has committed to reviewing the relevant provisions of the
Corporate Governance Code, ahead of the next full revision of
the Corporate Governance Code, to reflect the recent reforms to
the governance of company directors' remuneration. The FRC is
also reviewing the work of nomination committees, including on
board appointments, and will consider whether changes are needed
to the Code.
· The
FRC has agreed to consider what further action may be necessary
to align the next edition of the Stewardship Code with the Kay
Review Principles and Good Practice Statements. The FRC is currently
reviewing the implementation of the Stewardship Code and any resulting
changes will be subject to consultation in the first half of 2014.
· The
Government is working with the relevant regulatory authorities
and industry groups to consider what further steps would be appropriate
to encourage asset owners to consider stewardship and to develop
and implement stewardship policies when allocating investment
mandates to asset managers. The Government is also considering
whether existing guidance and requirements on pensions schemes
with respect to investment governance, including the Myners Principles,
and the statutory requirements on pensions schemes to prepare
a Statement of Investment Principles, could be better aligned
with the Stewardship Code.
· The
Pensions Regulator has recently issued a new Code of Practice
for trust-based defined contribution pension schemes. We understand
the accompanying guidance for Trustees, published this autumn,
will be appropriately aligned with Professor Kay's Good Practice
Statement for asset holders. The Pensions Regulator will consider
the Kay Review Principles, Good Practice Statements and directions
for regulatory policy in the course of their work to update their
regime for defined benefit pension schemes.
· The
FCA is conducting a review of the practices of asset managers
with respect to both fund charges and conflicts of interest. We
expect its current work programme and its renewed focus on conduct
of business regulation to support achievement of the minimum standards
set out in the Government's response to the Kay Review.
· The
Department for Work and Pensions has recently consulted on minimum
standards for workplace defined contribution pension schemes.
The Government intends to make regulations in 2014, under a power
in the current Pensions Bill, setting out minimum quality standards
that workplace money purchase schemes would be required to meet.
· The
Office of Fair Trading published the report of its study of the
market for defined contribution pension schemes on 18 September
which included recommendations on improving the standards of scheme
governance and on improving the transparency of costs and charges
on pension schemes. The Government will respond to the report's
recommendations in due course.
7 The GC100 and Investor Group comprises the Association
for the General Counsel and Company Secretaries of the FTSE 100
(GC100), the Association of British Insurers, and a number of
leading pension schemes and investment firms. Back
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