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Government responds to Business, Innovation and Skills Select Committee report into implementing the recommendations of the Kay review

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08 Nov 2013

The government has provided their response to the Business, Innovation and Skills Select Committee (BISC) report which discussed the government’s approach to implementing each of the 17 recommendations outlined by Professor Kay in his review of the UK Equity market in 2012 (the “Kay Review”). Included within their response ‘The Kay Review of UK Equity Markets and long-term decision making: Government response to the Committee’s third report of session 2013-14’, is a commitment to remove mandatory quarterly reporting in the UK.

Professor Kay’s review ‘Kay Review of UK Equity markets and long-term decision making’ (link to BIS website), published in July 2012, sought to address the issue of short-termism in the equity market.  The aim of the report was to “set out principles that are designed to provide a foundation for a long-term perspective in UK equity markets and describe the directions in which regulatory policy and market practice should move”.  

The review concluded: 

Short-termism is a problem in UK equity markets, and that the principal causes are the decline of trust and the misalignment of incentives throughout the equity investment chain.

The Kay review established 17 recommendations which were intended for the government, regulatory authorities and “key players in the investment chain” to provide “the first steps towards the re-establishment of equity markets that work well for their users”. 

The BISC report sought to take forward the recommendations in the Kay review and provide actions for the government to undertake in order that progress against the recommendations could be measured.  It called on the government to publish “clear, measureable and achievable targets” for implementation of each of the 17 recommendations outlined by Professor Kay in his review of the UK Equity market in 2012.

The government has provided support for a number of the recommendations including the removal of the requirement to publish interim management statements or quarterly reports.  These changes have been agreed at a European Union level with the amendments to the Transparency Directive.  The government has commented that it is “committed to removing mandatory quarterly reporting for UK companies, and following publication of the new Directive in the Official Journal, intends to implement the relevant sections of the revised directive in the UK as soon as is practical”. 

However, the government does not support the recommendation in relation to appointment of executives.  Professor Kay provided a recommendation, proposing that companies “consult with major investors over all board appointments”. The BIS Committee recommended that the “Government publishes a timetable for the implementation of this policy, clarifies which investors companies are to consult with and outlines how it intends to combat the issues surrounding insider trading and confidentiality which inevitably accompany such board appointments”.  The government commented that effective consultation on appointment was to be seen as “good practice” and so did not plan to “regulate such an approach”.

In response to the recommendation on narrative reporting, the government has commented that “over-regulation” of narrative reporting is “likely to result in boilerplate and compromise high quality reporting”.  They note that companies should be provided flexibility and highlight the non-mandatory guidance of the FRC to assist preparers of narrative reports.

Further responses are included in the full report, which also includes an appendix summarising progress to date and setting forward looking objectives.

The government has indicated that it will report on progress in implementing the recommendations in 2014.

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