Government approach to Kay recommendations "resists temptation" of new legislation, says expert

Martin Webster of Pinsent Masons, the law firm behind Out-Law.com, was commenting as a committee of MPs criticised the Government for not backing up "warm words" with "action" in the year since Kay published his final report. The Business, Innovation and Skills (BIS) Committee said that it wanted to see "evidence of significant progress" by next year, when the Government is due to publish a report of its progress against the recommendations.

Corporate law expert Webster, however, said that encouraging cultural change from within the industry itself in the first instance was a far better approach.

"It is good to see that the Government has resisted the temptation of new legislation in this area to further the Kay reforms," he said. "With all the changes to annual reporting, beneficial ownership and other transparency measures, there is a degree of regulatory overload at the moment. Better by far to encourage the market to reform itself; with the clear understanding that if companies pass up the challenge, new laws will follow."

The Kay Review was commissioned by Government to look at ways to encourage long-term corporate decision-making, and restore public confidence in stock markets. The final report set out 17 recommendations in the form of 'statements of good practice', which Kay said should be adopted into "clear and specific guidance" rather than "detailed regulation".

In its response to an earlier review of its progress by the BIS Committee, the Government said that it had not "ruled out legislative or regulatory measures where there is a clear case" that they would be the most effective way to bring about Kay's recommendations. However, it noted that "additional prescriptive regulation of behaviour is unlikely to achieve the cultural change which is needed".

One area in which the Government is pressing for legislative change is in removing the requirement for certain publicly-listed companies to provide quarterly Interim Management Statements, as recommended by Kay. This requirement is set by the EU's Transparency Directive and applies to public companies listed on the main market, although certain AIM-listed companies may also choose to publish quarterly statements on a voluntary basis. According to its response to the BIS Committee, agreement has now been reached at an EU level on amendments to the Transparency Directive, which would remove this requirement. Once the new directive is published in the Official Journal, the Government intends to "implement the relevant sections" in the UK "as soon as is practical".

Removing the requirement for quarterly reports will also involve changes to the Financial Conduct Authority's Disclosure Rules and Transparency Rules, which cannot be made until the FCA has carried out cost benefit analysis and consulted on the changes. The Government has asked the FCA to set out the timetable for this process once the changes to the directive come into force, it said.

The Government has also commissioned research into "the uses and limitations of metrics and models used in the investment chain, from the perspective of long-term investors", according to its response. The results of this project, which is due to be completed by April 2014, will be used to develop guidance for long-term investors in assessing performance. In addition, the Law Commission has been asked to consider whether fiduciary duties, requiring intermediaries to act in the best interests of savers, should be extended to more parties within the investment chain. It will report back in June 2014, according to the response.

Although the Government appears supportive of Kay's view that asset managers' remuneration should be aligned with the interests and timescales of their clients, including by delivering incentives in the form of long-term holdings in the funds that they manage, it says that "flexibility to fit different fund types and structures" is needed. This should instead be "good practice" for firms, as should Kay's recommendation that shareholders be consulted over major board appointments.

The Government will also keep changes to the executive remuneration and narrative reporting regimes under review, it said in its response.