Gem Briefing Note 19/6 - Information on significant changes to the Financial Reporting Council's (FRC) Stewardship Code

November 2019

Purpose of this Briefing Note   

This briefing note summarises the FRC UK Stewardship Code 2020, due to take effect from 1 January 2020. The new Code is a substantial and ambitious revision to the 2012 edition of the Code, now with a stronger emphasis on the activities and outcomes of stewardship, not just policy statements. Additionally, the 2020 Code sets a standard that is higher than the minimum UK regulatory requirements for the responsible allocation, management and capital for clients and beneficiaries, to enable the creation of sustainable long term value. 

The FRC previously consulted on its proposed changes to the 2012 Code, with the feedback received helping shape the 2020 Code. In addition, earlier in 2019 the FRC and the Financial Conduct Authority (FCA) also published a discussion paper ‘Building an effective regulatory framework for stewardship’ (DP19/1). The paper aimed to advance the discussion about what effective stewardship should look like, expectations for financial services firms, and how this can be best supported by the UK’s regulatory framework. This briefing note also provides a summary of the FCA’s just published industry feedback on DP19/1.

Introduction to the 2020 Code

The 2020 Code differs significantly from the 2012 Code in that it now comprises 12 ‘apply and explain’ Principles for Asset Owners and Asset Managers, with reporting expectations relevant to their role. Additionally, there are now six similar ‘apply and explain’ Principles for Service Providers, also coming with reporting expectations.

Although becoming a signatory to the Code is voluntary, firms who manage investments for professional clients are required under the FCA COBS 2.2.3R to disclose the nature of their commitment to the Code or, where they do not commit to the Code, their alternative investment strategy. In any event it is likely that this ’rising tide’ of accountability will lift all in scope firms as stakeholder expectations come to see Code adherence as a positive indicator.

Asset owners and Asset Managers cannot delegate their Code responsibility and are accountable for effective stewardship. Stewardship activities include investment decision-making, monitoring assets and service providers, engaging with issuers and holding them to account on material issues, collaborating with others, and exercising rights and responsibilities.

Capital is invested in a range of asset classes over which investors have different terms and investment periods, rights and levels of influence. Code signatories should use the resources, rights and influence available to them to exercise effective stewardship, no matter how this capital is invested.
Service Providers play a key role in the investment community as they provide services that support clients to fulfil their stewardship responsibilities. Service providers applying the Principles include, but are not limited to, investment consultants, proxy advisors, and data and research providers.

Activities Service Providers undertake to support their clients’ stewardship may include, but are not limited to, engagement, voting recommendations and execution, data and research provision, advice, and provision of reporting frameworks and standards.

The key changes to the current 2012 Code include:
  • Establishing a clear benchmark for stewardship as the responsible allocation, management and oversight of capital to create long-term value for clients and beneficiaries leading to sustainable benefits for the economy, the environment and society.
  • Defining an extended focus that includes Asset Owners and Service Providers as well as Asset Managers, in order to help align the approach of the whole investment community in the interest of end-investors and beneficiaries.
  • A requirement to report annually on stewardship activity and its outcomes, with signatories’ reports showing what has actually been done in the previous year, and what the outcome was, including their engagement with the assets they invest in.
  • Signatories will be expected to take environmental, social and governance factors, including climate change, into account and to ensure their investment decisions are aligned with the needs of their clients.
  • Signatories are now expected to explain how they have exercised stewardship across asset classes beyond listed equity, such as fixed income, private equity and infrastructure, and in investments outside the UK.
  • Signatories are required to explain their organisation’s purpose, investment beliefs, strategy and culture. They are also expected to show how they are demonstrating this commitment through appropriate governance, resourcing and staff incentives.
The Principles

A principles based Code allows organisations to meet the stewardship expectations in a manner that is aligned with their own business model and strategy, and avoids the prescription of a single approach to effective stewardship. A brief summary of the principles for both Asset Owners and Asset Managers, and for Service Providers is set out in the following tables. Full details can be found in the Code document, which is linked to above.
Principles for Asset Owners and Asset Managers
Purpose and Governance What this means
Principle 1
Purpose, strategy and culture
Signatories’ purpose, investment beliefs, strategy, and culture enable stewardship that creates long- term value for clients and beneficiaries leading to sustainable benefits for the economy, the environment and society.
Principle 2
Governance, resources and incentives
Signatories’ governance, resources and incentives support stewardship.
Principle 3
Conflicts of interests
Signatories manage conflicts of interest to put the best interests of clients and beneficiaries first.
Principle 4
Promoting well functioning markets
Signatories identify and respond to market-wide and systemic risks to promote a well-functioning financial system.
Principle 5
Review and assurance 
Signatories review their policies, assure their processes and assess the effectiveness of their activities.
Investment approach  
Principle 6
Client and beneficiary needs
Signatories take account of client and beneficiary needs and communicate the activities and outcomes of their stewardship and investment to them.
Principle 7
Stewardship, investment and ESG integration
Signatories systematically integrate stewardship and investment, including material environmental, social and governance issues, and climate change, to fulfil their responsibilities.
Principle 8
Monitoring managers and service providers
Signatories monitor and hold to account managers and/or service providers.
Principle 9
Signatories engage with issuers to maintain or enhance the value of assets.
Principle 10
Signatories, where necessary, participate in collaborative engagement to influence issuers.
Principle 11
Signatories, where necessary, escalate stewardship activities to influence issuers.
Exercising rights and responsibilities  
Principle 12
Exercising rights and responsibilities
Signatories actively exercise their rights and responsibilities.
Principles for Service Providers
Principle What this means
Principle 1
Purpose, strategy and culture
Signatories’ purpose, strategy and culture enable them to promote effective stewardship. 
Principle 2
Governance, resources and incentives
Signatories’ governance, workforce, resources and incentives enable them to promote effective stewardship. 
Principle 3
Conflicts of interets
Signatories identify and manage conflicts of interest and put the best interests of clients first. 
Principle 4
Promoting well functioning markets
Signatories identify and respond to market-wide and systemic risks to promote a well-functioning financial system. 
Principle 5
Supporting clients’ stewardship
Signatories support clients’ integration of stewardship and investment, taking into account, material environmental, social and governance issues, and communicating what activities they have undertaken. 
Principle 6
Review and assurance
Signatories review their policies and assure their processes. 


All Principles are supported by reporting expectations. An organisation applying to become a signatory to the Code will now need to provide a single Stewardship Report (the Report) that sets out how they have applied the Principles in the preceding 12 months. This must include reporting on the activities they have undertaken, and the outcomes achieved.

For the organisation to be listed as a signatory on the FRC website, the Report will need to meet the reporting expectations of the FRC. This change simplifies the reporting for signatories and encourages a greater focus on the activities and outcomes of stewardship. The Code recognises that signatories differ by size, type, business model and investment approach, and do not exercise stewardship in an identical way. As such, the reporting expectations do not require disclosure of stewardship activities on a fund-by-fund basis or for each investment strategy. However, the information provided should give a clear indication of how stewardship activities differ across funds, asset classes and geographies proportionately to their operations.

Reports must be reviewed and approved by the applicant’s governing body, and signed by the chair, chief executive or chief investment officer. Once the applicant has been accepted as a Code signatory and the Report is approved by the FRC, the Report will be a public document and must be made available on the signatory’s website

Feedback on DP19/1 - Building an effective regulatory framework for stewardship’

The financial service industry’s response to the FRC and FCA joint discussion paper, DP19/1, was largely positive and supportive of the direction being taken by the new Code and the FCA’s regulatory stance in this area. What the feedback did emphasise though, was the need to allow the Code to embed during 2020 without further regulatory intervention or requirements being imposed. The FCA have agreed that this is a pragmatic approach.

However, the FCA will be responding to the feedback which indicated that there were some remaining barriers to effective stewardship across the institutional investment community, but in a way which helps market led initiatives remove these barriers rather than through further regulation and prescriptive rules, which would be costly and counter productive. Further detail on these and the proposed FCA actions can be found in the DP19/1 feedback paper, section 4.6.

The FCA plan to tackle these stewardship barriers through a framework of four key attributes around which policies can be based and action plans determined. The four key attributes are:
Key attribute of effective stewardship Definition
Clear purpose A clear understanding of the scope, role and purpose of stewardship. Contractual and other arrangements that reflect clients' and beneficiaries' investment and stewardship objectives
Constructive oversight, engagement and challenge
Active and effective monitoring of assets, constructive dialogue
with issuers, and exercise of ownership rights. Integration of stewardship and investment processes to achieve outcomes consistent with clients' and beneficiaries' investment and stewardship objectives
Culture and institutional structures that support effective stewardship
Culture and institutional structures to promote and support investment strategies and stewardship activities consistent with clients' and beneficiaries' investment and stewardship objectives
Disclosure and transparency of stewardship activities and outcomes
Reporting and disclosures across the institutional investment community to demonstrate that stewardship activities and outcomes reflect clients' and beneficiaries' investment and stewardship objectives

Next steps in the Stewardship Code journey

1 January 2020
The 2020 Code takes effect for reporting years beginning on or after 1 January 2020. Organisations wishing to confirm their commitment to the Code before applying to become a signatory may request to be listed on the website.

Throughout 2020
The FRC will engage with investors to communicate their expectations for the quality and content of Code reports.

31 March 2021
Applicants seeking to be included in the first list of signatories to the Code must submit their Stewardship Reports by 31 March 2021.

Summer 2021
The FRC completes assessment of Code reports. Applicants that meet the FRC’s expectations will be listed as 2020 Code signatories. The list of signatories to the 2012 Code will be archived.
Signatories reporting in Year 1 will not be graded or tiered. Applicants which meet the reporting expectations will be included in a single list based on their role i.e. asset owner, asset manager or service provider.
In 2021, following the first year of reporting against the 2020 Code, the FRC will:
  • report on their observations of the quality of reporting based on their assessment, and include examples of good practice in stewardship and reporting.
  • determine what resourcing may be necessary to engage signatories on their reporting.
  • encourage signatories to work together and with the FRC to develop good practice norms on reporting stewardship outcomes
  • propose a timeline to review of the Code’s reporting expectations, to ensure the Code remains up to date and continues to encourage effective stewardship.
The Code Principles will not change without formal consultation; however, the FRC may periodically update the reporting expectations. When they do so this will be clearly explained by them.

Next steps for GEM clients

As previously mentioned, the Code is voluntary, but in-scope firms from an FCA perspective i.e. firms that are managing investments for professional clients must either commit to the Code or explain their alternative investment strategy. Even if your firm isn’t signing up to the new Code, we would recommend that between now and January 2020 you need to evidence a review and update of your Stewardship Code disclosure taking into account the new Code. 

If your firm wishes to become a signatory to the new Code then the FRC should be contacted in the first instance to note your intent.

Additionally, you must then review the detail of the Code Principles and conduct a gap analysis of these with your current policies and processes. This is important even if you are complying with the current Code as the changes to the 2020 Code are significant.

The results from this gap analysis will determine where improvement work is required to be 2020 Code compliant. This is a key step as your firm’s approach to applying the Principles is the basis for your subsequent Stewardship Code Report. As the timeline above shows, this has to be submitted by March 2021 if you wish to be in the first wave of signatories.

Given the above timing, firms should also bear in mind the new Shareholder Rights Directive (SRD II) rules which came into effect in June 2019 (see previously issued Gem Compliance briefing note – linked here).
Firms may therefore wish to take the opportunity as part of the Code 2020 review to consider if any disclosures required under the SRD II can be combined and/or to ensure that those disclosures in their own right are compliant. 
Please contact us at Gem Compliance if you’d like support with any aspect of the 2020 Code (and SRD II), including for example, implementation advice, a gap analysis assessment or associated policies rewrite.

This newsletter contains generic information and has been generated for professional clients and associates of Gem Compliance Consulting Limited only and should not be regarded as advice. We will not be liable for loss, however caused by parties acting on the information contained herein.

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