INVESTOR RELATIONS: Compliance alert

Richard Carpenter talks to the Investor Relations Society chairman Diane Faulks about the pitfalls to avoid in financial regulation

Prepare yourselves for a busy year. That's the message from Diane Faulks, chair of the UK's Investor Relations Society (IRS), to all of those involved in communicating corporate messages to the financial community.

Her reasoning? Not only do firms face continuing scepticism from investors, they will also have to deal with a whole raft of new legislation and regulations that are set to radically reform the investor relations and financial comms landscape.

Faulks is well qualified to talk through these matters; in addition to her role as chairman of the IRS since June last year, she is an investor relations high flyer at banking giant Citigroup.

First to consider are the directives and regulations emanating from the EU as part of its Financial Services Action Plan (FSAP), including new thinking on price sensitive information, frequency of reporting and the move to international accounting standards. The FSAP is due for completion by 2005. The UK's Financial Services Authority has been reviewing the Listing Rules with a view to modernising and simplifying the appendices, sub-clauses and definitions that have been amassed.

Uniform financial reforms

Add all this to several EU and domestic initiatives on company law, corporate governance, analyst independence plus the increasing influence of regulators in the US and you have the recipe for busy times ahead.

So what are the key issues to think about? One of the main reforms envisaged by the FSAP is that EU markets will all operate under a more cohesive system of listing on stock exchanges, definitions of price-sensitive information, and the release of financial information to the market. The more unified approach replaces the markedly different systems that currently prevail.

Faulks notes that much of the new regulation will have an impact on the 'what, when and how' of financial communication. The Market Abuse Directive, for example, covers areas such as insider dealing and market manipulation but also introduces some clarifications as to what constitutes price-sensitive information (PSI) - the 'what and when' of financial disclosure.

PSI has always been a tricky number to pin down to an exact definition, but those expecting a miracle cure from the EU will have to wait. 'It still doesn't give us anything of a really precise nature. It doesn't box it into a ten per cent or 15 per cent move in stock. PSI will always be easier to define in hindsight rather than foresight,' says Faulks.

What it does do is help companies think more carefully about what they should be telling the market - and when to do it. That's where the Transparency Obligations Directive (TOD) comes into play. The TOD has caused all sorts of problems way before its release due to its original plan for all EU companies to switch to quarterly reporting, in the same fashion as the US. The IR Society was one of many UK bodies that opposed such plans, arguing that such a move would increase short-termism and is unnecessary given the continuous disclosure requirement of the UK market. The opposition gained some results with the EU toning down its requirements but the TOD is still set to introduce a basic form of quarterly reporting for all listed firms across the EU next year. But few UK firms seem aware of the changes or have introduced any means of coping with them.

There is a similarly relaxed approach to the ruling on International Accounting Standards (IAS). Faulks points out that all EU-listed companies will have to report according to IAS from 2005 onwards. It's only a year away yet few are prepared for the changes.

The main differences for UK firms relate to the treatment of pensions, goodwill and tangibles. Communicating these changes to the financial audience is the key challenge and firms should begin planning now. 'You are going to have to explain how you got from A to B,' says Faulks. 'Firms already used to reporting according to two different accounting principles will probably be at an advantage when IAS is introduced.'

Communicating the detail may be important but getting the big picture across, particularly to private investors, is just as crucial. 'The main message has to be that figures might have changed but the fundamentals remain the same. Institutional shareholders and analysts may have a few problems with this but not half as many as the retail audience.'

And Faulks's advice for those involved in communicating a company's finances?

'You've got to ensure that you're working together. This is a team effort and you cannot afford to have IR, PR, the company secretary and so on working separately,' she says. 'Some companies that have patched over those issues in the past are really going to have to learn to work together.'

Clear advice on communications

The great danger is that some companies put a freeze on their financial comms due to a lack of confidence or knowledge of what the new regulations imply. Faulks has some reassuring words for those PROs who might not have a wealth of financial communications experience: 'It shouldn't bring about mammoth changes if you've been doing your job properly.'

She adds that there have always been constraints on the what, when and how of financial disclosure, it's just that the goalposts will move slightly.

'Any financial communicator should realise that lawyers are going to be their new best friends. They're always doing interpretation notes so get on their circulation lists. It comes back to reassuring senior management that you know what you're doing.'

She stresses that knowledge is power in the changing environment. The best way to ensure that communication is not constrained or does not recede is to know the new rules and then be able to reassure senior managers as to the processes required.

Faulks views the regulatory changes as an opportunity rather than something to fear. 'It's a chance for IROs and PROs to fight for their audiences, to be that champion for the audiences within the company.' She says changes being introduced to corporate disclosure will often mean that lawyers become more heavily involved in the process. It will be the job of the IROs and PROs to ensure that comms still reigns supreme: 'We have to make sure that plain English continues despite the challenges ahead. We need those in charge of financial communication to stand up and say "this won't work" or we're going to get more questions than we're managing to answer.'


The main European Union directives and regulations set to impact UK companies' IR programmes are:

Transparency Obligations Directive

Requires companies to disclose:

- an audited financial report and a management report within three months of the end of each financial year

- a half-yearly condensed financial report

- quarterly financial information for the first and third quarter, including net turnover, profit and loss before tax, plus trend information on the remainder of the financial year. The last section is at the company's discretion

- swifter and better information about the interests of important shareholders.

Such information has to be released within shorter time limits

Market Abuse Directive

- requires each member state to designate a single authority to deal with insider dealing and market manipulation

- introduces new rules relating to the risk of market manipulation by financial journalists

- establishes a commitment to market transparency and equal treatment of all market participants by issuing companies

Prospectus Directive

- harmonises the prospectuses published by companies and their advisers when seeking to list securities on EU stock exchanges

- introduces minimum disclosure requirements for prospectuses and conditions for advertisements publicising any listing

International Accounting Standards

(IAS) Regulation

- requires all EU-listed companies to prepare their consolidated accounts in line with IAS from 2005 onwards

- aims to ensure that all EU-listed companies publish the same type of financial information to aid transparency and comparability

- companies should be reconciling their 2004 accounts to IAS in order to provide a comparative year for investors.

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