The Big Four: brace yourself for the legislative changes affecting business in 2022


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Boris Johnson walking around satellite dishes owned by telecoms company Avanti at Goonhilly Earth Station in Helston, England. Companies are now required to pre-notify acquisitions in “sensitive” sectors for national security, including satellite technology. (Photo by Dan Kitwood/Getty Images)

An old proverb says the best time to plant a tree was 20 years ago – but the second best time is now. This year is set to see significant regulatory changes with real consequences for UK financial and professional services. Many firms will have been preparing for them for months, if not years. Some of these changes, on the other hand, may not have previously seemed of relevance – but very much are now.

The first involves ARGA. The frequently-postponed proposals for the expanded remit of the Financial Reporting Council’s successor are wide-ranging. ARGA is expected to be the answer to structural challenges with the audit market, improving corporate and auditor accountability for accounting scandals.

The new regulator is expected to introduce shared audits, which aim to give challenger audit firms beyond the Big Four opportunities in the FTSE market, and other reforms to both the audit market and audit oversight.

Yet, proposals around director responsibility for audit and account controls raised eyebrows. This proposal looks likely to be watered down, so that rather than a legal requirement, an annual statement on internal controls will be included in the Corporate Governance Code on a comply-or-explain basis. However, ARGA will still become the regulator of large company directors. They are expected to be subject to regulatory duties and ethics, and to investigation and disciplinary fines for misconduct in relation to accounting and audit matters.  That will be a sea-change for the director profession.

A second key development took place on January 4, with the new National Security Investment Act coming into effect. This law gives the UK Government the right to scrutinise, amend, and potentially block any acquisitions or investments in UK companies and assets that might affect national security. There are seventeen “sensitive” sectors – including defence and satellite technology – in which companies must pre-notify acquisitions of stakes as low as 25 per cent. Failure to make these notifications would render the transaction void.

Even outside of these sectors and thresholds, BEIS retains the right to “call in” a transaction for review if they have grounds to suspect it has a national security aspect. The government estimates around 2,000 notifications a year, with about 100 full assessments, so this has the potential to affect all manner of investments. 

Thirdly, expect big changes in the prospectus regime. Lord Hill’s review into UK listings made a number of recommendations in March last year to make the regime more agile. The Treasury is proposing to follow some of these, for instance to allow for the circumstances in which a prospectus needs to be produced to be cut back. 

In theory, changes to the prospectus regime should make it easier for more companies to list, and for companies to raise money in the UK. In practice, however, this will mean significant powers are delegated to the FCA as it tries to create a flexible environment that can take advantage of new markets and post-Brexit ability to diverge from EU rules. Changes to the prospectus regime will only come in through passing legislation, so the timeline for reform is uncertain. 

Lastly, ESG has been on everyone’s lips – with environmental issues receiving top billing alongside concerns over companies’ “greenwashing”. The government wants the UK to be at the forefront of the transition to net zero and 2022 marks the year things will get serious. From 6 April 2022 large companies (those with more than 500 employees and more than £500m in annual turnover) will need to disclose potential risks to their business associated with climate change – and their net-zero transition plans – in their annual report. 

At the same time, the CMA has published a “Green Claims Code”, breach of which may be treated as evidence of a breach of consumer law and other sector-specific rules – meaning potential fines. The CMA has said it will carry out a full review of misleading green claims this month, so businesses will want to make sure that any ESG-related claims they are making are accurate. 

As we emerge from the uncertainty of the last two years, companies will want to drive ahead and get back to business. But in the rush to get on with the job, it will be vital to take notice of what is happening in the world of corporate legislation.  Businesses that plan for the changes ahead should be in a position to take advantage of many opportunities – we have already seen City activity boom across the last six months. But those that fail to prepare could find themselves left behind. It is now very much the second best time to start considering the legal changes ahead. 


Read More: The Big Four: brace yourself for the legislative changes affecting business in 2022

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