The Financial Conduct Authority (FCA) recently released a consultation paper on bringing forward the demise of the interim management statement.
Under the European Union’s Transparency Directive, listed firms are required to publish trading updates during the first and second halves of their financial year – essentially compelling them to report on a quarterly basis.
When the European Commission reviewed the directive, it acknowledged that ‘the obligations to publish interim management statements or quarterly financial reports represent an important burden for many small and medium-sized issuers whose securities are admitted to trading on regulated markets without being necessary for investor protection’.
The FCA also noted ‘a widely held concern that rigid quarterly reporting requirements can promote an excessive focus on short-term results by company management and investors’.
So the directive was replaced by the clumsily named Transparency Directive Amending Directive last November, which removed this obligation – although companies will still be free to issue updates at their own discretion.
The European Union has given members until November 2015 to implement the new directive. ‘However, the Treasury has asked us to remove the requirement to publish interim management statements early to lessen the administrative burden for issuers,’ the FCA said.
The regulator is therefore proposing to let companies drop quarterly reporting this autumn, a year ahead of the deadline.
‘Removing the requirement to publish interim management statements will reduce costs for relevant issuers and benefit smaller companies,’ the FCA argued.
By coincidence, the day that the FCA published its consultation paper also brought trading updates from Brewin Dolphin and Charles Stanley. Rathbone Brothers, Close Brothers and Brooks Macdonald reported the following day.
The immediate share-price reactions - Rathbones gained 1.68%, Close Brothers 1.65%, Brooks Macdonald 2.61% and Brewin Dolphin 0.28%, while Charles Stanley dropped 2.01% - indicated that interim statements do have significant impacts.
According to the current regulations, interim management statements are supposed to provide: ‘an explanation of material events and transactions that have taken place during the relevant period and their impact on the financial position of the issuer’; and ‘a general description of the financial position and performance of the issuer’.
That sounds eminently sensible, and perhaps worth the costs incurred. ‘As an institution that invests in other companies, of course news flow is good,’ commented John Morton, executive chairman of European Wealth Management.
However, he observes that trading updates rarely contain anything too revelatory. ‘Quite honestly, I would worry if there was a lot in a quarterly statement that we didn’t already know about,’ remarked Morton (pictured).
‘That’s not to say there aren’t the odd shocks on the upside and the downside, but we wouldn’t be doing our job right if we were surprised.’
Morton’s own firm is listed on AIM, and constituents of that index are already exempt from the mandated quarterly updates. In Morton’s opinion, such reporting requirements – which will become the norm – are ‘about right’.
In any case, companies cannot simply ignore the market outside their annual and half-year reports. ‘The overriding obligation is the requirement to keep the market aware of price-sensitive news,’ Morton explained. ‘It’s like a conscience on your shoulder, which is great.’
The best possible outcome of abolishing interim management statements would, for Morton, be more about encouraging long-term thinking than merely easing the regulatory burden.
‘Quarterly announcements have led investors down more of a short-term route. Movements from one quarter to another do not necessarily indicate trends.’
The FCA’s consultation will run until 4 September.