The peer review was carried out on the basis of a questionnaire to all NCAs, as well as on-site visits to seven jurisdictions: Germany, Italy, Malta, Norway, Portugal, Romania, and the UK, where officials spoke to both the FRC and the Financial Conduct Authority (FCA).

The report identifies areas where NCAs can improve their enforcement and makes recommendations in relation to how issuers are selected to examine their financial information; the depth of inquiries into financial statements going beyond correcting disclosure; and the financial and human resources allocated by NCAs to the enforcement of financial information.

In particular, ESMA’s research found five of the jurisdictions – Malta, Portugal, Romania, Sweden and UK – do not fully comply with guideline five, which requires that NCAs use selection models in which all issuers are eligible to be selected for scrutiny.

In the case of the UK, ESMA said the selection model does not sufficiently take into account small equity issuers, pure bond issuers or UK issuers listed outside the country. It says the UK selection model focuses on issuers included in the FTSE 350, hence issuers outside this index are only captured for examination in case of news in the media, referrals by other authorities, grounded complaints received from stakeholders or random sampling.

The report states: ‘While it is acknowledged that small issuers are not subject to the same level of attention from media or from other external parties to submit referrals or grounded complaints, issuers captured in the random sample in the last two years were very few.

‘Although issuers outside the FTSE 350 amounted to approximately 1,900 (approximately 80% of UK issuers), only 9% (34 examinations) of the total number of issuers selected for examination in the two years under review derived from random sampling.’

Around 1,300 of the listed companies in the UK are bond issuers. According to the FRC many of these companies are subsidiaries of often the same listed parents and so prepare accounts in accordance with UK GAAP. The FRC has argued that there is considerably less investor interest in these accounts than the group accounts which are subject to review (given that the groups have listed equity). Also, the FRC points out that, of the issuers the FRC selected for examination in the last five to ten years, approximately 35-40% are issuers from outside the top 350.

Notwithstanding this, the ESMA report argues there is no real likelihood of an issuer from this population being selected, as each year this selection approach selects for examination in the region of 2.5–4% of the approximate 1,900 issuers falling outside of the top 350.

Based on statistics reported by the FRC, the assessment group also concluded that the decisions taken by the FRC with regard to correcting material errors in financial statements are too weighted towards permitting those corrections to be made in future.

In addition, ESMA says that, in comparison to other NCAs in markets of relatively comparable size, the UK has approximately three times the number of issuers per FTE (and twice as many equity issuers per FTE), a strong indication that there may not be sufficient resources in the FRC.

Steven Maijoor, ESMA chair, said: ‘The peer review’s findings show that in some jurisdictions there is a risk that insufficient resources are allocated to enforcement, and that some issuers are not eligible to be selected for scrutiny.

‘Additionally, in some jurisdictions there is a tendency to focus on disclosure issues instead of in-depth inquiries into valuation issues. ESMA will work with the national competent authorities to implement the recommendations of the peer review, in order to promote more convergent supervisory practices throughout Europe.’

Among the report’s recommendations are that a list of common risk factors should be created, to be used by all NCAs in the selection of issuers for examination; all NCAs should use a common approach for the selection model, providing for the use of rotation and random selection in addition to selection based on identified risks; and NCAs should ensure that the selection models allow the coverage of the whole population of issuers in a member state within at least 10-15 years.

ESMA says it will now consider these recommendations and work with the NCAs in the corporate reporting area to see if they can be addressed by amendments to the guidelines or by other work in this area.

ESMA’s peer review on guidelines on enforcement of financial information is here.