A proposed UK government rule change threatens a foundational investor protection established in the 19th century. Buried in a 70-page consultation on "Modernising corporate reporting," the plan would replace the capital maintenance regime with vague management attestation. Investors argue this move strips away core safeguards designed to prevent companies from distributing excessive capital to shareholders.
The current regime ensures capital remains invested in productive activities, requiring distributions only from accumulated realised profits. Two key features stand out: prudence, requiring companies to provide for foreseeable losses, and the prohibition of distributing "unrealised" profits. Critics point to the water industry as a cautionary tale, where billions in dividends were paid while infrastructure investment lagged.
The government suggests replacing capital maintenance with a solvency regime, but experts note this resembles a going concern approach that has failed to predict corporate failures. A think-tank reports this method failed to provide early warning in three out of four large liquidations between 2010 and 2022. The accountancy profession has long sought to remove these rules, citing confusion with International Financial Reporting Standards.
However, opponents argue simplicity is not a reason to remove essential safeguards, especially given recent government calls for stronger enforcement following high-profile collapses.
Source: Financial Times Companies · Summarized by HeadlinesBriefing