UK accounting watchdog the Financial Reporting Council (FRC) confirmed Tuesday that “over half” the 18 reforms proposed following a consultation in May were to be dropped, and the King’s Speech to Parliament – which sets out the legislative programme for the next session – did not include any proposals to modernise regulation of audit, corporate reporting or governance.
Commenting on the Speech, the FRC said: “Whilst disappointing, we are pleased that as recently as the 16 October the Government restated its continued commitment to reform and bringing forward legislation when Parliamentary time allows. There is broad stakeholder consensus that this reform continues to be necessary to restore investor and public trust following the very damaging collapse of several high-profile businesses including Carillion, BHS and Thomas Cook.”
Light-touch regulation
The FRC linked its move to drop some proposals to business secretary Kemi Badenoch’s decision last month to scrap legislation to tighten corporate governance rules for large companies. Badenoch, an advocate of light-touch regulation, considered the proposals “burdensome” and there had been a strong lobbying campaign from within the financial services industry over the cost of proposed new rules.
Reform is dependant not just on Parliamentary time, but Parliamentary composition, with a general election widely expected next year – possibly as early as the Spring – and the current governing party trailing in the polls. The opposition Labour Party has said that, if elected, it would establish “an audit and governance system that firms can have confidence won’t be subject to political point scoring”.
Rob Mason, Global Relay’s Director of Regulatory Intelligence, acknowledged that: “The change reflects that additional burdens placed on UK firms add to the challenge regarding competitiveness to prevent further loss of business to overseas damaging UK Plc”. But, he went on: “ESG and D&I appear to be regarded as less significant priority issues now, which is surprising. Overall this seems a politically driven agenda which sacrifices some prudence in favour of competitiveness.”
Political will
Institute of Directors’ policy and governance director Roger Barker said the move was “the latest stage in the unravelling of the government’s corporate governance reforms”, while Michael Izza, chief executive of accountancy professional body ICAEW said: “it appears that the government’s promise of comprehensive reform will remain unfulfilled due to a lack of political will”.
The FRC was itself to be replaced by a new Audit, Reporting and Governance Authority (ARGA), but with legislation to create the new regulator also missing from the King’s Speech the FRC will carry on to do what it terms “utilise its current regulatory toolkit”. What this means for now is that it “take forward only a small number of the original 18 proposals we set out in the consultation and to stop development of the remainder”.
The main change to be taken forward “concerns revisions to our original proposal on internal controls”, the FRC says, and it goes on to explain: “The decision has been informed by very helpful stakeholder feedback to ensure we end up with a more targeted and proportionate Code revision. This includes allowing more time for its implementation and ensuring the UK approach clearly differentiates from the much more intrusive approach adopted in the US.”
It also says: “There will be a small number of changes that streamline and reduce duplication associated with the Code that were overwhelmingly supported by stakeholders in the interests of reducing burdens”.
Audit and assurance
But, says the FRC, it will “not take forward the remainder, over half, of the original proposals. These include: those relating to the role of audit committees on environmental and social governance and modifications to existing code provisions around diversity, over-boarding, and Committee Chairs engaging with shareholders. A number of other proposals will also not be taken forward as a result of the Government’s recent decision to withdraw its Statutory Instrument relating to an audit and assurance policy, reporting on distributable profits and resilience statement requirements.”
Noting that the FRC would continue to operate, UK Finance said: “We therefore do not expect delays to the proposed changes to the UK Corporate Governance Code (including the statement on the effectiveness of internal controls), nor the proposals to introduce the resilience statement, fraud statement, audit and assurance policy, and the distribution statement into law.”