About the FRC Procedures and Policies Memorandum of Understanding Memorandum of Understanding between the FRC and the Department for Business, Innovation and Skills

Memorandum of Understanding between the FRC and the Department for Business, Innovation and Skills

This Memorandum of Understanding sets out the understanding of the Department for Business, Innovation & Skills (BIS) and the Financial Reporting Council (the FRC) of the principles that underlie relations between them and confirms the framework for co-operation.

Related objectives

The Government is committed to raising UK levels of productivity, creating the conditions for business success and strengthening the economic performance of all the regions.

BIS’s mission is to build a dynamic and competitive UK economy by: 
  • Creating the conditions for business success
  • Promoting innovation, enterprise and science
  • Giving everyone the skills and opportunities to succeed
BIS’s Departmental Strategic Objectives include the delivery of “free and fair markets, with greater competition, for businesses, consumers and employees”: the FRC is one of BIS’s partner organisations in this regard.

The FRC is the UK’s independent regulator for corporate reporting and governance. Its aim is to foster in the public interest high quality financial and governance stewardship of listed and other entities and so support investor, market and public confidence.

Responsibilities and accountability

The Corporate Law & Governance Directorate of BIS aims to provide a range of world class frameworks for flexible business forms including companies and partnerships and to ensure their effectiveness; and the Secretary of State for BIS is accountable to Parliament for these matters.

The FRC is a private body and is independent of Government. The FRC and its operating bodies have various responsibilities for setting, monitoring and enforcing accounting, auditing and actuarial standards and overseeing the accountancy and actuarial professional bodies.

Many of these responsibilities are undertaken on a voluntary basis with the agreement of the market and the FRC’s stakeholders. Some of the FRC’s responsibilities are statutory and include responsibilities delegated to it or to an Operating Body by the Secretary of State.

The FRC is directly publicly accountable for all its responsibilities and will report on the exercise of its regulatory functions in its annual company report and otherwise as it considers appropriate.

The relevant operating body is specifically responsible to Parliament via the Secretary of State in relation to the statutory responsibilities delegated to it. Where required, the FRC or relevant Operating Body will, report to the Secretary of State on the exercise of its statutory functions and such reports will be laid before Parliament. 

The FRC will support the Secretary of State in fulfilling his responsibilities, including by providing information for answering Parliamentary Questions and Ministerial correspondence and by appearing before Select Committees as necessary.

The FRC is responsible for ensuring that the uses to which it puts the funds received from BIS are consistent with the purposes for which the funds were given and comply with any conditions and requirements attaching to them. This includes ensuring that grant-in-aid is used for its intended purposes, and in an efficient and effective manner.

As a private limited company, the FRC complies and shall continue to comply with the requirements of the Companies Act 2006 generally and specifically in relation to the preparation and filing of its Annual Report and Accounts.

The FRC shall send BIS its Annual Report and Accounts as soon as they are available each year.

Risk management and internal control

The FRC shall ensure that its financial and other management controls conform with the requirements of regularity, propriety and good financial management, including adopting and implementing policies and practices to safeguard itself against fraud and theft.

The FRC shall ensure that the risks that it faces are dealt with in an appropriate manner, in accordance with relevant aspects of best practice in corporate governance.

Relationship

In agreeing this MoU:

  • BIS fully recognises the operational independence of the FRC; and
  • the FRC recognises the legitimate interest of BIS in the overall work and effectiveness of the FRC and its specific interests in the FRC’s exercise of statutory functions and in the FRC’s financial management.

The FRC will maintain its own bilateral relationships with bodies such as the Financial Services Authority, the main accountancy bodies, the Treasury etc.  The FRC will keep BIS informed of key strategic developments that may affect BIS policy interests; and BIS undertakes to facilitate these relationships as appropriate.

The working relationship

The complementary nature of the objectives of both the FRC and BIS and the necessary relationship in order to achieve them is recognised in the day to day working arrangements. The FRC and BIS undertake to continue to work together in a spirit of co-operation and partnership. This will include:

  • timely exchange of information – a “no surprises” approach
  • joint working up of ideas and policy options
  • joint problem solving
  • partnership working with stakeholders, including the media and, especially, the FSA/HMT, with whom BIS and FRC will hold quadrilateral discussions  on issues of common interest
  • initiatives such as encouragement by both of staff interchange, joint training, awaydays

The FRC and BIS also recognise the strong desirability of working closely together to present the UK’s position within the EU and internationally.  They therefore agree to make reasonable efforts to share information on EU and international developments, formulate policy positions where applicable and influence relevant international regulators and other parties to achieve acceptable outcomes.

Communications

Each party undertakes to ensure that the other has early warning – at least 24 hours notice unless that is not legally permissible or practically attainable – of any issue that is likely to cause comment in the media, and to share briefing, lines to take, key messages and press notices.

Protection of information

Each party will from time to time share with the other information of a sensitive nature.  Both parties undertake to treat such information received as confidential and not to disclose it to any other party without the prior agreement of the disclosing party. In making any disclosures, each party shall comply with any relevant statutory provisions.

Contacts

The FRC and BIS shall nominate primary contacts who shall be responsible for ensuring that their organisation acts consistently and in a co-ordinated manner in relation to the other.  In addition, BIS and the FRC each have a series of bilateral contacts working on specific policy issues.  The partners in each bilateral relationship will ensure that the primary contacts are kept informed of key issues.

BIS representatives attend the meetings of a number of individual FRC Operating Bodies and groups as observers or in response to specific invitations.

In addition, the FRC and BIS are both committed to open dialogue at senior levels as necessary.  These relationships are intended to operate relatively informally, with both sides willing and able to ‘pick up the phone’ to sound out ideas or raise issues before they become problems.

The Chairman of the FRC may approach BIS Ministers direct as he sees fit; but as a courtesy he undertakes not to do so without first alerting officials.

Appointments

In recognition of the public interest in and served by the functions performed by the FRC, the Chair and Deputy Chair of the FRC Ltd are appointed by the Secretary of State.

Financial arrangements

The FRC is funded by contributions from the accountancy and actuarial professions, the business community, insurance companies, pension funds and public sector organisations. In addition, grant-in-aid is provided by the Secretary of State pursuant to the power contained in Section 16 Companies (Audit, Investigations and Community Enterprise) Act 2004.

BIS shall confirm the annual amount of grant-in-aid each year and as early as possible recognising the FRC’s need to set its annual budgets and to publish its budgets and levy proposals on a timely basis. Grant-in-aid will be paid in quarterly instalments and following written requests. The request shall confirm that the grant-in-aid is required for purposes appropriate to the FRC’s functions. Further, the FRC shall provide BIS with such information about its operations and expenditure as BIS may reasonably require in order to allow it to assess whether grant-in-aid is being used appropriately.

The FRC recognises that the amount of the annual grant-in-aid shall vary from year to year. BIS undertakes to pay on an annual basis a grant sufficient to preserve the statutory immunity provided for in Section 18 Companies (Audit, Investigations and Community Enterprise) Act 2004.

BIS undertakes to give the FRC all reasonable assistance in collecting levies from public sector organisations.

Section 17 Companies (Audit, Investigations and Community Enterprise) Act 2004 provides that the Secretary of State may by regulations provide for a levy to be paid to a grant-aided body by specified bodies or persons in order to meet any part of the expenses of the grant-aided body.  Where the FRC and BIS agree that funding of the FRC by means of a statutory levy is necessary, BIS undertakes to lead on the preparation of draft regulations and securing ministerial approval for draft regulations to be laid before Parliament for approval.

BIS shall be given the opportunity to comment in good time during the FRC’s business planning and budget setting process on its budget generally and strategic and spending priorities. 

Legal Costs Fund

The FRC maintains a separate fund (the Legal Costs Fund) to cover costs that might arise:

  • in connection with proposed or actual litigation in respect of departures from accounting standards or from the accounting or reporting requirements of the Companies Act 2006; or
  • taking steps to secure compliance with those standards or requirements.

These funds shall continue to be held in separate interest-bearing bank accounts. The FRC shall use its best endeavours to recover from third parties any legal costs incurred.  To the extent that any interest earned or any recoveries, taken together with interest, cause the balance on the legal costs fund to exceed £2million, the excess amount shall be used to defray operating costs.

If the authorisation given to the FRRP under Section 457 Companies Act 2006 is revoked, the FRC and BIS shall, after meeting any outstanding liabilities and taking account of any recoveries and having regard to an equitable division, agree an amount to be refunded to BIS out of the balance on the Legal Cost Fund.

The Legal Costs Fund may in the future, and following consultation with the contributors, be used to cover categories of costs in addition to the categories detailed at 33 above. In relation to the proportion contributed by BIS and any proposed use to cover additional categories, the written agreement of BIS shall also be obtained.

Status, review and public availability of this MoU

This MoU is not legally binding and is intended to have no legal effect.

This MoU shall be regularly reviewed, and formally reviewed not less than three years after signature. It will be amended, as necessary, in the light of experience. Either party can request an amendment.

The FRC shall place a copy of this MoU on its website.