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FRC Position in respect of paragraphs 6(b) and 6(c) of the Eligibility Criteria

The FRC does not accept any liability to any party for any loss, damage or costs howsoever arising, whether directly or indirectly, whether in contract, tort or otherwise from any action or decision taken (or not taken) as a result of any person relying on or otherwise using this document or arising from any omission from it.

The Financial Reporting Council Limited 2024 The Financial Reporting Council Limited is a company limited by guarantee. Registered in England number 2486368. Registered Office: 8th Floor, 125 London Wall, London EC2Y 5AS

FRC position in respect of paragraphs 6(b) and (c) of the Eligibility Criteria

Purpose

1This position statement concerns the interpretation and application of paragraphs 6(b) and (c) of the FRC's Eligibility Criteria and related provisions of Schedule 10 to the Companies Act 2006.

Background

Legislative background

2The FRC is the competent authority for the regulation of statutory audit in the UK.

3Section 1212 of the Companies Act 2006 provides that, to be eligible for appointment as a statutory auditor, an individual or firm must be (a) a member of a recognised supervisory body ("RSB”), and (b) eligible for appointment under the rules of that body.

4Part 2 of Schedule 10 to the Companies Act 2006 contains provisions regarding the rules that RSBs must put in place. Paragraph 6(1)(b)(ii) of Schedule 10 to the Companies Act 2006 requires RSBs to have in place rules which will ensure that a firm is not eligible for appointment as a statutory auditor unless it is "... controlled by qualified persons".

5Paragraph 7(3) of Schedule 10 to the Companies Act 2006 provides that a firm is to be treated as controlled by 'qualified persons'1 if, and only if:

  • a majority of the members of the firm2 are qualified persons; and
  • where the firm's affairs are managed by a board of directors, committee or other management body, a majority of that body are qualified persons or, if the body consists of two persons only, at least one of them is a qualified person.

6Paragraph 7(4) goes on to explain that the phrase "a majority of the members of the firm" means:

  • where under the firm's constitution matters are decided upon by the exercise of voting rights, members holding a majority of the rights to vote on all, or substantially all, matters;
  • in any other case, members having such rights under the constitution of the firm as enable them to direct its overall policy or alter its constitution.

7Paragraph 7(5) explains in similar terms what is meant by "a majority of the members of the management body of a firm".

SATCAR 2016

8Regulation 3(1) of Statutory Auditors and Third Country Auditors Regulations 2016 (“SATCAR 2016”) sets out the responsibilities of the competent authority, which include:

  • the public oversight of statutory auditors under SATCAR 2016;3
  • the determination of criteria for the purpose of determining whether persons are eligible for appointment as statutory auditors (the FRC discharges this duty by publishing the Eligibility Criteria4);5
  • the application of the criteria to determine whether persons are eligible for appointment as statutory auditors;6 and
  • registration of persons approved as eligible for appointment as statutory auditors.7

9By way of delegation agreements,8 the FRC has delegated to the RSBs, amongst other things, the task of the application of the Eligibility Criteria to determine whether persons are eligible for appointment as statutory auditors, the registration of such persons, the keeping of the register and making it available for inspection. The FRC has retained responsibility for determining the Eligibility Criteria.

10The following paragraphs of the Eligibility Criteria reflect the requirements of paragraphs 6(1)(b)(ii) and 7(3) of Schedule 10 to the Companies Act 2006:

  • Paragraph 6(b) requires that qualified individuals must hold at least a majority of the voting rights or hold such rights under the firm's constitution as enable them to direct its overall policy or alter its constitution.
  • Paragraph 6(c) requires that qualified individuals must hold at least a majority of the voting rights in the management board or hold such rights under the firm's constitution as enable them to direct its overall policy or alter its constitution.

11The Eligibility Criteria were amended with effect from 5 December 2022 to clarify the meaning of "majority" in the above contexts. This was done by adding footnotes to paragraphs 6(b) and 6(c) of the criteria to explain that – in that context - “majority” means more than 50% of the voting rights, or of such rights under the firm's constitution as enable direction of its overall policy or alteration of its constitution, unless the firm's constitution specifies a higher percentage of those rights is required for decision-making, in which case, “majority” shall be taken to mean that specified percentage or more.

The FRC's position

12The FRC recognises that there is a potential tension between the wording used in paragraphs 7(4)(a) and 7(5)(a) (“all, or substantially all") and paragraphs 7(4)(b) and 7(5)(b) (“direct its overall policy or alter its constitution”) of Schedule 10 to the Companies Act 2006.

13The FRC concludes that Parliament cannot have intended that the test for whether qualified persons have control of a firm should be different depending on whether matters are determined by the exercise of voting rights (paragraphs 7(4)(a) and 7(5)(a)) or in some other way (paragraphs 7(4)(b) and 7(5)(b)). The potential tension is resolved by reading the relevant sub-paragraphs together so that qualified persons only have the right to vote on substantially all matters if they are able to direct the overall policy or alter the constitution of the firm.

Financial Reporting Council August 2024

  1. 'Qualified persons' is defined in paragraph 7(2) of Schedule 10 to the Companies Act 2006. ↩

  2. A 'majority of the members of a firm' is defined in paragraph 7(4) of Schedule 10 to the Companies Act 2006. ↩

  3. SATCAR 2016, regulation 3(1)(a). ↩

  4. https://www.frc.org.uk/library/supervision/professional-bodies-supervision/oversight-of-audit/eligibility-criteria-for-statutory-auditors/ ↩

  5. SATCAR 2016, regulation 3(1)(f). ↩

  6. SATCAR 2016, regulation 3(1)(g). ↩

  7. SATCAR 2016, regulation 3(1)(h). ↩

  8. https://www.frc.org.uk/auditors/professional-bodies-supervision/oversight-of-audit/delegation-agreements ↩

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Name FRC Position in respect of paragraphs 6(b) and 6(c) of the Eligibility Criteria
Publication date 16 August 2024
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