Statement: FRC policy update
News types: Generic Announcement
Published: 7 November 2023
The FRC notes that in His Majesty’s Speech to Parliament today the Government’s plan for primary legislation to modernise the regulation of audit, corporate reporting and governance has not been prioritised for the next Parliamentary session. Whilst disappointing, we are pleased that as recently as the 16th 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.
The FRC has an important public interest role to enhance the quality of audit and corporate reporting and governance, whilst supporting the UK’s economic growth and its international competitiveness. We remain resolutely focused on ensuring our current regulatory tool-kit is used to best effect for this purpose, working closely with our stakeholders. This includes setting proportionate standards, fostering a culture of continuous improvement and holding to account those that fall short. In doing so, we want our work to support the Government’s broader ambition of making the UK the best place in the world to start, grow and invest in a business.
We would like to use this opportunity to provide an important policy update on our recent consultation with stakeholders on certain revisions to the UK Corporate Governance Code. This consultation followed a request we received from Government to consider some specific areas and enhancements. We have been encouraged by the widespread stakeholder engagement and general support for the Code. In deciding how to respond to the consultation on Code revisions, we have carefully considered the full range of feedback we received, as well as taking into account our objectives to enhance trust and confidence in governance whilst supporting UK economic growth and competitiveness. In doing so, we are also conscious there is currently a much wider debate about business reporting requirements and burdens across the economy.
Taking all these factors into account, the FRC considers the right balance at the current time is to take forward only a small number of the original 18 proposals we set out in the consultation and to stop development of the remainder. Specifically:
- 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.
- The main substantive change we will take forward concerns revisions to our original proposal on internal controls. 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.
- The FRC 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.
We intend to publish an updated Code in January 2024, but thought stakeholders would welcome early sight of what to expect at that point to aid their planning.
The FRC is conscious that some stakeholders have raised concerns about how our guidance issued under the Code can have unintended effects on businesses, investors and their advisers. We are very keen to explore ways of ensuring any guidance is proportionate and limits burdens whilst not weakening effective governance. This is critical to our role in supporting growth and the UK’s competitiveness. To help tackle this, from January 2024, the FRC intends to give an additional remit to its Stakeholder Insight Group to provide the FRC with advice on whether there are aspects of its current and planned guidance associated with the Code that could be improved to ensure the right balance is struck between supporting effective governance and reducing unnecessary burdens. This Group’s membership consists of a mixture of investors, preparers, advisors and related membership bodies. It will report on this additional remit directly to the FRC CEO.
The FRC also notes that during our consultation on the UK Corporate Governance Code, we heard some concerns from stakeholders about aspects of the UK Stewardship Code. The FRC is due to review this Code in 2024. Once the updated UK Governance Code is issued in January 2024, we will as our next priority start to engage with stakeholders on how best to review the Stewardship Code, including understanding how it works in practice and what changes may be required going forward to ensure it remains fit for purpose. In doing so, we recognise the need to engage closely with other regulators who also have an interest in the operation of this Code.
Richard Moriarty
CEO
Financial Reporting Council