In-Conversation with FRC CEO, Richard Moriarty

Published: 8 January 2024

15 minute read

In the first 'In-Conversation' of 2024, the FRC's new CEO, Richard Moriarty, reflects on his first three months leading the organisations, talks about his view on what makes an effective regulator and discusses his priorities for the year ahead.

You can also listen on Apple Podcasts and Spotify.


Hello there and welcome to the first FRC In Conversation podcast for 2024. My name's Kate O'Neill. I'm the Director of Stakeholder Engagement and Corporate Affairs here at the FRC. And today I'm joined by our Chief Executive Officer, Richard Moriarty, who's going to share some reflections on his first three months of the FRC, but also set out some of his thinking about what he's expecting to be a focus for the FRC during the year to come. So welcome, Richard, to your first podcast at the FRC, I think. Thank you, Kate

And Richard, you've been here three months now and I know that it's going to stop probably thinking in terms of months. But I guess it'd be helpful for our listeners to understand perhaps your background because you've joined from a long career in regulation at a variety of different regulators with different focuses. So what do you think after those experiences are the key requirements of an effective regulator?

I wouldn't pretend to have a textbook answer, but from my experience, Kate, I would draw a distinction between the regulator needing to succeed at both what it does and also how it goes about its work. In terms of what it does, I think it's really important that the regulator delivers good and highly relevant public interest outcomes and can show that it is doing so. In terms of how it goes about its work, it's really important that it does so in a timely way, it engages really well with its partners, but also its decision making is objective and impartial and appropriately transparent and predictable.

You know, it's really important that people understand how you reach decisions as a regulator, even if they don't always personally agree with them. And I think to be successful, all regulators need any really engaging approach with stakeholders interested in their work. They need the appropriate authorities and legitimacy to act, of course, the appropriate powers. They need great, talented and committed colleagues and also good governance and leadership and internal systems in terms of the way they go about their work. I'm really interested in how a regulator can act to improve the health of the underlying sector that it regulates, not just stopping bad things happening and taking actions against those that have fallen short of expectations.

Richard, it's quite interesting because over the last year, let's say, there's been a lot of focus on deregulation. Some voices are saying "regulation gets in the way of, you know, growth and prosperity, It's just a burden, why do we have it, we should be concentrating on getting rid of a lot of regulation." I can't believe that this is the only year that someone with your experience would have heard some of those voices. So it sounds like, from what you're saying, we know as regulators, we're not always going to be loved for what we do. But if people understand the why and the how, there's a lot more being brought on the journey. Would you agree with that? I would certainly agree with that. I think it's important

as a regulator that we have balance in what we do. It's really important that we deliver on those public interest outcomes. And of course one thing that I am pleased with is the relevance of what the FRC does and the importance of our work, I think has been brought into sharper focus this year, not diminished. Ensuring people have trust and confidence in audit, financial reporting and good corporate governance is a goal that everyone shares. And I'm pleased to say it has cross-party political support and it seems to unite all stakeholders. Of course, how we go about our work is something that we will want to discuss with our stakeholders and partners as we do it.

One thing that interests me is making sure we do so in a way that contributes to the UK's economic growth and competitiveness. I think the FRC has a good story to tell because by improving and enhancing trust and confidence in UK markets and UK companies, we're able to really underpin investment in UK PLC. However, what we've got to do, I think, is be really sharp in our focus that when it comes to regulatory expectations and requirements, they're smart, they're proportionate and they're targeted. So we really understand any burdens that we place on industry.

Yeah, and I think sometimes people and maybe some of our listeners are surprised at the breadth of the FRC's remit and as you said, how it touches on so much of corporate Britain in different ways. But during your first few months, I mean, they certainly were perhaps busier and more under the microscope from a public perspective than you may have anticipated when joining. I mean, just to remind people, you joined at the time when the government withdrew the statutory instrument that had been laid in July, that there was the conclusion of the wide-ranging consultation on the corporate governance code and then The King's Speech came. Where the legislation to create ARGA was definitely not in it.

I'm going to stop there before I move on to some of the other things that happened during your first three months. But I guess looking at The King's Speech, first of all, you put out a public policy statement in response to the fact there was no primary legislation to create arga in it. What does that mean for the FRC? Are we really going to be able to fulfil its duty to act in the public interest without becoming ARGA? No one should be surprised that The King's Speech was very limited, given it's the last year of the parliamentary term and a topic like audit reform didn't make the cut. I am pleased that enhancing our powers does seem to have

cross party and stakeholder support and it is the case that we will continue to press, but what it won't do is distract us from our day-to-day work of really enhancing public trust and confidence in audit, in corporate governance and financial reporting. We still have a really important job to do and we will do it to the best of our ability. The ARGA vision is really a means to an end. It's not an end in itself. The end is the public interest around good governance, good reporting and good auditing contributing to UK economic growth and competitiveness. ARGA will give us a more modernised set of powers, and I'm pleased that it has broad

support. So, yes, of course it would be nice to have these powers earlier than maybe otherwise the case, but it certainly won't stop us in our tracks getting on with the important work that we need to do. And Richard, I left out the update agreement letter that we received from the Secretary of State that was updated. We hadn't had one since 2019, but it had an explicit reference to growth and competitive duty. What do you say to those people who think that that was a new thing for the FRC? I mean, that's suddenly we've got to consider these things and we haven't considered them before. Yeah. I think that narrative is a little misplaced because

the FRC has had this duty, the growth duty, since 2015. But like all regulators, this duty has come into sharper focus in recent times owing to the context of the UK having relatively weak economic growth, particularly compared to our international peers. And all parts of the public sector and particularly regulators that touch on industry have a role to play here and the FRC is no exception. So I was really pleased to see this recognition of this context in the remit letter, not least because it is something that I strongly believe in. Our core role is to enhance trust and confidence in audit,

financial reporting and corporate governance. This is credit positive to UK PLC because it means that investors can trust in putting their money into the UK. Of course we have to be really careful with the interplay with any requirements and expectations that we have on industry, particularly if they impose burdens and costs. And that was one of the reasons why I was really keen to have a forensic look at the additions to the latest UK corporate governance code to make sure that they were really focused on what matters and updates and proposals that potentially did not quite meet the cut were put to one side. And I guess that's the heart of

any consultation you go out wide because you want people to really think about a whole range of issues in such an important vehicle as the corporate governance code. And that is the point of consultation to listen and reflect some of the responses. And you were very public in saying that as a result of that consultation it was time to be very focused on internal controls. But just pausing there for one moment because internal controls really comes back to another issue that happened in your first three months which was the conclusion of the Carillion enforcement action. I think, Richard, there are people who go, well, you can't stop corporate failure, you know, you can't even try to stop corporate failure.

But Carillion really was that textbook example of where both corporate governance and high audit quality were missing.

That's right Kate. I mean coming fresh to this and looking at the case, it was clear to me that this was a textbook failure. It was a particular egregious failure and it led to the record regulatory fine that we issued. We ought to be clear though that this does not reflect auditors more generally. You know, like solicitors, like doctors, auditors are highly trained and diligent professionals. However, there is a role for the regulator to ensure that standards are met and any misconduct from auditors is addressed. In the case of Carillion, it really was a textbook case of failure. It led to very, very painful implications

for employees, for pensioners, for investors, but the public sector, because Carillion obviously was very important to a number of projects in the public sector across the country. And it was right that we took the action that we did. But I think that this does not reflect the entirety of the auditor profession. And I think you make a really interesting point there Richard, because I think when people think about big high profile corporate failures like Carillion, Thomas Cook, BHS, they kind of focus on how it impacts auditors in fund managers, I guess you could say City of London type of communities and jobs. But they forget that this really has an impact across the whole of Britain. I mean how do you think

people really do understand it's not just about auditors and fund managers, it is about whole towns in some cases like Thomas Cook where 5000 jobs are lost overnight. That's right. It's really important that we I think as the regulator understand the public impact of the work of auditing, corporate governance and financial reporting. Although a lot of our stakeholders naturally are focused in the city and in the business community the impacts are felt far and wide of any failure and any misconduct. So it's really important that we understand that because you know ultimately that's what the public expect from regulators

to protect them from harms. The growth and competition - we've talked about it and how you view it - what would a regulator like the FRC, what do we need to do to promote that because you could argue, well how can we promote that one being a regulator. But in the kind of scope of work that we're involved in, it's important for me that we embed this approach to growth and competitiveness strategically in the work that we do. We don't just see it as a nice to have or a bolt on. And I think that starts with a very clear view of you know, do we really understand the impact of the work that we do? Do we really understand

how things like the corporate governance code and the stewardship code get used in practice in reality as opposed to theory? And do we understand that and do we feed that back into our organisation in terms of our policy development? Do we look at existing regulations as well as new regulations to make sure are they still needed? You know, could we actually remove and streamline some existing regulations because it's important that we look at the stock of regulation, not just apply a proportionate lens to any new additions to regulation. I mean, ultimately I think a lot comes from making sure that

engage broadly with stakeholders and we really understand how our work affects their lives and also their abilities to start, invest and grow businesses in the UK. And I guess too, there's this sense that there are other regulators in some of the spaces in which we operate. So working with other regulators to, you know, lessen any overlap, any unintended consequences is important for the FRC to continue to do as well. Totally. It's really important, particularly in our space that we have great relationships with those regulators where there is a potential touch point. So the obvious ones for us will be the Financial Conduct Authority, the Prudential Regulation

Authority, the pensions regulators. But also here is an important point that it's important that we work well with our international regulatory colleagues as well. And many of the businesses that are within our purview, they are international businesses and therefore they are interested in how standards and practices are set across the globe. And I've been quite encouraged by how many have said to me, Richard, it's really important that the FRC continues to play a leading role in establishing an influence in international standards.

Thanks for that Richard. And we've just recently published a consultation on our three-year plan and budget, which is of course part of our natural consultation. After a period of rapid growth for the FRC in terms of budget and headcount. In this consultation, I guess some of our stakeholders would notice that we're taking a pause on both financial increases but also head cut. What's driven this?

That's correct, Kate. I was keen that we keep the size of the organisation flat next year after a number of years of growth. This will be about 17% less in headcount terms than what we forecast when we set our budget for last year. And I think this change reflects 3 important factors. The 1st is the assumption that the realisation of ARGA is now not as close as we previously forecast and I think we have to reflect that reality. The 2nd is that after years of growth, I think it's really important to pause and consolidate and make sure we are really focusing on the right priorities, embedding people into the organisation and looking to unlock efficiencies and synergies

within the FRC. And thirdly is that many of our key partners and those that fund us have not had a strong commercial performance of late. And hence I'm quite sensitive in those circumstances of trying to put up our fees too much unless we have a very good reason for doing so. So you put all those factors together and I thought the right thing for us to do is to pause our growth, consolidate and look to do more with the resources that we've currently got. And an additional part of the remit which has come into the FRC sphere over the last year to 18 months, is becoming the incoming shadow system leader for local audit.

How does this role fit with the FCC's regulatory priorities? And indeed, what role will we or can we have in helping to tackle what is quite a huge backlog of unaudited accounts in the local authority world? Well, Kate, it's absolutely the case that restoring trust and confidence in local authority audit is in the public interest. The backlog now measures hundreds and hundreds of audits that have just not been completed, some over several years, and it's an issue that affects councils up and down the country. Of course, there's complex reasons for this and no one organisation can solve this on their own. It will require quite a number of organisations

to act in harmony and adopt and really can-do flexible mindset to solve this. In addition to the FRC, this will require government, the National Audit Office, CIPFA, audit firms and local government to all put in and all work for the same direction. We have a role to play both in terms of how we go about regulating those that undertake local audit and by working with key partners and coordinating our efforts on helping restore the system back to a sustainable footing. This is called the so-called system leader role, which the government is keen for us to take on. I'm keen that where we can help and use our expertise, we do so, consistent

with our public interest focus. I should say that discussions so far with our key government and commercial partners has been really encouraging. I think there is a real shared sense of the public interest here and a spirit which is really driving us to collaborate well together. I'm under no illusions that this is an easy task to perform and I know the hard yards are ahead for us all, but I think we've got the right partners now in the system looking to try and solve this. So I am optimistic that progress can be made in the course of this year.

And Richard, everyone's got to play their part. As you listed all of the parts of the system. Nobody should be thinking, oh good, the FRC's come in, they're going to solve it all. Everyone's got a part to play. Absolutely. The FRC cannot solve this on our own. We can coordinate and we can suggest actions for others to take as well as ourselves. But it will require a consistent and coordinated effort and also an enduring effort because I suspect the solution will be measured in years. Richard, a lot has been said about regulators' impact on professionals who work in the areas which they regulate in, in our case, the audit profession. What do you say

the people who say, "well the FRC's regulatory stance, it's enforcement actions actually are making the profession less attractive, or at least for those people in the profession already mean they don't want to undertake activity the falls within the regulatory scope because of the fear of enforcement, sanctions, et cetera". I start from the position that the regulator ought to be proactive and interested in the attractiveness of the profession. I appreciate that the professional bodies, the firms and industry will be more frontline on this, absolutely. But the regulator can't be disinterested. Having a pipeline

of diverse talent coming through is really important not just to the health of the profession, but actually to our or to public interest, which is that trust and confidence that people can have from the work of the profession. So it's really important that the FRC understands and acts on its approach to making sure the profession is attractive. Now when it comes to how we do that, clearly there's a discussion to be had. I'm quite interested in understanding why people think the FRC's regulatory functions act as a deterrent or a barrier to entry to the profession. Because actually, when you look at the facts, we take

very, very few cases against professionals and they tend to be for serious misconduct or, you know, heinous errors of judgement that have had real consequential impacts. So, you know, like most regulators, our enforcement functions are used very sparingly and, in rare and significant cases, I'd be interested to know whether actually that reality is being communicated powerfully and landing with the right audiences. So, you know, I am interested in the attractiveness of the profession. It's important that we play our part, but also we've got to be clear here, dumbing down

and having a consequence free regulatory zone is not the answer to the attractiveness of the profession. We absolutely have to get the balance right. I'm in listening mode on this. But you know, let's be clear here that the public do not expect a consequence free zone from misconduct and serious, serious errors that have a profound impact on the livelihoods of the pensions and the communities up and down the country. How, Richard, I guess a lot of people don't understand that being an auditor, you are acting in the public interest. You know, there is that requirement for auditors to consider the public interest in their work. Well, that's true, and that's one of the reasons why.

I'm always very careful to say we need to be clear in our tone of voice that auditors are highly trained, diligent professionals who do, in the main, think about the public interest in their work as they are duty bound to, just like solicitors, just like doctors and other noble professions. But clearly, like all other professions that have their, you know, regulatory oversight, there is a need for public confidence, for there to be a independent way of dealing with misconduct and, you know, serious examples of people falling short of standards. And that is part of the role of the FRC.

And I guess like many things that we do in the wide stakeholder universe in which we operate, everybody's got to play their part here; professional bodies, the firms, individuals in really helping people better understand the importance of the career, but also the impact it has on, as you say, people's lives, whether it's pensions, savings, jobs, et cetera. That's right. And that's why I say that the professional bodies and the firms and industry will be on the front line for this. But I'm really keen that as the regulator, the FRC is not in a disinterested state. I think we have to be quite proactive and sensitive to making sure that

we're assured that there is a pipeline of talent coming through into the profession. Because if there isn't, that is actually a risk for us in terms of the goal that we have around public trust and confidence in audit, corporate governance and corporate reporting. So, Richard, busy, busy three months and I won't ask you whether you're expecting to have so many big issues to deal with in your first three months, but what are your key areas of focus for the FRC in 2024 or at least the first quarter if a crystal ball isn't making you see 12 months hence?

Well, I think it's going to be a very busy and exciting year ahead. Some of my priorities are to publish in a few weeks and updated corporate governance code with the associated guidance and then move on to undertake a fundamental review of the stewardship code. I'm keen this year that we really continue to enhance the quality and trust in audit through our supervision activities and also alongside our partners focus on improving the situation in local audit. Above all, what I'm really keen for the FRC to do is engage intensively this year with our stakeholders to really understand what they need from us to make sure that we're open, we're listening and we're

sensitive to delivering our core public interest whilst supporting the UK's growth and competitiveness. Richard, that sounds like a very busy agenda. And this won't be the last podcast you do for 2024, I'm afraid. And we'll have you back most definitely after we launched the revised Corporate Governance Code. Give us the sense of what are some of the differences we're putting out there and why they're important to our stakeholders. So thank you for your time today, Richard, and I'm sure our listeners will be very interested in both your reflections on the last few months and what we're focusing on for the next 12 months. So thank you indeed. Thank you, Kate.