RELEVANT TO … ACCOUNTANTS’ PI AND D&O
UK Corporate Governance In August 2023, Where Are We?
Confusion seems to reign at the moment in relation to two rather fundamental aspects of the UK’s corporate governance regulatory regime: the first in relation to the future of the UK Financial Reporting Council (“FRC”) and the second relating to revisions to the UK Corporate Governance Code.
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The future of the FRC: Is ARGA DOA?
I have written about ARGA before (as have many). In 2018 Sir John Kingman recommended the establishment of a new governance authority to be called the Accounting Regulation and Governance Authority (ARGA) to replace the FRC which he described as “not fit for purpose.” Shortly after that, Mr (now Sir) Jon Thompson was brought out of a senior position in the Ministry of Defence and appointed chief executive of the FRC. His job was to prepare the FRC to become ARGA, and government promised that parliamentary time would be found to pass the legislation to create ARGA and provide the powers that it needed to be effective.
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Nearly five years have now passed; ARGA still doesn’t exist as a statutory entity and Thompson has just left the FRC, to become chair of HS2 (possibly another kiss of death). The annual report of the FRC, published on 21 July 2023, contained a report signed by Thompson in which he said what must be regarded as the understatement of the decade: “It has been somewhat frustrating that legislation has not yet been passed more than four years after Kingman, and we continue to work with Government on preparing the legislation for when parliamentary time allows.’’
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Thompson has worked hard to prepare the FRC to look as much like ARGA as possible short of actually having the statutory authority it needs (or the name!). The imposition in the past twenty-four months by the FRC of over £46 million of fines on the largest accounting firms in the UK for poor auditing standards is testament to a new harder line at the FRC.
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Is the reality then that ARGA is never going to be established? Probably. The talk earlier this year was that legislation would be brought in 2024. However, with the deadline for the next general election set at January 2025, and the reality that it may well occur earlier, it seems unrealistic to believe that time will be set aside before an election for the ‘boring’ business of ARGA regulation; and any new government following an election is going to have far too much on its plate to give it priority. One can’t help but conclude that it was this realisation that sparked Thompson’s resignation …
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Revisions to the Corporate Governance Code: Mixed Signals?
This is the second major confusing issue. In its desperate keenness to stop the haemorrhaging of IPOs from the UK to the US stock markets, the UK Treasury has been keen to publicise the FCA proposals for a “lighter touch” around London listing requirements (eg abolish the distinction between premium and standard listings; allow dual voting and non-voting structures; and remove requirements for shareholders to vote on substantial transactions).
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The institutions don't much like the idea: on 28 June 2023 ten pension managers including Railpen and HSBC holdings Retirement Fund said in an open letter that rolling back investor protections to make listings easier would diminish the UK's global reputation and make it “more challenging to act as effective stewards.”
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So, now to the Corporate Governance Code. The Code is, of course, an integral part of the London listing regime. Yet, in May, following the consultations on the 2022 White Paper “restoring trust in audit and corporate government ‘’, the UK Department for Business and Trade invited the FRC actually to strengthen the Code in specific areas, and the FRC recently launched a public consultation on proposed revisions to the Code which are set out in a new draft.
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The revisions are somewhat defensively portrayed as “limited” but in reality they are significant. For example, listed companies will be asked to set out a revised framework of ‘’prudent and effective controls to provide a stronger basis for reporting on and evidencing their effectiveness.’’ Changes will also be brought in to “reflect the responsibilities of the board and audit committee for sustainability and ESG reporting, and associated assurance in accordance with the company's audit and assurance policy.” Disclosures strengthening reporting on performance penalties and claw back arrangements are also going to be required. These are not ‘’light touch” measures.
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So, there appear to be some mixed signals here. Does the left hand of government know what the right hand is doing? It’s not impossible that government departmental changes have led to fractured communications. At any rate, UK plc needs to see some joined up thinking.
