FRC’s transition to ARGA sailing into in the Doldrums

October 25, 2019

In our July Newsletter, we wrote about the Financial Reporting Council’s (“FRC”) programme of transition into the Audit, Reporting and Governance Authority (“ARGA”), a statutory body with enhanced regulatory powers to address corporate governance failures and audit malpractice.

What, if anything, has happened in the meantime to demonstrate progress? This is, clearly, a question exercising Sir John Kingman, whose 2018 report was severely critical of the FRC and was the catalyst for its transition to ARGA. But the recent Queen’s Speech contained no reference to the legislation required to provide statutory underpinning for ARGA and to bestow the powers it needs to operate effectively. This has prompted Sir John to write to BEIS expressing concern that this omission will allow the FRC to drift along in a toothless, half-reformed state.

That is not to say that no progress has been made and Sir John Kingman recognises this. Former HMRC CEO, Sir Jon Thompson and former GlaxoSmithKline CFO, Simon Dingemans have taken-up their roles as CEO and Chair respectively of the FRC (ARGA), in place of Stephen Haddrill and Sir Winfried Bischoff. Simon Dingemans is also a former partner at Goldman Sachs. Both new men have strong financial and commercial credentials, augmented in Sir Jon Thompson’s case by leading roles within Government departments – an indication perhaps that ARGA’s new leadership team is unlikely to have any trouble managing relationships with company boards, auditors or Government.

The FRC’s goal is to recruit an additional 80 employees in 2019/20. Its 2018/19 Annual Report indicates that the Enforcement Team has been increased by 25% to deliver more timely and effective enforcement of audit standards. Whilst audit may grab the headlines, the FRC’s remit extends far beyond, including the UK Corporate Governance Code, to which far-reaching amendments were made in 2018 and the Stewardship Code.

On 24 October, the FRC published a “substantial” and “ambitious” revision to the Stewardship Code. The revised code, which comes into force on 1 January 2020, extends to service providers as well as asset managers, to help the investment community develop and align a consistent approach to stewardship.

Signatories’ annual reports must describe their stewardship activities across all asset classes (including alternative investments) wherever situated and the results of those activities, including engagement and their voting records. Signatories will also be expected to take ESG factors into account and will be required to explain their investment strategy and culture, and how they relate to their stewardship activities. Finally, signatories will be expected to work together with regulators and industry bodies to identify and manage systemic risks.

This signifies a move towards greater transparency, which is to be applauded. However, it also means there will be a greater workload, which will require higher resource levels. And importantly, if the FRC is to operate as an effective partner and regulator (not only for the investment community but for UK companies and audit firms, as well) it must also have the legislative underpinning as recommended by Kingman. This raises questions about the incursion of political bias into the equation and the need for adequate safeguards, but the path has been laid and the failure to include proposed legislation in the recent Queen’s Speech leaves the FRC potentially becalmed as a regulator without the teeth to deliver its remit. If that comes to pass, all the good work may count for nought.

To discuss any points arising from this article, please contact: Paul Norris.

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