RegulationDec 18 2018

Calls for independent regulator

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Calls for independent regulator

A review of the Financial Reporting Council (FRC) has found the body should be replaced by an independent statutory regulator, as part of a "fresh start" in corporate governance.

The FRC currently regulates auditors, accountants and actuaries in the UK, sharing this responsibility with professional membership bodies.

But Sir John Kingman, chairman of Legal & General and former second permanent secretary to HM Treasury, who led the independent review, said the body should be replaced by a new Audit, Reporting and Governance Authority, to be accountable to Parliament and with new leadership and powers.

The review was published today (December 18) after it had been requested by business secretary Greg Clark in April.

It followed a number of high profile failings such as the collapse of Carillion and BHS.

It also recommended the self-regulation of major audit firms through their own professional bodies should end, with the regulation of these firm passed to the new regulator.

The review also called for "major steps in transparency" and "significant" powers for the new regulator to investigate concerns relating to companies, their accounts and governance.

To achieve a greater level of transparency, it was recommended audit quality reviews and corporate reporting reviews be published for the first time.

Sir John said: "All in all, some of the FRC’s critics overstate their case. Nevertheless, I have sympathy with the view that the FRC has tended, overall, to take too consensual an approach to its work.   

"The FRC’s approach to its own governance has also not been consistent with either its public importance, or its role in championing governance in the corporate world.   

"We need to take the opportunity to make a fresh start."

The review suggested the regulation of the actuarial profession be moved to the Prudential Regulation Authority and the creation of a new "duty of alert" for auditors to report serious concerns about corporate viability to the new regulator.

It was also recommended that the Stewardship Code be "fundamentally overhauled" to give it greater credibility and effectiveness.  

Chris Cummings, chief executive of the Investment Association, said investors have been clear they had concerns over the FRC’s purpose, mission and culture.

He said: "The review has recognised the key role that investors play and have taken concrete steps to address their concerns.

"Forming a new body, with a new mission and purpose, and making it accountable to Parliament was a key recommendation by asset managers, and they will welcome the clarity of responsibilities this new structure brings."

Mr Cummings added: "Investors strongly support the recommendation that Corporate Reporting Reviews and Audit Quality Reviews are published, so that they can better understand the findings and concerns from the regulator and use that information when making engagement and investment decisions.

"We look forward to more details on the proposed overhaul of the Stewardship Code. Investors will want the new body to have a cultural-bias towards stewardship to signal the importance of investors fulfilling their responsibilities."

rachel.addison@ft.com