Delay in new statutory powers for UK Financial Reporting Council leads to postponement of planned headcount increase
Published on 28th Mar 2024
Absence of legislation to expand its remit means FRC will instead focus on a year of consolidation to prioritise its core purpose
On 25 March 2024, the Financial Reporting Council (FRC) published its Plan and Budget for 2024-25. The main takeaway from this plan is that no new statutory powers for the FRC are expected in the next financial year.
This is because of continued delay to the long-awaited legislation to place the new Auditing, Reporting and Governance Authority (ARGA) on a statutory footing. The new regulator, which will replace the FRC, will have increased powers and is the result of proposals first put forward in the 2018 Kingman Review.
Given this delay, the FRC has decided not to continue with the previously planned 16% increase in headcount and instead will keep its headcount broadly flat.
The timing of the publication is interesting, coming just a day before the FRC's chief executive, Richard Moriarty, appeared before the Business and Trade Select Committee. Mr Moriarty stated that there were "serious gaps" in the FRC's powers, including its powers to compel the provision of information. In response, the Committee stressed that the legislation to establish ARGA would be put in place when there was time to do so.
Focus on growth duty
The FRC's plan shows it will focus on embedding the importance of its growth duty (the duty to support UK growth and competitiveness) into all regulatory decision making.
This focus is reflected in its acknowledgement that regulation can impose costs and have unintended consequences for businesses. It has said that it is important that the regulatory expectations on businesses are targeted, risk-focused, proportionate and drive the right outcomes.
Code reviews
Other key features of the FRC's 2024-25 Plan and Budget include finalising the work associated with its review of the UK Corporate Governance Code and associated guidance, and beginning a full review of the Stewardship Code.
Corporate reporting
The FRC also plans to support the simplification and streamlining of corporate reporting by continuing close engagement with the government on its review of non-financial reporting requirements.
It intends to make the UK's sustainability reporting framework world-class through working with international standard setters and other regulators and in its role as secretariat to the UK Sustainability Advisory Committee.
Enforcement
The FRC will use its enforcement powers effectively and efficiently by focusing its investigations and enforcement action on subjects (firms and individuals) for breaches and misconduct in the most serious or significant matters and highest priority areas of regulatory concern.
The plan sets targets to conclude, settle or close 80% of enforcement case investigations within a three-year target period and 50% of enforcement case investigations within a two-year period.
Audit quality supervision
In relation to the FRC's supervisory role, following its creation of a model for year-round engagement on audit quality with Tier 1 firms, it plans to build out proportionate supervision for Tier 2 and 3 firms where audit quality is less consistent.
Budget provision
While there is a provision in the budget for the proposed new FRC office in Birmingham, the FRC accepts that work on this new office will start later than planned, in the final quarter of 2023-24.
While its budget for 2024-25 is higher than that of 2023-24 (£71.5m as opposed to £66.3m), due to inflation this represents a decrease of about 2.3% in real terms.
Osborne Clarke comment
The continued uncertainty and delay in introducing new legislation to give the FRC the greater statutory powers it has been expecting for many years has clearly been a pertinent factor in shaping its 2024-25 plan and budget. While the FRC waits for this legislation, it is perhaps unsurprising that it has chosen not to progress its planned increase in headcount and that its budget has not increased in real terms.
The FRC's acknowledgement of the impact of regulation on businesses and its focus on supporting UK growth and competitiveness is also a critical part of the its plan for 2024-25.
It will be interesting to see how these decisions are reflected in the various divisions of the FRC – not least in its enforcement division, with its statement that it will focus its enforcement efforts on only the most serious or significant matters and areas of regulatory concern.
