Financial Reporting Council (Miscellaneous Provisions) Order 2021

Lord Callanan Excerpts

Thursday 18th March 2021 Grand Committee

Moved by

[Lord Callanan]

That the Grand Committee do consider the Financial Reporting Council (Miscellaneous Provisions) Order 2021.

[The Parliamentary Under-Secretary of State, Department for Business, Energy and Industrial Strategy (Lord Callanan) (Con)]

My Lords, I beg to move that the Financial Reporting Council (Miscellaneous Provisions) Order 2021, which was laid before the House on 8 February 2021, be approved.

The Financial Reporting Council, or the FRC, as I shall refer to it, is an independent regulator. It is responsible for regulating auditors, accountants and actuaries, and setting the UK’s corporate governance and stewardship codes. Following corporate failures such as BHS and Carillion, the Government have been working to understand and address shortcomings within the UK audit environment, including the role that the FRC as the regulator plays. As a result, the Government commissioned Sir John Kingman to conduct an independent review of the FRC. This review was commissioned in April 2018 and reported on 18 December 2018.

The FRC review made over 80 recommendations; its central recommendation was for a new, stronger regulator. The review indicated that the new regulator needed to be more transparent than the FRC had historically been and should be held to the same standards as other public sector bodies—including full compliance with the Managing public money handbook. The review also recommended that the FRC be subject to the Freedom of Information Act and the Regulators’ Code. These findings were supported by the Government and welcomed by the Business, Energy and Industrial Strategy Committee in another place.

Since the FRC review reported, the regulator has undertaken significant steps to strengthen its capabilities. Under new leadership, it has also begun to build the additional capacity needed to deliver on the ambitious mandate set out by the review. The FRC has also worked to streamline its governance structures and expand its stakeholder engagement. This order builds on the FRC’s progress in taking the non-legislative steps needed to implement the review’s recommendations on its internal workings.

Today represents another important milestone for audit and corporate governance reform. I am pleased that today we have published the Government’s White Paper Restoring trust in audit and corporate governance. It sets out a comprehensive and ambitious vision for reform of the corporate landscape and outlines the Government’s detailed proposals for further reform of the regulator. The instrument’s legislative measures are a further step forward on the path to transforming the FRC into a new, strengthened regulator. They apply the Freedom of Information Act, the Regulators’ Code and the public sector equality duty to the FRC.

I turn first to the application of the Freedom of Information Act to the FRC. As identified by the FRC review, currently only some of the FRC’s statutory functions are subject to the Freedom of Information Act. Since December 2019, however, the FRC has voluntarily complied with the provisions of the Act across the range of its work. This measure designates the FRC as a public authority for the purposes of the Freedom of Information Act so that all of its public functions are covered by the Act.

The Freedom of Information Act provides a general right of access to the public for information held by public authorities, subject to the exemptions set out in the Act. Public authorities are also obliged under the Act to produce and maintain a publication scheme approved by the Information Commissioner. The FRC was consulted on the application of the Freedom of Information Act and it supported the application of the Act to its public functions. Since the FRC is a public body, it is reasonable and proportionate that this measure is taken to apply the Freedom of Information Act to its public functions. In doing so, it will help to underpin trust and confidence in the regulator.

I turn now to the Regulators’ Code measure. The FRC is already subject to the code in respect of some of its regulatory functions. This order will apply the Regulators’ Code to all of the FRC’s regulatory functions, except for those that it has delegated to the relevant professional bodies. The code aims to encourage proportionate and consistent regulatory activity; it also promotes trust, open dialogue and accountability between the regulator and those that it regulates. Application of the code by legislation will enable the FRC to be more accountable and bring it into line with other regulators who are subject to the code in this way. It will encourage greater transparency for regulatory delivery, allowing the FRC to target its resources better. This in turn will support the FRC’s delivery of high standards of audit, reporting and governance in the UK. The Government have worked closely with the FRC and the relevant professional bodies and have consulted them regarding this measure. All the parties consulted support the application of the Regulators’ Code to the FRC through secondary legislation.

I turn to the public sector equality duty measure, which will add the FRC to the list of public bodies that are formally subject to this duty. At present, the FRC is subject to the public sector equality duty only in respect to the exercise of its public functions. The measure expands this so that the FRC itself will be subject to the public sector equality duty in respect of all of its functions. Sir John Kingman’s review of the FRC recommended that the regulator should fully consider and assess equalities impacts in its work. This measure will support that recommendation.

Those subject to the equality duty must: eliminate unlawful discrimination, harassment and victimisation and other conduct prohibited by or under the Equality Act 2010; advance equality of opportunity between people who share a protected characteristic and those who do not; and foster good relations between people who share a protected characteristic and those who do not. The term “protected characteristic” refers to those characteristics covered by the equality duty and includes age, disability, pregnancy and maternity, race, religion or belief, sex and sexual orientation and gender reassignment. This order means that the FRC will need to consider the objectives of the public sector equality duty in its oversight of those it regulates. Additionally, as the FRC is the regulator that sets the UK Corporate Governance Code, it promotes diversity reporting to the UK’s largest companies. It would only be right that the FRC itself was subject to the public sector equality duty in full. This measure will ensure that equality is considered as an important aspect of the regulator’s day-to-day activities.

In March 2019, in their initial response to the FRC review, the Government committed to replace the FRC with a new independent statutory regulator with stronger powers. The new regulator, the audit, reporting and governance authority, will be a stronger regulator underpinned by legislation. It will have stronger enforcement powers and will be funded by a mandatory levy on the industry that it regulates. The White Paper published today sets out the Government’s proposals in more detail. The Government intend to bring forward the necessary primary legislation to create the new regulator when parliamentary time allows. But we want to press forward with measures such as those in this draft instrument. They do not need to and they should not wait. These measures will ensure that the FRC is more transparent and accountable to the public as well as to the businesses and professions it regulates. It will also bring the FRC into line with the requirements of similar public bodies. These measures are therefore a further step down the road to creating the new regulator.

I conclude by emphasising that I see the measures contained in this order as important since they will help to bring about greater transparency on the part of the FRC. I hope that noble Lords will support them and commend the draft order to the House.

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[Lord Callanan (Con)]

I thank noble Lords who have contributed to this debate. The points that we have been discussing highlight the need for the measures contained in this order and emphasise the beneficial impacts they will have on the Financial Reporting Council and those that it regulates.

Reliable audit and corporate reporting are critical to well-functioning markets, business investment and growth. A transparent and effective regulator has a vital role in assisting the UK economy to realise these benefits. These measures will help the regulator meet the goal of ensuring that the UK maintains and advances its status as a place of the highest standards in audit and corporate reporting. They are a crucial part of the Government’s commitment to acting on the findings of Sir John Kingman’s independent review.

The noble Lord, Lord Davies of Brixton, asked about the timing of the SI given that the FRC is on the way out, and wanted to understand what we might not be applying to the regulator. He also asked how the Government enforce the Regulators’ Code. Establishing the new regulator, ARGA, requires primary legislation, and the Government intend to introduce that when parliamentary time allows. We think it is right to ask the FRC to start now, as we mean the new regulator, ARGA, to go on in this vein.

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[Lord Callanan (Con)]

To resume, the FRC did not start out as a public body. Since its creation in the 1980s, it has slowly accumulated public functions to the point that it has more recently been classified as a public body. Certain statutory functions of the FRC are already subject to the FoI Act. As the FRC is now a regulator acting in the public interest, we think it is right to extend the FoI Act to cover all the FRC’s public functions.

The noble Lord, Lord Davies, and the noble Baroness, Lady Wheatcroft, asked whether the Government have a system for monitoring the work of all regulators. In monitoring these regulators, the FRC is required to report annually to the Secretary of State on its activities relating to the oversight of statutory auditors, and that report must in turn be laid before Parliament. We have proposed yet stronger arrangements in relation to ARGA.

I answered the question the noble Baroness, Lady Wheatcroft, asked about when we might realistically see legislation. The answer to that is, I am afraid, the standard one: when parliamentary time allows. Now that we have published the White Paper setting out our intentions for the new regulator, the Government will recruit a permanent chair of the FRC. We are making these changes as laying the foundation for the new regulator, not extending the FRC’s house.

The noble Baroness, Lady Wheatcroft, and the noble Lord, Lord Lennie, also asked why we are still waiting for these changes. We are intending to legislate as soon as parliamentary time allow us, and ARGA will of course come into being thereafter. However, I cannot give any guarantees as to when it is likely that will be.

The noble Lord, Lord Sikka, raised a number of comments about the order. The FoI Act obliges public authorities to publish certain information about their activities, and entitles members of the public to request information from public authorities. As RSBs are independent professional bodies rather than regulators, we do not believe it would be proportionate to subject them to the Freedom of Information Act.

On the point about referring to accounting standards rather than auditing standards, the new UK endorsement board, not the FRC, will be the body to endorse and adopt international financial reporting standards in the UK. The FRC has exercised some oversight of the RSBs, hence this function should be subject to freedom of information. The Regulators’ Code will promote openness at the FRC. Access to the FRC’s board meetings is, of course, a matter for the FRC itself. Although the FRC has staff from companies and the industry, its chair is appointed by the Secretary of State.

In response to the noble Lord, Lord Lennie, who asked why we disagreed with the regulator taking over the running of a failing auditor, we think this would be a fairly major step and we are not totally convinced of its likely effectiveness.

The noble Lord, Lord Lennie, also raised the point that ARGA will be a company limited by guarantee. The creation of ARGA will be achieved by renaming and reconstituting the FRC, which is a company limited by guarantee at the moment, at the same time as making substantial changes to its functions. The Government will legislate to rename the existing body and make provision for its internal governance, as will be set out in its articles of association. We are clear that ARGA will be a regulator with teeth, backed by legislation. It will be funded by a mandatory levy on industry and given much stronger enforcement powers. The Government consider that this approach has the advantage of minimising the transitional costs which would be involved in setting up a new, statutory corporation.

The important measures in the order ensure that the FRC will be designated as a public authority in respect of its public functions for the purposes of the Freedom of Information Act; that all the FRC’s regulatory functions will be subject to the Regulators’ Code; and that the FRC is added to the list of public bodies which are explicitly subject to the public sector equality duty. As a result, its responsibility for adherence will be clear. Compliance on a statutory level with the Freedom of Information Act, the Regulators’ Code and the public sector equality duty will ensure that the FRC is made more transparent and accountable to those that it regulates. It will support the FRC’s effective operation and bring the regulatory requirement in line with similar public bodies. It will also further strengthen its regulated status as a public body.

Establishing the new regulator will, of course, require primary legislation. As I said, the Government will introduce this when parliamentary time allows. In the meantime, the FRC has made some progress on the recommendations from Sir John Kingman’s review and those proposals can be implemented without legislation, in parallel with this order. The FRC recognises the significant role that it has to play in paving the way for the new regulator. Building trust in the UK’s audit, accounting and corporate reporting regulator is an essential part of the Government’s programme of work to reform audit and corporate reporting. Our proposals, published today, set out how we will achieve this.

Meanwhile, applying the measures in the order now to the FRC builds on other progress, and it does so through statute. It shows that the Government are committed to putting in place the right degree of transparency and oversight for the work of an important regulator. I recommend this draft order to the Committee.

Motion agreed.