The Financial Reporting Council (FRC) is stopping development of more than half of the 18 proposals set out in its consultation on revisions to the UK Corporate Governance Code.

Instead, it says there will be a small number of changes that streamline and reduce duplication associated with the Code, which were overwhelmingly supported by stakeholders in the interests of reducing burdens. 

In a policy update from published just after the King’s Speech, CEO Richard Moriarty said: “Taking all these factors into account, the FRC considers the right balance at the current time is to take forward only a small number of the original 18 proposals we set out in the consultation and to stop development of the remainder.”

The main substantive change concerns revisions to the FRC’s original proposal on internal controls. The regulator said the decision would result in a more targeted and proportionate Code revision and would allow more time for its implementation. It would also ensure that “the UK approach clearly differentiates from the much more intrusive approach adopted in the US”, Moriarty said.

More than half of the FRC’s original proposals, including those relating to the role of audit committees on environmental, social and governance, and modifications to existing code provisions around diversity, over-boarding and Committee Chairs engaging with shareholders, will not be taken forward. 

A number of other proposals will also not be taken forward following the government’s decision last month to scrap draft reporting regulations, after it described them as burdensome. These had included the requirement for companies to produce a new strategic report, a resilience statement and a directors’ report that includes an audit and assurance policy statement, a policy on material fraud and distributions.

The FRC intends to publish an updated Code in January 2024. 

Michael Izza, ICAEW Chief Executive, said it was positive that the FRC had carefully considered consultation feedback and that it has prioritised the most urgent and key parts of the consultation. “It is important that detailed and timely guidance is available for companies to ensure that they are able to comply with the proposed changes in 2025. 

“We have offered to support the FRC to help draft detailed guidance and tools to support the FRC’s proposed changes around internal controls and to help prevent a US-style ‘SOX’ regime being implemented in the UK through the backdoor. We will continue do our part in helping restore trust in Audit and Corporate Governance and support the FRC.”

Moriarty said stakeholders’ feedback had raised concerns about how FRC guidance issued under the UK Corporate Governance Code could have unintended consequences for businesses, investors and their advisers. Moriarty said exploring ways of ensuring any guidance is proportionate and limits burdens, while not weakening effective governance, is critical to the FRC’s role in supporting growth and the UK’s competitiveness. 

With that in mind, from January 2024, the FRC’s Stakeholder Insight Group will have an additional remit to provide the regulator with advice to ensure the right balance is struck between supporting effective governance and reducing unnecessary burdens. This Group’s membership consists of a mixture of investors, preparers, advisers and related membership bodies. 

Meanwhile, the FRC said revisions to the UK Stewardship Code were also in its sights following concerns raised by stakeholder during the UK Corporate Governance Code consultation process.

“Once the updated UK Governance Code is issued in January 2024, we will as our next priority start to engage with stakeholders on how best to review the Stewardship Code, including understanding how it works in practice and what changes may be required going forward to ensure it remains fit for purpose,” Moriarty said.

The FRC described the absence of audit reform in the King’s Speech as “disappointing”, but said it was pleased that audit and corporate governance reform remained on the agenda after the government as recently as 16 October restated its commitment to bringing forward legislation when Parliamentary time allows. 

“There is broad stakeholder consensus that this reform continues to be necessary to restore investor and public trust following the very damaging collapse of several high-profile businesses, including Carillion, BHS and Thomas Cook,” Moriarty said.

Izza, meanwhile, said the government’s aims of making the UK listing regime more attractive and improving trust in audit and corporate governance were not mutually exclusive. “It is therefore disappointing that government seems to have a different view and that the reform of audit and corporate governance no longer seems a priority despite assurances to the contrary.

“A strong corporate governance regime with high quality financial and non-financial reporting that is aligned with international standards such as the OECD revised Principles is in investors and other stakeholder interest. Watering down these aspects of corporate governance reform is a missed opportunity as is the government’s continued reluctance to provide the FRC with the powers it requires to become ARGA as recommended in light of the collapse of Carillion,” Izza added.

Moriarty said the FRC had an important public interest role to enhance the quality of audit and corporate reporting and governance while supporting the UK’s economic growth and its international competitiveness. “We remain resolutely focused on ensuring our current regulatory toolkit is used to best effect for this purpose, working closely with our stakeholders. This includes setting proportionate standards, fostering a culture of continuous improvement and holding to account those that fall short.”