Corporate Governance regulatory update – summer 2024

Three elements of the Speech pertained to corporate governance in particular, with the key announcement being to strengthen audit and corporate governance. The inclusion of the draft Audit Reform and Corporate Governance Bill is welcomed and follows a lot of influencing work in this area by ICAEW. The other aspects of note include the announcement of a Football Governance Bill, seeking to establish an independent football regulator, and a Water (Special Measures) Bill, both of which will have implications for individual board director liability.

Back on the agenda, the draft Audit Reform and Corporate Governance Bill will replace the Financial Reporting Council (FRC) with the Audit, Reporting and Governance Authority (ARGA), giving it powers to tackle bad financial reporting and to build back trust following a series of disorderly corporate failures in recent years.

This statutory regulator will form a platform for other important changes, including:

• a wider remit, through extending Public Interest Entity (PIE) status to the largest private companies and thus making sure the audits of those important businesses are high quality and giving early warning of financial problems.
• removing unnecessary rules on smaller PIEs, making life easier for important smaller businesses by cutting requirements that are disproportionate.
• powers to investigate and sanction company directors for serious failures in relation to their financial reporting and audit responsibilities, so there are consequences for putting forward dodgy accounts.
• a regime to oversee the audit market, protect against conflicts of interest at audit firms, and build resilience so quality audit is available to all companies that need it.

ARGA was first called for in the Independent Review of the Financial Reporting Council led by Sir John Kingman (the Kingman Review) in 2018 to examine the role and powers of the FRC. We supported the findings of the Review, including Kingman’s suggestion that the proposed new regulator should be able to sanction directors under certain circumstances. Key recommendations included:

• Recommendation 36: The Review recommends that the Government, working with the new regulator, should task the regulator to develop detailed proposals for an effective enforcement regime in relation to Public Interest Entities that holds relevant directors to account for their duties to prepare and approve true and fair accounts and compliant corporate reports, and to deal openly and honestly with auditors. The Review recommends that this should apply to a company’s CEO, CFO, chair, and audit committee chair.
• Recommendation 37: The Review recommends that the regime for non-member directors should follow the principles of the Audit Enforcement Procedure, with the same threshold for action to be taken, and a graduated range of sanctions. To achieve this, the regulator should set out relevant requirements or statements of responsibilities in relation to auditing and corporate reporting in order that directors are individually accountable for their roles.
• Recommendation 38: Although the regulator should be able to impose a range of sanctions, the Review recommends that action relating to director disqualification should continue to rest with the Insolvency Service. The Review does, however, recommend that the FRC should have the necessary powers to investigate directors and refer cases to the Insolvency Service, working closely with them to ensure effective action is taken where necessary.

Pre-legislative scrutiny may take up to a year with the Bill expected in late 2025/early 2026. Since the Bill was last on the parliamentary agenda, some issues now have greater prominence including sustainability assurance and cyber resilience. Local audit is also an important consideration. Justin Madders MP will be the lead Department for Business and Trade (DBT) Minister on this work. The Institute is largely supportive of the FRC becoming ARGA. DBT officials have welcomed ICAEW’s input to date and we will continue to engage with government during the pre-legislative scrutiny period.

The government will work with the Water Services Regulation Authority (Ofwat) to drive more responsible decision-making in the boardrooms of water companies. Boards need to go further to protect and promote the interests of customers and the environment in its handling of sewage and waterways. The Bill will aim to strengthen regulation, give the water regulator new powers to ban the payment of bonuses if environmental standards are not met and increase accountability for water executives. More detail on the Bill is due to be set out in due course.

The Football Governance Bill, initially introduced in March 2024, failed to pass through Parliament before the general election was called in May. The legislation will grant powers to a body that is independent from government and football authorities to oversee clubs in England's top five tiers. Key aims are to ensure greater sustainability in the game and to strengthen protections for fans. The government said it will "protect football clubs" by "ensuring their financial sustainability".

We will continue working closely with government and regulators to ensure that the UK corporate governance landscape is strengthened.

Read this press release outlining ICAEW’s priorities for the new government, including on audit reform, local audit and business rates.

Separately, the FRC has announced that a review of the UK Stewardship Code will be consulted on later this year with the updated Code due to be released in early 2025. The upcoming consultation will focus on five key themes:

• Purpose – The FRC will consider all stakeholder views and set out its expectation of what defines effective stewardship, what this looks like in practice, and how reporting against the Code can help to deliver this.
• Principles – The FRC is considering what reporting will be necessary to deliver on a renewed purpose of the Code.
• Proxy Advisors – The FRC will carefully consider how the Code might support greater transparency of their activities.
• Process – The FRC will take forward proposals to reduce the reporting burden currently associated with being a Code signatory and ensure that information included in reports is useful and accessible to all underlying investors and other stakeholders.
• Positioning – The FRC is working closely with other regulators such as the DWP, TPR and the FCA to support clarity in understanding the revised Code and its successful implementation. The Code will continue to support the objectives of those other regulators to avoid any confusion and duplication that signatories may encounter.

The FRC is also making five immediate changes to significantly reduce the reporting burden on existing signatories. These changes will:

• Remove the requirement to annually disclose all ‘Context’ reporting expectations, except for new reports or material changes.
• Remove the requirement to annually disclose against ’Activity‘ and ’Outcome‘ reporting expectations for some Principles.
• Explicitly allow use of content from previous reporting and cross-referencing of such reports.
• Set clear expectations of what is considered an ‘outcome’ for stewardship purposes.
• Emphasise the ability to exercise reporting against Principles 10, collaborative engagement, and 11 escalation ‘where necessary’.

• Read the FRC’s full update on changes to the Code