The Financial Reporting Council (FRC) should be scrapped and replaced with an independent statutory regulator with “the interests of consumers of financial information, not producers” at its heart, an independent review of the body has recommended.

The new body should be accountable to parliament, have clarity of purpose and mission, new leadership, and new powers, according to the review led by John Kingman, chairman of Legal & General.

Business secretary Greg Clark, who asked Kingman to lead the review of the FRC, said the government would “take forward the recommendations set out in the review to replace the FRC with a new independent statutory regulator with stronger powers”.

Several stakeholders – most notably the Local Authority Pension Fund Forum and former MEP Sharon Bowles – have been calling for the FRC to be abolished for some time. 

The Kingman Review made 83 recommendations in total, including putting the new organisation in charge of regulating major audit firms, ending self-regulation through trade associations, and for reviews of audit quality and corporate reporting to be made public.

The review also advocated a “fundamental shift in approach” to the UK’s Stewardship Code – currently overseen by the FRC – saying that “serious consideration should be given to its abolition” if in its upcoming revised form it could not focus on “outcomes and effectiveness” rather than policy statements.

The new regulator also needed to engage at more senior level in a much wider and deeper dialogue with UK investors, both fund managers and representatives of end-investors.

The review also recommended that regulation of the actuarial profession should move to the Prudential Regulation Authority.

The FRC is currently the regulator for auditors, accountants and actuaries, sharing this responsibility with the relevant professional membership bodies. It is also the body responsible for setting the UK’s corporate governance and stewardship codes. A new version of the former was published in July, while the FRC was due to present a new stewardship code for public consultation before the end of the year.

Kingsman’s criticisms

Kingman said that although some of the FRC’s critics overstated their case, he had “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,” he added.

Elsewhere in the report, the FRC was likened to “a rather ramshackle house” that was just about “serviceable, up to a point, but it leaks and creaks, sometimes badly”.

“The inhabitants of the house have sought to patch and mend,” the review report continued. “But in the end, the house is built on weak foundations. It is time to build a new house.”

Investor reactions

The UK’s pension fund association expressed “hope” that the measures proposed in the Kingman Review would “help ensure that a new body can work better towards the interests of investors”.

Caroline Escott, policy lead for investment and stewardship at the Pensions and Lifetime Savings Association, said: “Although we believe that the Stewardship Code was a significant step forward, we support moves to ensure the code helps schemes tell how well their asset manager is doing on stewardship.

“We welcome the review’s recognition that the FRC needs to develop deeper relationships with the investor community, but think that a key step in doing so would be to ensure that the FRC, or its successor body, employs more staff with investor practitioner experience and expertise.”

Chris Cummings, chief executive of the Investment Association, said asset managers would “welcome the clarity of responsibilities” the proposed new regulatory body would bring and that investors were “strongly” supportive of the recommendation that corporate and audit quality reviews be published.

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

Audit market faces reform after CMA study

The release of the Kingman review coincided with the UK’s competition watchdog today launching a consultation on proposals for “robust reform” of the audit market to address a shortfall in audit quality.

The Competition and Markets Authority (CMA) has proposed legislation to: split audit from consulting services; introduce measures to substantially increase the accountability of those chairing audit committees in firms, and impose a ‘joint audit’ regime giving firms outside the four dominant providers a role in auditing the UK’s biggest companies.

CMA chief executive Andrea Coscelli said: “We have moved fast to come up with a comprehensive package of proposals for legislation, which we will now consult on.

“Successful reform of the audit market will require legislation, in combination with planned improvements to regulation as recommended by Sir John Kingman.”

The CMA launched a study on the audit market in October.

Auditor procurement

Separate to his review of the FRC, Kingman was also asked by the business secretary to consider whether there was any case for changing way in which audits were currently procured, particularly for major companies of public interest.

In a letter to Clark, Kingman said there was a case for “radical change” in relation to who appoints company auditors, but that for reasons including firm investor opposition, he would advise the government to consider more “modest and focused approaches”.

The radical change Kingman had sketched out involved company auditors being appointed by the FRC successor body instead of by the company’s board, with shareholders to be given the same right of veto on this appointment as they currently had on a board’s proposed auditor appointment.

The Kingman review report can be found here.

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