Sir John Kingman has recommended that the Financial Reporting Council (FRC) be replaced with an independent statutory regulator, accountable to parliament. The new body, which Kingman has called the Audit, Reporting and Governance Authority (ARGA), would have an expanded corporate governance oversight role, and would be subject to an overarching duty to "promote the interests of consumers of financial information, not producers".
Business secretary Greg Clark, who commissioned the review, said that the government would take forward Kingman's recommendations.
Corporate governance expert Martin Webster of Pinsent Masons, the law firm behind Out-Law.com, described the Kingman review as a "radical" one, which "doesn't pull its punches".
"In Kingman's words, the new regulator needs to be 'respected by those who depend on its work, and where necessary feared by those whom it regulates'," he said.
"At the moment, the FRC can only take action against directors who are accountants, through their professional bodies. The review calls time on this anomaly and wants to see an effective enforcement regime targeting all CEOs, CFOs, chairs and audit chairs of the largest companies. The new regime would focus on their duties to prepare true and fair accounts and compliant corporate reports, and to deal openly and honestly with auditors," he said.
"In Kingman's view, the Stewardship Code, currently under review by the FRC, is well-intentioned, but not effective in practice. And viability statements, introduced by the UK Corporate Governance Code in 2014, 'provide little meaningful insight'. If they can't be made more effective, Kingman says both should be abolished," he said.
Kingman was commissioned by the government to conduct a root and branch review of the FRC's role, function, impact, effectiveness and powers. His lengthy report makes 83 recommendations, beginning with replacing the FRC with a new independent regulator "as soon as possible".
The new ARGA, as envisaged by Kingman, would have statutory duties to promote competition; promote innovation; and to apply proportionality to all its work; as well as an overarching duty to promote the interests of consumers of financial information. The government should issue the new regulator with a remit letter at least once every parliament, as it already does for the financial regulators the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA).
The new regulator should have a "significantly smaller" board than that of the FRC, with greater oversight of the regulator's investigation and enforcement functions. There should be some, but "limited", continuity with the board of the FRC. All appointments to the new board should be public appointments, approved by the business secretary, and should be openly advertised, with headhunters used. Conflict of interest policies should be put in place to prevent the board and other staff working on regulatory functions relating to past employers.
Significantly, the report recommends a number of new powers for the new regulator. The ARGA, working with the government, should develop detailed proposals for an effective enforcement regime, through which all relevant directors, not just members of professional bodies, would be held to account for their duties to prepare and approve "true and fair" corporate reports and to deal "openly and honestly" with auditors. The government should also review the UK definition of 'public interest entity', potentially expanding the number and type of entities subject to statutory audit duties.
The new regulator should be required to report on whether the statutory reporting framework is best serving the interests of stakeholders at least once every parliament, and should be required to promote "brevity and comprehensibility" in accounts and annual reports. It should be "more sparing and disciplined" than its predecessor in publishing guidance and discussion documents, which should only be issued if they are "genuinely useful".
The report recommends that the new regulator be funded by a statutory levy, rather than on a voluntary basis as with the FRC. Budget and chief executive pay should be set by ministers, with other pay decisions made by the regulator "subject to proper transparency and within the overall financial budget set by ministers".