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In its submissions to the BEIS Select Committee in September 2020, the FRC had clearly made some headway in terms of implementing, or progressing, a number of recommendations of the Kingman Review, Brydon Review, and the Competition and Markets Authority (CMA) Review.
By way of a brief recap, back in 2018, the Department for Business, Energy & Industrial Strategy (BEIS) commissioned three independent reviews. The Kingman Review came first and was published in December 2018. It focused on reviewing the FRC as a regulator, and made over 80 recommendations to replace it with ARGA, an independent statutory regulator. These recommendations concern the proposed new regulatory framework, and the enforcement powers, scope, and governance of ARGA.
Following this, in April 2019, the report from the CMA’s Review of the statutory audit services market proposed four additional recommendations, namely increasing audit scrutiny, introducing mandatory joint audits for most large companies within the FTSE 350 (with one of the joint auditors to be a non-Big Four firm) and measures to mitigate the effects of a Big Four failure, an operational split between the audit and non-audit practices of the Big Four, and a five-year review of progress by the new regulator, ARGA.
Finally, the Brydon Review, published in December 2019, considered the quality and effectiveness of audit and added over 60 more recommendations to the previous two independent reviews, including the establishment of a new corporate auditing profession with a unified purpose and set of principles. The Brydon Review’s recommendations are aimed primarily at the audit of Public Interest Entities (PIEs; being listed companies and credit and insurance firms).
These independent reviews and the recommendations arising from them kick-started a transformation programme at the FRC comprising six work-streams (setting up the new regulator, audit scope and regulation, corporate regulation, corporate reporting, corporate governance, and market reform) which is anticipated to continue over the next few years. In its recent draft strategy and plan & budget 2021/22, which we turn to in more detail below, the FRC has assumed its transition period to ARGA will be extended to 2023, though the legislative timetable for ARGA is yet to be confirmed.
By September 2020, the FRC’s report to the BEIS Select Committee set out evidence of its work plan since the initiation of the transformation programme. At that time, 24 of the Kingman Review’s recommendations had been implemented and the FRC was progressing with 30 more, where this was possible under the FRC’s current statutory powers.
In the latest FRC’s draft Strategy and Plan & Budget 2021/22, the number of implemented recommendations has increased to 34. Of note, a significant number of recommendations across the Kingman and Brydon Reviews can only be implemented with new legislation, which has been hampered by a number of factors, not least the Covid-19 pandemic.
We now return to the recent consultation which the FRC launched this week, concerning its draft Strategy and Plan & Budget for 2021/22. With the implementation of some of the recommendations from the independent reviews now fully underway, leaving aside those which will require legislative intervention, the FRC’s proposed strategy for the coming year unsurprisingly reflects an increase in the planned budget and a proposed growth in staffing numbers and resources.
The overall budget will increase by 15% from £45.4 million in 2020/21 to £52.2 million for 2021/22, and headcount by 16% from 358 in March 2021 to 417 by March 2022. The more detailed budget headlines include:
A total budget increase of £6.8 million on last year’s funding requirement.
A large portion of this increase will go towards the new Supervision Division (£2.8 million) with the greatest share of this amount going to the FRC’s new Audit Firm Supervision team (£1.9 million). The budget also accounts for an additional 16 new recruits to the Supervision Division by March 2022.
The three other Divisions will also have increased budgets and headcounts to cover the period to March 2022, with Regulatory Standards receiving increased funding of £1.5 million and an additional 9 people, Enforcement a funding increase of £600,000 and 4 more people, and Corporate Services a boost of £1.3 million and an extra 20 people.
The FRC states the increased budget reflects the increased expenditure in audit regulation and enforcement that will be required over the next financial year, in order to achieve its objectives and continue the transition to ARGA.
A large part of the FRC’s focus over the coming financial year will concern setting up its newer activities in developing Regulatory Standards and its Supervision function, and implementing many of the remaining recommendations in respect of these ahead of legislation. The work plan set out for the year includes, among a host of other things:
Developing an actuarial policy function to support and advise the Supervision and Enforcement divisions;
taking on two new functions – audit committee supervision and actuarial monitoring;
undertaking greater and improved stakeholder engagement;
revising its standards, codes and guidance;
undertaking thematic reviews to promote improvements in corporate reporting, audit quality and audit market resilience; and
building the Supervision function to be more forward-looking, and implementing processes by which the regulator will engage with the major audit firms in a much more consistent way.
In addition to these, the Supervision and Regulatory Standards divisions will need to be supported by a more consistent and transparent Enforcement function, to create long-term changes and a sustainable holistic regulatory approach. Underpinning all of this will also require a more resilient Corporate Services structure, processes, and technological support. The FRC is undergoing significant organisational growth; ensuring learning and development and a strong culture and values is embedded across the organisation will therefore be key to support all Divisions in performing their functions.
Unsurprisingly then, this will all come at a cost, and indeed, it has always been understood that the transformation to ARGA will not happen over night, bearing in mind the significant expansion of the FRC’s role and responsibilities.
It is clear the road to ARGA is a long and winding one; it was to be expected considering the substantial changes required. The FRC is transforming and progressing along much the same trajectory as we have seen previously for other statutory regulators, such as the Financial Conduct Authority and the Solicitors Regulation Authority. These regulators too are now organised around similar structures broadly comprising Regulatory Standards, Supervision, Enforcement and Corporate Services.
Since its transformation began, much has been done; but the FRC still has a long way to go in its chrysalis stage before ARGA can emerge as the butterfly it intends to be. Until such time, the twists and turns will no doubt continue. The 2021/22 Strategy builds on the work progressed over the past year, which was considerable bearing in mind the difficult times of late. Indeed, lessons from the Covid-19 pandemic will feed into the journey, particularly in relation to the future strategy for Corporate Services, to ensure the organisational resilience of the new regulator.
The FRC is inviting respondents to submit their comments on the draft strategy and budget by 12 March 2021.
If you have any questions or concerns about the content covered in this blog, please contact a member of the Regulatory team.
Julie Matheson is a partner in the Regulatory Team. Her expertise lies in advising professionals and professional services firms, particularly in the accountancy and built environment sector, on regulatory compliance, investigations and enforcement proceedings.
Lucinda Soon is a professional support lawyer in the Regulatory team, and is responsible for knowledge management and practice development.
Her work focuses on leveraging the team’s collective knowledge and expertise, ensuring that know-how and current and emerging regulatory developments are identified, evaluated, synthesised, and shared. She is particularly experienced in the adoption of technology to aid the delivery of these outcomes.
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