The review, to be conducted by Sir John Kingman, has a wide remit, including: inquiring into the structure, culture and processes, oversight, accountability, powers, impact, resources and capacity of the FRC.
Key objectives: The review, to be conducted by Sir John Kingman, has been given two broad objectives:
'Put the FRC in a position to stand as a beacon for the best in governance, transparency and independence; strengthening its position and reputation.
Ensure that its structures, culture and processes; oversight, accountability, and powers; and its impact, resources, and capacity are fit for the future'.
The scope of the review includes the FRC's objectives, governance and transparency; its independence (including conflicts of interest); and its impact, resources and capacity. The seven areas of investigation identified in the Terms of Reference are outlined in more detail below.
Timing: According to the Terms of Reference, the review will 'aim' to submit its findings by the end of 2018.
Why is the review happening? The Terms of Reference explain that: 'The FRC and its remit have developed considerably since it was initially established; and it was last the subject of a review in 2011/12. Since then, there have been changes both in regulation, and in expectations of regulators and how they operate. The FRC is a public body. Some stakeholder groups have called for the FRC to demonstrate greater independence from those they regulate. The government’s expectation is to see the UK at the forefront of corporate governance internationally, including in terms of regulation. In the context of the UK's exit from the EU, it is even more important that our regulatory structures are fit for the future. With reforms to the UK’s Corporate Governance Code in hand, it is also appropriate to make sure that the governance of the FRC as the body with responsibility for the Code, is best in class'.
Further detail: Seven areas of inquiry
The Terms of Reference include seven areas of inquiry. These are outlined below.
Governance: 'The review will consider whether current governance arrangements and their transparency are suitable given the FRC’s status as a public body; the increasing span of the its functions (including in relation to large private companies); and in comparison to the increasing expectations on companies, including those that will flow from anticipated changes to the Corporate Governance Code, and especially so as to promote confidence and emulation.'
[Note: Consultation on a proposed new UK Corporate Governance Code closed on 28 February 2018 and the FRC has indicated that it intends to publish a final version of the code by 'early summer 2018'. The new code is intended to apply to accounting periods beginning on or after 1 January 2019. See: Governance News 15/12/2018]
Independence: The review will consider whether the FRC is sufficiently independent within government and from those it regulates. It will also consider whether current funding arrangements should be revised in this context and/or how any lack of independence might be addressed. The Terms of Reference add that the 'The review will also consider, in particular, whether there are sufficient safeguards in place to ensure and assure that independence. Such measures may include FRC’s processes, transparency, culture, or other factors'.
Avoidance of Conflicts of Interest: The review will consider whether the practices, structure, culture and functioning of the FRCs activities and operations are safeguarded against conflicts of interest, or a perception that there may be conflicts of interest; whether existing mechanisms and practices for the prevention, detection, and resolution of conflicts of interest are adequate, or if additional measures are needed; and whether the procurement of legal and consulting services are suitable.
Oversight and Accountability: The Terms of Reference state that 'Whilst respecting the FRCs operational independence, the review will consider appropriate mechanisms to realise its accountability to parliament and government'. In addition, it will consider whether current arrangements for the FRC's accountability to stakeholder stakeholders and the public are appropriate, including on the specific matter of Freedom of Information.
Powers: The review will also consider whether any 'extension of powers is necessary, advisable, or otherwise recommended' and the adequacy of 'the current legal bases for FRC activities'. In addition, it will consider it will consider 'whether there is a case for an underpinning statutory architecture.
Impact: The review will consider what changes would best enable the FRC to be viewed and able to act as a 'world class regulator', able to take effective action to detect and act on breaches, as well as to deter inadequacy and wrong-doing, and incentivise compliance.
Resources and Capacity: The review will consider the adequacy of the resources, skills experiences and capacity within the organisation as well as the question of whether current funding arrangements are adequate and desirable. The Terms of Reference note that 'the review will take account of whether there are lessons that could be taken from international comparator bodies'.
The FRC released a statement welcoming the review: 'We welcome this independent review of the FRC’s governance, impact and powers to be led by Sir John Kingman and look forward to contributing positively to it. Meeting public expectations means using our powers effectively, working closely with other regulators and identifying where gaps in those powers exist. The review will ensure we are best placed to support UK efforts to attract investment in business for the long term.'
[Sources: UK Department for Business Energy and Industrial Strategy media release 17/04/2018; Terms of Reference: Independent Review of the Financial Reporting Council (2018); Financial Reporting Council media release 17/04/2018; Economia 21/03/2018; CityAM 21/03/2018; The Guardian 31/03/2018]