Collaboration or regulation

Collaboration or regulation

In our recent article “Government confirms new regulator” we examined the government’s proposals for the Financial Reporting Council (FRC) to be replaced by a new independent regulator. The intention is for the Audit, Reporting and Governance Authority (ARGA) to be accountable to Parliament and to have statutory powers which were not available to the FRC.

The government’s proposals are currently the subject of a consultation which closes on 11 June. Partly in response to this consultation the Institute of Directors (IoD) has issued an open letter to the Business Secretary, Greg Clark, raising concerns over the way in which corporate governance would be overseen under the proposed new regime.

The letter opens by praising the decision made to carry forward most of the proposals contained within the Kingman report. It comments that recent corporate failures have “highlighted the need to replace the FRC with a tough new audit market regulator that ‘is respected by those who depend on its work, and where necessary feared by those whom it regulates.”

However, the letter goes on to highlight the way in which the UK Corporate Governance Code has since its inception in 1992 been seen as a collaboration between government, business and investors. Moreover, through the comply or explain principle, the code has been designed to flex in response to individual company circumstances.

The IoD is therefore concerned that should the Corporate Governance Code be placed under the remit of a statutory audit regulator, the end result could be “a more legalistic, US-style regulatory approach with limited scope for flexibility or business input.” In order to avoid this outcome the IoD is therefore calling on the government to consider implementing an alternative framework for both the UK Corporate Governance Code and UK Stewardship Code, perhaps via a dedicated Corporate Governance Commission.

The UK Corporate Governance Code is widely recognised as being one of the most flexible in the world, as well as one of the reasons why business is attracted to the UK. As the IoD comments, despite the failures which have been seen at specific companies in recent times our governance framework as a whole still represents a source of competitive advantage for the UK. We therefore await further developments with regard to the consultation with interest and will report on them as required.

 

Nick Lindsay
nick.lindsay@gmail.com
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