In another surprise move in the normally placid world of corporate governance, the FRC provided an important policy update in response to the King’s Speech on 7 November 2023 – which failed to include any primary legislation to modernise the regulation of audit, corporate reporting and governance - announcing that it was dropping over half of its proposed changes to the UK Corporate Governance Code (Code). The FRC also announced that it will extend its objectives to supporting UK economic growth and competitiveness, in addition to enhancing trust and confidence in governance.
U-turn on proposed changes to the Code
The FRC announced a consultation on its proposed changes to the Code in May 2023 which closed in September 2023 (Consultation). The proposed changes were being made in response to the Government's paper, “Restoring trust in audit and corporate governance” (2022), which called upon the FRC to strengthen the Code in certain areas. The Government’s paper was the long-awaited response to the Kingman review of the FRC (2018), the CMA's statutory audit market services study (2019) and the Brydon review of the quality and effectiveness of audit (2019), which were prompted following the high-profile collapse of Carillion in 2018.
The changes set out in the Consultation were widely expected to be adopted, largely wholesale, by the end of the year, until the Government announced on 16 October 2023 that it had withdrawn the draft Companies (Strategic Report and Directors’ Report) (Amendment) Regulations 2023, which would have imposed additional reporting obligations on large companies (Withdrawn Regulations), citing its ambition to reduce the burden of red tape.
Following feedback from stakeholders during the Consultation process, the Government’s focus on reducing red tape, as well as taking into account the FRC’s new objectives to support UK economic growth and competitiveness, the FRC has concluded that it will drop over half of the original 18 proposals set out in the Consultation.
Specifically:
- The FRC will take forward its proposed changes to internal controls, as well as other changes that streamline and reduce duplication associated with the Code.
- The rest of the proposals will be dropped, including those relating to the role of audit committees on ESG and modifications to existing provisions around diversity, over-boarding, and committee chairs engaging with shareholders.
- The FRC will not take forward proposals that sought to align the Code with the additional reporting requirements in the Withdrawn Regulations, such as the maintaining an audit and assurance policy and publishing a resilience statement.
The FRC intends to publish the updated Code in January 2024, which is expected to apply to premium listed companies with an accounting period starting on or after 1 January 2025.
New focus on supporting UK economic growth and competitiveness
The FRC also announced that it will extend its objectives to supporting UK economic growth and competitiveness, in addition to enhancing trust and confidence in governance.
Some stakeholders have raised concerns with the FRC about how its guidance issued under the Code can have unintended effects on businesses, investors and their advisers.
To tackle this, the FRC intends, from January 2024, to give an additional remit to its Stakeholder Insight Group (made up of investors, preparers, advisors and related membership bodies) to provide the FRC with advice on whether there are aspects of its current and planned guidance associated with the Code that could be improved to ensure the right balance is struck between supporting effective governance and reducing unnecessary burdens.
UK Stewardship Code to be reviewed in 2024
Finally, the FRC announced that once the updated Code is issued in January 2024, its next priority will be to engage with stakeholders on how best to review the UK Stewardship Code, including understanding how it works in practice and what changes may be required going forward to ensure it remains fit for purpose.
Social Media cookies collect information about you sharing information from our website via social media tools, or analytics to understand your browsing between social media tools or our Social Media campaigns and our own websites. We do this to optimise the mix of channels to provide you with our content. Details concerning the tools in use are in our privacy policy.