Getting things in proportion

We have a habit in the UK for taking a rule from the EU and then gold-plating it.

Tim Ward, Chief Executive, Quoted Companies Alliance
Tim Ward, Chief Executive, Quoted Companies Alliance

Investors like this as it reduces their risk but it adds to the burden of smaller companies, reduces their ability to perform and discourages companies from joining the public markets.

I can’t see this changing much after we leave the EU, but there is a glimmer of hope arising from our lobbying.

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At the end of last year, the independent review of the Financial Reporting Council (FRC) submitted its report to government.

The Review, led by Sir John Kingman, recommended that the FRC be replaced with a new independent statutory regulator, which would be called the Audit, Reporting and Governance Authority (ARGA).

The Review concluded that the FRC was no longer fit for purpose. Having not started its life as a regulatory body, its lack of powers and non-existent statutory base meant that it had no direct regulatory purchase on the largest audit firms, meaning that these firms were not regulated by an independent body.

As well as this, the FRC faced substantial scrutiny and criticism from two leading Select Committees that accused the Council of being too reserved.

The FRC’s role is one that can be characterised as having significant duty without any authority, something of which has considerably constrained its effectiveness. Thus, the Review concluded that the FRC’s weaknesses outweighed its strengths, leading them to recommend for the FRC to be replaced with a new body.

The new regulatory body, will seek to overcome the fundamental issues associated with the FRC. Its replacement, the Audit, Reporting and Governance Authority would have clearly defined statutory powers and objectives and should be accountable to Parliament, with the Chair and Chief Executive appearing in front of the Business, Energy and Industrial Strategy Select Committee on an annual basis.

The underlying responsibility of the regulator will be to promote the interests of the consumers of financial information.

Significantly, and as well as having a duty to promote innovation and competition, the new regulatory body will also have the responsibility to apply proportionality to all of its work. As such, the authority will have to take account of the size and resources of those being regulated and adjust its regulatory actions accordingly to ensure that the costs and benefits of regulation are balanced.

The creation of such a body, with proportionality at the centre of regulation, comes as a welcome announcement for the small and mid-sized companies that make up the majority of companies accessing public markets.

We argue that such an approach will help foster competition and stimulate the growth of smaller companies as well as the UK economy as a whole.

Therefore, a move towards proportionality will ensure that previously disproportionately affected smaller companies will now have their standards and regulatory requirements weighted to take into account their size and resources. A move which will help aid their

growth and development.

At the QCA, we regard this as a major step forward in terms of regulatory approach.

It does not mean that smaller companies should relax on their corporate governance and reporting, but in future companies should be better able to develop an approach which is conducive to creating sustainable long-term value for shareholders whilst ensuring that their investors are protected.

We will use this example to encourage other rule makers to have similar objectives.

Gold-plating may look attractive but sometimes it can be seriously overdone.