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Corporate world angry over plans to create a new super-watchdog

Companies argue there is enough regulation as it is without the Financial Reporting Council being given extra powers. Richard Northedge reports

Sunday 24 October 2010 00:00 BST
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An attempt by the Business Secretary, Vince Cable, to create a new corporate super-watchdog is being opposed by investors, the City, the London Stock Exchange and Britain's companies.

They see his plan to boost the relatively unknown Financial Reporting Council (FRC) as a power struggle to build a new regulatory regime independent of the Treasury.

Edward Davey, the Liberal Democrat Trade minister, admits the planned expansion of the FRC is intended to establish a strong corporate monitoring body. "Creating a new companies regulator – perhaps better described as a corporate governance and listing authority – could provide advantages in bringing together in one place those people considering different aspects of corporate governance," he says.

But the plan to expand the FRC by giving it the UK Listing Authority – currently part of the Financial Services Authority – has provoked almost unanimous opposition by companies and investors. The heads of the stock exchange, CBI, National Association of Pension Funds and major City institutions wrote separate letters to ministers last week asking them to rethink the move.

The FRC has grown rapidly since it was set up after a 1988 report by a former Post Office chairman, Sir Ron Dearing, who recommended an agency independent of the accountants' professional bodies to set financial standards. It has added many new powers; the Financial Reporting Review Panel, which monitors companies accounts to ensure they comply with accounting standards and the law, plus bodies that set standards for auditors and actuaries. It now incorporates the Professional Oversight Board, which regulates those three professions, plus the Audit Inspection Unit and the boards that discipline actuaries and accountants. It has also taken over the unit that produces the corporate governance code for companies and their directors and the new stewardship code for investors which went into effect last week.

Cable joined FRC leaders at the Grange Hotel on Coopers Row in the City to celebrate the launch, saying it is central to rebuilding trust in the corporate sector. Davey added: "You may not have realised it, but the stewardship code published by the Financial Reporting Council is, in my view, an indication of how investors can play their role in the Prime Minister's Big Society."

But big business questions why a new corporate watchdog is needed, believing they were victims of the banking crisis rather than a cause. And they oppose moving UKLA, the body that monitors Britain's 22,000 quoted shares and bonds.

Andy Banks, Legal & General's head of corporate governance, says: "FRC is a good regulator, but there should be limits to what it can do and moving the listing authority there is a step too far."

Giles Varley, a former chief executive of the London Stock Exchange who now runs the Plus stock market for smaller companies, also opposes a third regulatory force. "It's pretty unacceptable," he says. "The need for a corporate regulator is less than people think. Companies think they have enough regulatory bodies poking at them."

The FSA's other roles are being divided between the Bank of England and a new Consumer Protection and Markets Authority – both of which will report to the Treasury. That follows the "twin peaks" regulatory approach used in some foreign countries, but Lisa Condron, the company secretary of the London Stock Exchange says: "This is adding a third peak to the twin-peak model."

All quoted companies, Britain's largest private firms and professional bodies already pay a levy to finance the FRC's £20m annual budget. But many firms doubt it has the ability or capacity to take on new work such as monitoring prospectuses before flotations. Condron says: "We've nothing against the FRC. They do a good job post-event monitoring accounts but UKLA is a real-time live markets regulator".

This year, the FRC has been beefed up by making Baroness Hogg its chairman. As Sarah Hogg, she headed prime minister John Major's policy unit and is now a company director. The head of the Association of British Insurers, Stephen Haddrill, has been recruited as her chief executive with Peter Montagnon following him from the ABI to become chief investment officer.

The FRC's expansion is being seen as an attempt by the Department of Business to wrest regulation from the Treasury. Although the FRC boasts of its independence, it reports to the Business Secretary, who appoints the chairman and her deputy. In July, Hogg signed a 39-point memorandum of understanding detailing its relationship with Cable's department.

The FRC's objective is to promote high-quality governance and reporting, but an Ipsos Mori poll this year showed that confidence in companies' reporting and their governance is lower now than it was two years ago. There was a decrease among directors, investor and auditors. The director general of the Institute of Directors, Miles Templeman, also wrote to ministers last week. He says: "Until there is greater clarity in the overall financial regulatory structure, we do not advocate any changes to the position of the FRC in the regulatory system."

The London Stock Exchange's chief executive, Xavier Rolet, warned ministers that it threatens the City's competitive position against other financial capitals. Jamie Matheson, the chairman of stockbrokers Brewin Dolphin, says: "Disbanding or merging UKLA with another organisation that is not specialist poses a threat to the very thing which is intended: it will lose access to proper capital for companies."

Stephen Haddrill argues, however, that there are considerable synergies between the FRC and UKLA. "We understand that there are arguments on both sides of the narrow debate about whether the UKLA and FRC should be combined," he says. "But we believe this is part of a bigger issue."

There are questions about the FRC's transparency and capabilities too. Condron worries that the organisation is excluded from the new European Securities and Markets Authority starting in January. "London will have no voice, but there's so much legislation coming out of Europe," she says.

The FRC has been criticised before. This year's revised corporate governance code was condemned by Sainsbury's chairman, David Tyler, as a "charter of mischief making" for forcing companies to require re-election of every director every year. British Airways warned that changing from a revolving rota of re-elections would allow disgruntled workers to disrupt shareholder meetings.

Companies are concerned at the duplication and inefficiency of dealing with a third major regulator. Between 1,500 and 2,000 financial firms will be supervised by the bank's Prudential Regulation Authority but must also answer to the Consumer Protection and Markets Authority and would also have to report to the FRC under ministers' plans. A company issuing shares in a flotation would be supervised by the FRC but its associated share stabilisation programme would be monitored by CPMA.

The FRC defends its wide remit, explaining: "We believe that there are strong connections between the issues of corporate governance, auditing, actuarial practice, corporate reporting and the professionalism of accountants and actuaries. We believe that the breadth of our responsibilities will enhance our effectiveness."

At the Department of Business, Davey says opposing views will be considered before UKLA is transferred to the FRC. But he states: "Rules about listing and rules concerned with corporate governance, audit and accounting are all concerned with issuers of capital. The new regulator – if established in this way – would build on the FRC and UKLA's track record of effective engagement with issuers, investors and their advisers."

Haddrill says: "Given the strategic importance of the capital market to the UK's competitive strength, it is important that our regulatory structure responds to this new European reality. The real question, therefore, is whether the UK should be thinking of creating its own securities regulator focused on the wholesale markets and aligned with the European Securities and Markets Authority, including the FRC and UKLA, instead of putting consumer protection in with market regulation. It is widely recognised that combining consumer protection with prudential supervision in the FSA created a lack of focus – something which should be avoided in future."

Influential Tory economist who, as head of the FRC, is now a controversial regulator

Sarah Hogg, 64, grew up immersed in Conservative politics. Her father was Lord Boyd-Carpenter, a Tory Treasury minister, and she married Douglas Hogg, an MP until this year, who gained fame for claiming the expense of cleaning his moat. Her husband was Agriculture minister in John Major's cabinet while she headed the Downing Street policy unit.

She became Viscountess Hailsham when her father-in-law, the Tory Lord Chancellor, Quintin Hogg, died in 2001 but had already been made a baroness in her own right in 1995, bringing her into the House of Lords.

The Independent's former economics editor and Channel 4 News presenter now chairs the Frontier Economics consultancy besides heading the FRC and sitting on the BG gas group board. Lady Hogg has also been a BBC governor, chairman of investment group 3i, and a director of P&O, Carnival and GKN.

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