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White Paper Bulletin 6 - a strengthened regulator (Chapter 10 of the White Paper)

  • 24 May 2021 24 May 2021

In this sixth article in our series on the Government’s White Paper ‘Restoring trust in audit and corporate governance’, Clyde & Co Accountants’ Liability and Regulatory team examines the Government’s proposals to create a strengthened regulator, set out in Chapter 10 of the White Paper.

Our seventh article examines Chapters 9 and 11 of the White Paper which propose the tools to be given to the regulator to enable it to exercise its new strength.

Taken together, Chapters 9, 10 and 11 suggest a formidable consolidation of power in the new regulator, the Audit, Reporting and Governance Authority (“ARGA”) a significantly extended scope, underpinned by statute, to enable the regulator to: control entry to the UK statutory audit market; make public the results of its audit monitoring in individual cases (without the consent of audited entity or auditor); actively intervene in cases of serious concern before a public interest entity (“PIE”) reports; impose a skilled person review on PIEs; cement its oversight of the Chartered professional bodies; and take enforcement action against Chartered professional body members in relation to breaches in public interest cases regardless of whether those members are engaged by a PIE.

These proposals come condensed, almost hotch-potch, at the end of the White Paper. However, in tandem with the proposed introduction of a statutory enforcement regime for company directors, they indicate the remarkable depth and breadth of authority which it is proposed should be vested in the new regulator. Specifically, they emphasise that the regulator’s muscle is to be flexed in anticipation of crisis rather than predominantly in response.

A strengthened regulator – Chapter 10

ARGA’s mission is proposed to derive from clear statutory objectives and functions, bolstered by improved governance, strategic direction supplied by Government banded with accountability to Parliament, and funding from a statutory levy.

At its core is a proposed overriding General Objective “to protect and promote the interests of investors, other users of corporate reporting and the wider public interest” (paragraph 10.1.8). This, particularly by reference to unidentified “other users” and “the wider public interest”, together with the fact that corporate reporting will not be limited to financial reporting, creates a substantial territory for ARGA to range over when exercising its wider policy-making functions e.g. setting standards and issuing guidance. However, the Government says that ARGA’s statutory objectives will not be engaged when carrying out its other functions e.g. when carrying out its enforcement functions including in relation to competition (paragraph 10.1.29). It does not say why that is the case. We presume that at least in relation to enforcement, it is in order to enable the enforcement arm of the regulator to maintain sufficient independence in its investigation and enforcement activity.

The General Objective is supported by two operational objectives:(1) a Quality Objective “to promote high quality audit work, corporate reporting, corporate governance, accounting and actuarial work”, reflecting the breadth of the new regulator and (2) a Competition Objective “to promote effective competition in the market for statutory audit work”. These are to be supplemented by a number of Regulatory Principles, referred to below (paragraph 10.1.12). When making policy, ARGA will be required to advance either or both its Quality Objective and Competition Objective, according to its judgement, and only insofar as it is reasonably possible to do so (paragraph 10.1.13).

As horizon-scanning handmaidens in the policy-making process, Regulatory Principles are proposed to which ARGA should “have regard” (paragraph 10.1.21):

  • the promotion of innovation in statutory audit work, corporate reporting and corporate governance;
  • the promotion of brevity, clarity and usefulness in corporate reporting;
  • working closely with other regulators from the UK and internationally; and
  • anticipating emerging corporate governance, reporting or audit risks by being forward looking and acting proactively where possible.

These in turn will be supplemented by a requirement that ARGA should have regard to the general Regulatory Principles and Regulators’ Code when carrying out its functions, and it is stated that the following duties proposed by the FRC Review can be addressed in this way: a requirement for proportionate action, having regard to the size and resources of those being regulated and balancing the costs and benefits of regulatory action; and the prioritisation of activity on the basis of risk (paragraphs 10.1.22-24).

We are told that it is undesirable to prioritise competition over quality, and quality should receive equal prominence. Nevertheless, we are also told that audit quality is a “key” priority, and that competition will be sufficiently addressed by the competition enforcement powers set out in Chapter 8 of the White Paper, plus the sector-specific powers proposed in response to the CMA Review (paragraphs 10.1.18-20).

It is proposed that ARGA’s functions will be a combination of existing FRC functions, which it will take over, and new ones, to include (paragraph 10.1.26):

  • Setting and applying high corporate governance, reporting and audit standards.
  • Regulating and being responsible for the registration of a new audit profession.
  • Maintaining and promoting the UK Corporate Governance Code and the UK Stewardship Code, reporting annually on compliance with the Codes.
  • Maintaining wide and deep relationships with investors and other users of financial information.
  • Monitoring and reporting on developments in the audit market, including trends in audit pricing, the extent of any cross-subsidy from non-audit work and the implications for the quality of audit.
  • Appointing inspectors to investigate a company’s affairs where there are public interest concerns about any matters that falls within the Authority’s statutory competence.

ARGA’s functions will be provided for by legislation, in place of the current ad hoc arrangements, whereby the FRC’s functions derive from a mixture of legislation and voluntary arrangements.


The General and Operational Objectives and the Regulatory Principles will be provided for by legislation. Parallels can be drawn with the Financial Conduct Authority (“FCA”), as the Financial Services and Markets Act 2000 (“FSMA”) sets out its strategic objective (ensuring that the relevant markets function well), its operational objectives (consumer protection, integrity and competition), its general functions, and applicable regulatory principles to which it must have regard.

There is a similar caveat that the FCA must act “so far as is reasonably possible” in a way compatible with its strategic objectives and which advances one or more of its operational objectives. Similarly to what is proposed for ARGA, the FCA must act in this way when discharging its general functions, which relate to policy-making (making rules, preparing and issuing codes, giving guidance and determining the general policy and principles by reference to which it performs particular functions under FSMA). The FCA must discharge its general functions in a way which promotes competition, but only in so far as is compatible with acting in a way which advances the consumer protection objective or the integrity objective. A considerable amount of detail is given in the legislation in respect of the consumer protection, integrity and competition objectives. For instance, FSMA sets out eight matters to which the FCA must have regard when considering what degree of protection for consumers may be appropriate and five matters to which it may have regard when considering the effectiveness of competition in the market. There are also several interpretative provisions, defining the meaning of the terms used in respect of the objectives. Such provisions would plainly assist in relation to ARGA’s proposed objectives, for example to define “other users of corporate reporting” and “the wider public interest”.  

In our view, as it stands, each proposed ARGA Objective poses challenges of interpretation on its own terms, and arising from the need to interpret each against the other e.g. if there is an implication that audit quality may have primacy, and in any event, in what situation could or should a regulator sustain a position in any individual policy-making exercise that competition should outweigh quality? While, for example, exercise of the proposed power to introduce a market share cap (paragraph 8.3.24 of the White Paper) may well satisfy the Competition Objective over the Quality Objective, what recourse would any stakeholder have in due course against the regulator where in any given case it perceived that quality had taken a serious blow in the interests of competition? These questions appear to be left to the judgement of ARGA, with a tacit acknowledgement that in some cases neither objective may be advanced, either as a result of ARGA’s judgement or because it is not “reasonably possible”.

Presumably, the rule-making which is to bring the functions to life, subject to the Objectives and Regulatory Principles, is to be delegated to ARGA. That should reduce the possibility of political intervention, will be undertaken by subject-matter experts, and will be more cost-effective and speedy than legislation. It may also increase capacity for challenge by judicial review of the application by ARGA of its own rules. Currently, there is no visibility on what the rules, either their framework or details, will be.

Does this principled framework make for a stronger regulator? Mission statements, objectives and statutory footings certainly give an impression of purpose and a perception of muscularity – and that may be sufficient short-term and to a point. But it is, in fact, the rules themselves, still to be presented, and how they are operated, which will indicate the real strength. The setting of objectives, we suggest, is to re-orient audit regulation rather than strengthen audit oversight itself. Audit regulation is to become outward-looking and consumer-focused. Are investors, “other users” and the public now, and for the first time, being given a seat at the standard-setting table? And, if so, will that have any meaningful impact?

That is only likely to come about if ARGA engages in a sustained, mandatory programme of outreach; and investor and public participation is similarly mandatory: input from that source may increase trust in the regulator, and by extension the processes and people it oversees. To make outreach and participation mandatory would require both clear, defined routes of communication, which still permit of confidentiality in appropriate cases, and defined bodies e.g. formally constructed advisory groups. Consideration should be given to the following: elements of those groups’ meetings with ARGA should be open, to give the public insight into both the regulator’s guardianship of its interest, and the issues raised by investors; the groups should be constituted by subject-matter experts, lay-people (including PIE employees), and under-represented communities in the interests of diversity and equality; and membership should be on staggered year terms to enable development of an increased understanding of the regulatory and audit processes.

Additionally, there should be transparency over the operations and activities of ARGA. In this regard, the proposal that it should be subject to legislation intended to increase transparency and accountability, rather than merely volunteer for it (e.g. the Freedom of Information Act, the Regulators’ Code, and Public Sector Equality Duty) is a welcome start, but query, realistically, whether that offers form over substance. There is to be a drive for improved governance and accountability: a remit letter sent at least once during the lifetime of each Parliament to which ARGA must respond, through which Government will convey its wishes as to its policy aims without compromising ARGA’s operational and regulatory independence; and production of an annual report, to include reporting on its broader regulatory activities, including performance of its enforcement function and the time taken to conclude investigations, for Parliamentary scrutiny.

However, this offers little by way of direct accountability on the regulator’s part to those subject to regulation, particularly auditors, who may be more confident if there were a route by way of appeal against the regulator’s decisions to the Courts for independent assessment. By contrast, decisions of the FCA, the Prudential Regulation Authority and the Pensions Regulator can be referred to the Upper Tribunal (Tax and Chancery Chamber) and if permission is given, decisions of the Tribunal can then be appealed to the Court of Appeal and ultimately the Supreme Court. Solicitors also have the right to appeal a decision of their disciplinary tribunal to the High Court (s.49 of the Solicitors Act 1974).

We are trailed a leaner, meaner ARGA Board, its members having diverse and leadership skills to enable challenge of the executive; the Chair and CEO being subject to a formal appointment process and Parliamentary scrutiny; and having a new (and possibly more hawkish) role in oversight of the regulator’s enforcement activities. In this last context (paragraph 10.2.20), it is stated that past decisions not to investigate have been the result of limited powers available to the regulator at the time, and the Board should be able to examine potential enforcement cases. Although the White Paper is careful to assert that the envisaged arrangements shall be appropriately constituted such that investigations are undertaken in an independent and fair manner, there may be a risk that Board oversight takes on something of a more prosecutorial quality. Query whether such activity is also to be subject to the Objectives (which we are told will not be applicable to enforcement activity, but only policy-making).

While changes to the identity and remit of the Board are welcome, do those go far enough? Might they usefully be reinforced by greater transparency as to the Board’s operations e.g. disclosure of meetings with outside parties (agenda, attendees and minutes); publication of correspondence with investors, industry trade associations, audit firms and public companies (unless there is a good reason for confidentiality); publication of voting records of Board members to demonstrate any significant divisions and directions within the Board; and public meetings where the Board discusses matters evidently fundamental to the public interest. The Government is effectively granting this Board oversight of the regulation of the UK corporate board function and audit function in the public interest. Where is the balance best struck between efficiency and room for candid discussion on the one hand (and, specifically, confidentiality in relation to Conduct Committee deliberations, and consideration of AQR and enforcement activity) and the demonstration of best practice and regard for the public interest on the other?

Vital too is ARGA’s funding (Chapter 10.3). ARGA is to be funded on a basis which is to be:

  •  fair (funded by market participants);
  •  transparent (with information made publicly available on the costs and activities being funded by levy payers and the basis for the apportionment model); and
  • proportionate (with factors such as the size and type of body being levied taken into account).

The Government will take forward legislation to enable ARGA to raise a levy. The source is broadly categorised as “market participants, persons or bodies for which ARGA’s activities directly relate or which otherwise benefit from those activities”.

PIE audit firms will contribute to regulatory activities relating to auditors and audits. Recognised Supervisory Bodies (“RSBs”) will contribute on the basis that they will continue to be supervised by ARGA. Corporate reporting and governance will likely be primarily funded by PIEs. Other funding groups included in the arrangements should follow from the scope of ARGA’s activities and will not be limited to, or automatically include, those groups currently contributing to FRC funding.

 ARGA will determine its own budget and levy arrangements, being empowered to make the rules requiring that market participants provide the levy, identifying those participants and the amounts payable by them, subject to prior consultation. Its budget and proposed levy rates will be publicly consulted on and agreed with BEIS each year in advance. There is express reference to the need for ARGA to increase the levy in a year (with approval from the Secretary of State) to cater for a swell in expenditure depending upon investigation and enforcement activity (paragraph 10.3.10). There is currently little meat on these bones, and we are told design and methodology of the levy will be the subject of formal consultation by the FRC in due course.

The FRC’s current annual budget is £45.4m, which can be contrasted with the Annual Funding Requirement of the FCA, which is £587.6m for 2020/21. The Impact Assessment published alongside the White Paper estimates that if the Government’s preferred option is adopted for the new regulator (all the recommendations proposed by the Kingman Review other than those outside the scope of the assessment or related to PIE definition changes and the internal costs regime), the average annual cost would be £69.3m. The estimated present value business costs required to deliver the recommendations of the preferred option over ten years are:

  •  £113m arising from the required increase in levy;
  • £148m arising from the increase in the costs of functions that operate on a cost recovery basis, such as the AQR regime; and
  • a best estimate of £338m (with a high estimate of £506m and a low estimate of £169m) for the costs of complying with regulatory activity[1].

Transparency on funding - calculation, contribution and expenditure of the levy - is key to building trust in, and understanding of, both the regulator and regulated. If competition is the best way to promote economic prosperity through well-functioning markets, regulation is only appropriate to achieve a public interest objective if the market itself cannot achieve that, and even then only if regulation is proportionate in terms of cost balance. It is stated that the costs estimates in the Impact Assessment have been developed in consultation with the FRC, but that they are tentative and likely to change over time, as more policy work and responses to the consultation will help them to be refined. How, and by whom, in reality the costs balance is to be calculated and funded therefore remains to be seen.


Chapter 10 addresses the fundamental issues of ARGA’s constitution, objectives, governance and funding – but only in the broadest of terms. How Parliamentary Counsel will craft from those a body of legislation of sufficient precision and flexibility to launch and sustain an accountable regulator which intends to create its own rules and tools, remains to be seen.

In our seventh article we address Chapters 9 and 11 of the White Paper, which indicate the rules and tools proposed.

[1] The best estimate for the Equivalent Annualised Net Direct Costs to Business is £34m, with a high estimate of £51m and a low estimate of £17m.


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