The UK is to scrap the country’s governance, financial reporting and audit watchdog—the Financial Reporting Council (FRC)— and replace it with a brand new regulator.

The Kingman Report—written by Sir John Kingman—has recommended that the new body should be focused on the “interests of consumers of financial information, not producers” and should be “feared” by the people and organisations that it regulates.

The Kingman Report was commissioned by Greg Clark, the business secretary, following heavy criticism of the FRC and its work in relation to monitoring the work of KPMG—auditors of Carillion, the construction giant that collapsed at the end of last year—and the company’s financial reporting.

The FRC stood accused of moving too slowly, being too close to the organisations it regulates and being “too timid”.

Kingman recommends that the FRC be replaced with a new body called the Audit, Reporting and Governance Authority and be accountable to Parliament, like the National Audit Office which undertakes reviews of work in Whitehall departments.

Pre-approval hearing

Kingman wants the chair and chief executive of the new body to be subject to a pre-approval hearing run by MPs on the business select committee. The report also says the new regulator should not be funded on a voluntary basis but should be supported by a statutory levy.

Greg Clark confirmed that the government would act on Sir John’s recommendations.

“The government will take forward the recommendations set out in the Review to replace the FRC with a new independent statutory regulator with stronger powers,” he said.

“This body will build on our status as a great place to do business and form an essential part of the government’s continued efforts to grow trust and public confidence in business and the regulations that govern them.”

Kingman summed up the FRC as being under “the spotlight”.

“What this spotlight has revealed is an institution constructed in a different era—a rather ramshackle house, cobbled together with all sorts of extensions over time.

“The house is—just—serviceable, up to a point, but it leaks and creaks, sometimes badly.

“The inhabitants of the house have sought to patch and mend. But in the end, the house is built on weak foundations.”

The report added that since the financial crisis of 2008 the UK’s other main financial regulators have been substantially reshaped. It added: “In fact, the financial crisis as much reflected failings in accounting and financial reporting as anything else.

“Yet at the time of the crisis, the FRC went through nothing like the same radical soul-searching and reform as its fellow financial regulators.”

Praise

Kingman praised the FRC for being an “effective custodian” of the UK’s governance code, for having respect internationally and for some successful innovations.

But Kingman worries that the FRC’s structure effectively left the big four audit firms—KPMG, PwC, Deloitte and EY—regulated by their own trade association.

Kingman criticised the FRC’s governance for having a self-perpetuating board and highlighted the fact that it remained a “council” instead of an “authority” or “regulator”.

It called the FRC’s funding model of voluntary contributions “seriously inappropriate”. The report said: “It creates a clear danger of blunting the FRC’s incentive to bite the hand that feeds.”

The FRC’s powers were described as “deficient” and yet “the FRC has failed to make the case for change, or has failed to make its case persuasively.”

The report concludes: “All in all, the review considers that some of the FRC’s critics overstate their case.

“Nevertheless, the review does have sympathy with the view that the FRC has tended, overall, to take an excessively consensual approach to its work.

“The FRC’s approach to its own governance has also not been consistent with either its public importance, or its role in championing governance in the corporate world.”