21 June 2013

FRC statement following publication of the Parliamentary Commission on Banking Standards' Final Report

Effective boards

The FRC agrees with the Commission that an effective board is crucial to the sustained success of any company. An important component of an effective board is informed, constructive challenge from the non-executive directors and so the FRC supports the Commission’s call for non-executive directors to make good use of their rights under the UK Corporate Governance Code to obtain information and professional advice both internally and externally.

Relationship between investors and financial companies

The report raises important issues and puts forward significant proposals which may change the current relationship between investors and banks. The FRC’s mission is to promote good governance and financial reporting to foster investment. The equity markets play a most important role in our economy. When credit is short as in 2008/9 that role can be vital. An amendment to the Companies Act to remove shareholder primacy could have a profound bearing on investors willingness to commit capital and might set precedents for other sectors. It should only be undertaken after detailed and rigorous consultation so that the FRC can assess and understand the impact this might have on the operation of the UK equity markets. It should be remembered that the concept of enlightened shareholder value which is enshrined in the Act was introduced on the basis of a consensus reached after wide public debate. Any changes to the Act should be equally well thought through.

Markets should be regulated in a way that means people can trust their integrity, but the FRC must bear in mind the continued need for markets to intermediate between savers and businesses which need long term capital to invest, grow, provide jobs and generate wealth for future generations. Regulation needs to ensure this happens without stifling the entrepreneurial side by limiting available capital and making what there is more expensive than it should be.

The general view is that equity capital will be in short supply in the coming decades. The UK and Europe will be at a competitive disadvantage if its regulatory arrangements are too heavily swayed toward safety at the expense of capital attraction. The FRC is not convinced that disenfranchising shareholders is the right solution. If shareholder primacy is removed it may affect the ability of banks to attract future capital.

The report suggests that it would be a mistake to expect greater empowerment and engagement of shareholders to lead to the exercise of profound and positive influence on the governance of banks. The FRC introduced the Stewardship Code in July 2010 and the evidence to date shows that stewardship has led to improvements in the quality and level of engagement. The FRC is working with the investment community to ensure that this trend continues.

Reporting requirements

The Commission recommends the development of a separate set of regulatory accounts which would be externally audited. The FRC expects to liaise with the PRA and FCA as they develop their view of the regulatory needs of a second set of accounts. The FRC would expect to be involved in setting and implementing standards and guidance as these audit requirements evolve. Greater clarity is needed in relation to the suggested commentary in auditors’ reports on remuneration.

The Commission also recommends an early decision on the expected-loss model for valuation of debt assets for the banking sector. BIS and the FRC have consistently urged Europe to adopt IFRS 9 improvements as they become available.

The FRC notes the Commission’s comments about IFRS. The FRC is participating actively in the EU review of IFRS led by Philippe Maystadt.

Auditors’ reports

The Commission recommends inclusion of specific commentary on matters of valuation, risk and remuneration in auditors’ reports on banks’ accounts. The FRC is working closely with the IAASB as it develops proposals in relation to additional auditor reporting. The FRC has though already issued revised Guidance for audit committees of certain companies which apply the UK Corporate Governance Code, including banks that require audit committee reporting about significant matters raised by the auditors. The FRC has also issued revised UK and Ireland auditing standards for auditors of such companies that require the auditor to include in the audit report their views about important financial statement risks (for example in areas of key judgments made by the directors.

Press release

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