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Audit and Corporate Governance Reforms

Volume 691: debated on Thursday 18 March 2021

Today the Government are publishing their ambitious plans to strengthen the UK’s audit, company reporting and corporate governance framework, “Restoring trust in audit and corporate governance”, which I will lay in the House. These proposals will ensure the UK’s markets are at the cutting edge of global best practice.

British business is built on trust, so it is vital that our leading companies can command the confidence of the financial markets, investment community and wider public as the UK recovers from the effects of covid-19. Our comprehensive package of reforms will strengthen reporting, audit and governance in the UK’s largest companies. The proposals will help cement the UK’s position as a world-leading destination for investment by helping to ensure that our leading companies are governed responsibly and that investors, creditors, workers and others have access to the information they need.

Our proposals respond to the independent reviews led by Sir John Kingman, Sir Donald Brydon and the Competition and Markets Authority, and I would like to thank each of them for their valuable contributions. Today’s publication sets out a balanced and wide-ranging package of reforms which will lay the foundations for British companies to build back stronger as the UK recovers from the effects of covid-19 and in the wake of recent corporate failures. Restoring business confidence, but also people’s confidence in business, is crucial to repairing our economy and building back better from the pandemic.

In particular, the Government’s proposals include:

supporting directors of large companies in planning for long-term success through annual resilience statements: setting out how they are mitigating short and long-term risks, for the benefit not only of shareholders but also of local communities, suppliers, customers and the wider UK economy;

making directors of the country’s biggest companies more accountable when they breach their duties, with the prospect of fines or bans only when there are serious failings, such as misleading accounts or hiding information from auditors. This measure is targeted at the very largest companies in the UK, not start-ups and small businesses, and would not affect the vast majority of directors. Instead, it reflects the level of responsibility that comes with a board position in the largest companies;

addressing “rewards for failure” through mechanisms to claw bonuses back following misconduct or management failures;

measures to unleash competition and strengthen governance in the audit market, overseen by a new regulator, to increase choice and drive up resilience;

recognising the economic importance of the largest privately-owned companies by ensuring they meet the highest governance and reporting standards;

making company reporting more transparent and informative: so that they pay out dividends only when they have sufficient reserves, and enabling companies to have a wider range of metrics audited, for example climate disclosures.

These proposals will all be backed by the creation of a strong and independent statutory authority for audit, corporate reporting and governance. Replacing the Financial Reporting Council, the new regulator will be given much stronger powers to enforce standards. We also propose that it will have the power to impose an operational split between the audit and non-audit functions of accountancy firms, to reduce the risk of any conflicts of interest that may affect the standard of audit they provide.

The UK is consistently placed as one of the leading destinations for foreign investment in Europe and around the world. These reforms will sustain and build on the UK’s position, and reinforce the Government’s wider work to ensure the UK remains a world-class destination for investment.

The reforms cover the whole of the UK since, although company law is devolved in Northern Ireland, to date the Northern Ireland Executive has preferred to align with Great Britain in this area. The Government will also continue to work closely with the devolved Administrations in Wales and Scotland in developing the final provisions.

In light of the challenging circumstances for companies, the Government’s consultation period will run for 16 weeks. The Government then intend to bring forward legislation when parliamentary time allows. We will implement reforms in a proportionate way that does not prove burdensome to business, for example considering a limited exemption for newly listed firms from the new requirements.

I will place a copy of the three supplementary publications, including an impact assessment of the proposed measures, in the Libraries of both Houses.