Mazars response to the Department for Business & Trade call for evidence on smarter regulation and the regulatory landscape

The government’s vision for regulation consists of three core pillars, namely minimising the regulatory burden & future-proofing regulations, making regulation the last resort, not the first choice, and ensuring a well-functioning landscape of regulators.

The call for evidence seeks feedback to “understand what works well and what could be improved in how regulators operate to deliver for the sectors they serve”, particularly relating to regulatory agility, proportionality and consistency of approach.

Our response was two-fold, addressing the regulatory landscape and considering what makes an effective regulator with a particular focus on the FRC.

Regulatory Landscape

Regarding the regulatory landscape we:

• Supported the Government’s premise that regulation should focus on proportionate, future-proofed regulation
• Urged the government to consider the need to balance streamlining the regulatory landscape and mitigating the regulatory burden on business, with the need to ensure robust, but proportionate regulation in the public interest.
• Supported a coordinated review of the regulatory landscape, to cover all regulators reporting to all government departments.
• Urged the government to maintain regulatory alignment with international partners where this is in the interest of UK companies.
• Suggested that the government may wish to consider how to best address competition in the audit market, given the balance between the competitiveness of the economy, deregulation and the public interest, and where that responsibility should sit.

Paul Winrow, Public Policy and Regulation partner, said:

“The regulatory landscape is complex. However, in reviewing the current arrangements it is important that the government balances the urge to streamline the regulatory landscape and mitigate the regulatory burden to support competition and growth, with the need to ensure that robust regulation provides proper oversight and enables confidence in corporate governance in UK businesses.”

What makes an effective regulator?

Although the Regulators Code sets out the requirements of regulators, we identified additional characteristics of an effective regulatory approach including accountability, clarity of purpose, proportionality, appropriate use of enforcement powers and sharing best practices.

Applying these characteristics to the FRC, we recognise the strengths of the FRC and suggest the following areas for further action:

• The FRC needs a stable legislative framework and we highlighted our disappointment with the continuing delays in audit and corporate governance reform. The establishment of ARGA with its full range of powers to effectively regulate all parties in the corporate reporting ecosystem, as well as to address competition and choice, is important.
• This legislative framework should also enable the regulator to be held accountable by the Government in the achievement of its objectives and improvement in the entities it regulates. It should also make clear the purpose of the regulator, whether it is to protect the market or individual shareholders, or both.
• It is important that the FRC (ARGA) is held accountable for effectively managing its range of powers covering competition, choice and market resilience, regulation, enforcement, and market supervision which need to be carefully balanced if the optimum outcomes are to be achieved. With the wider range of powers comes a responsibility to ensure transparent and independent appeal mechanisms are in place.
• The FRC should enhance its focus on improvement and ex-ante regulation, providing more guidance, advice and sharing best practice up front, as well as being open to consultation and discussion in advance of issues arising, rather than focussing on identifying where things have gone wrong after the fact.
• The auditing standard-setting process in the UK should be more transparent and there should be a greater focus on the proportionality of requirements to SME audits.
• The FRC’s Corporate Reporting Review is held in high regard, although it can sometimes lead to “gold-plating” of requirements and lack proportionality for smaller listed entities. Post-implementation reviews may be helpful in ensuring the appropriateness and proportionality of recommended actions.
• Enforcement powers must be applied consistently, fairly and in a proportionate manner. The bar for enforcement action against auditors appears to be much lower than that for other professions and it is not clear that enforcement is always proportionate to the public interest associated with the matters being investigated. The FRC should demonstrate more transparency in its decision-making as to why matters proceed to enforcement. Furthermore, the regulator should have enforcement powers over all parties that can influence their relevant activities, including all company directors.

David Herbinet, Head of audit, said:

“The lack of progress with audit reform, including the establishment of ARGA, is disappointing and frustrating in equal measure. It is important that the new regulator is established to ensure that it has the full range of powers it needs to effectively regulate all parties and to begin to address competition and choice. This will also enable the Government to hold the FRC accountable for the delivery of its wide range of responsibilities, which need to be carefully balanced.”