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11

Regulation: FRC - fit for purpose

Open-access content Thursday 15th December 2011 — updated 12.21pm, Tuesday 16th June 2020

Jim Sutcliffe explains the Financial Reporting Council’s proposals for reform and considers their implications for the actuarial profession

2


The government and the Financial Reporting Council (FRC) have recently announced a consultation on proposals to reform and restructure the FRC, which we believe will build on the successful implementation of the regulatory agenda set for us and the actuarial profession by the Morris Review in 2005.
 

Our proposals aim to produce a streamlined, unified FRC that can carry out its role more effectively. We are not proposing any change in the scope of actuarial standards or our regulatory oversight and disciplinary responsibilities for actuaries.

However, we believe that the changes to our structure will equip us to be even more joined-up, effective and accountable, as actuarial work and its regulation become increasingly international and multidisciplinary.

Our proposals aim to produce a streamlined, unified FRC that can carry out its role more effectively. We are not proposing any change in the scope of actuarial standards or our regulatory oversight and disciplinary responsibilities for actuaries.

However, we believe that the changes to our structure will equip us to be even more joined-up, effective and accountable, as actuarial work and its regulation become increasingly international and multidisciplinary.

The FRC is the UK's independent regulator responsible for promoting high-quality corporate governance and reporting to foster investment. We promote high standards of corporate governance through the UK Corporate Governance Code. We set standards for corporate reporting and actuarial practice, and monitor and enforce accounting and auditing standards. We also oversee the regulatory activities of the professional accountancy and actuarial bodies and operate independent disciplinary arrangements for public interest cases involving accountants and actuaries.

—

The FRC's functions are currently undertaken by seven operating bodies, including three bodies — the Board for Actuarial Standards (BAS), the Professional Oversight Board (POB) and the Accountancy and Actuarial Discipline Board (AADB) — which, since 2006, have built on the FRC's broader experience and expertise in other aspects of corporate governance and reporting, to:

  • • Develop seven principles-based technical actuarial standards (TASs) for actuarial work, together with a conceptual framework and other supporting materials for practitioners and users
     
  • •Monitor and provide input to the way the Actuarial Profession regulates its members acting in a professional capacity
     
  • •Work with the Profession and other regulators to review the way actuarial work is monitored and scrutinised, and make wide-ranging recommendations to the Profession regarding the way it ensures the competence and professionalism of practising actuaries and the extent to which it can place greater reliance on the quality controls at actuarial firms
     
  • •Establish an independent scheme for investigating public interest cases involving members of the Profession
     
  • Develop the Actuarial Quality Framework to support communications with the Profession and others about the main factors which promote high-quality actuarial work.


The case for reform

An effective, world-class regulatory framework for corporate governance and reporting is essential to support continued investment in the UK for economic growth. Through its work the FRC makes a significant contribution to the UK's overall regulatory framework which promotes corporate accountability and transparency, encourages responsible business behaviour and so provides the markets with confidence.

The FRC is well regarded in the UK, the EU and internationally, but we believe that by tightening the focus of its activities and reforming its structural framework it could be even more effective, increasing still further the contribution it makes to supporting the UK's business interests and at lower cost. In particular, we believe that:

  • •The FRC is currently structured in a way that is over-complex and insufficiently understood, with a risk that, in aggregate, regulation by its seven different bodies may be overly burdensome
     
  • The statutory framework for the FRC's role in regulating corporate reporting and audit work undermines its effectiveness and independence from the accountancy professional bodies (and many of the detailed proposals in the consultation document seek to address this)
     
  • The aim of the reforms is to consider how best to focus the FRC's activities where we can make a difference, create a simpler structure that is more easily understood by our stakeholders, reinforce our independence from those we regulate, and ensure we have the powers we need to respond proportionately and effectively.


New structure

To make the FRC more streamlined and efficient, we are proposing that:

  • •All the FRC's primary functions should be the responsibility of the FRC Board, and not its individual operating bodies as at present, so as to enable the FRC to take decisions at the right level within a streamlined structure
     
  • The FRC Board should retain responsibility for issuing standards (including the TASs) and should be supported by the FRC Executive team and two Board Committees — one to focus on codes and standards, the other on conduct (including discipline and oversight of the actuarial profession) — which will replace the existing seven operating bodies including the BAS, the POB and the AADB
     
  • The Committees will in turn be supported by advisory councils and panels as necessary — including a high-profile expert advisory council to advise on actuarial standards, policy statements, international developments, research and thought leadership (in effect the BAS, although the name has not yet been agreed and it will no longer be the final decision-maker), which will be chaired by a member of the Codes and Standards Committee and report to it.


What does this mean for actuaries?

As I indicated at the beginning, the proposals are not about changing the scope of our activities in relation to actuaries and actuarial work, and we will continue to maintain a strong actuarial team to ensure that the TASs are fit for purpose, to provide input to international initiatives, and to monitor the way the Profession regulates its members. Our disciplinary and supervisory functions will continue to be operated and overseen separately from standard-setting.

However, the proposals will ensure that actuarial matters are considered directly by the FRC Board and its committees, alongside other aspects of corporate governance and reporting such as the role of risk management in corporate governance, and the role of audit in insurance and pensions. This will mean we get broader input into actuarial matters. It will make it easier for us to demonstrate that our regulation of actuaries and actuarial work is relevant, proportionate and consistent with the way other professions are regulated. The proposals will also give us greater coherence and clout when talking to other regulators and internationally.

To ensure we retain our focus on actuarial work, the FRC Board and its Committees will include representatives with actuarial expertise. Meanwhile the BAS — which we envisage will continue with roughly equal numbers of actuaries and non-actuaries — will continue to assist the Executive in developing proposals relevant to actuaries and their work, and challenge the Executive when necessary.
It will have the right to make its views known to the Board directly should it feel that the Executive is not responding adequately to the needs of users and the market for actuarial services.

Although not specifically covered in the consultation, we intend to maintain and renew our regular roundtable meetings — currently constituted as the FRC's Actuarial User Committee — with representatives from key interested user groups such as insurers, pension funds, employers, trade unions, consumer groups, financial advisers and lawyers, to ensure we maintain a user focus to our work.

In summary, the changes are designed to provide a more effective, consistent, accountable and understandable regulatory system for accountants, actuaries and auditors, and to allow us to operate more effectively in an increasingly global financial environment.
 

What do you think?

The consultation closes on 10 January 2012. Please take a look at our proposals and respond to our questions, either directly or via your firm or the Actuarial Profession. If you have any questions please do not hesitate to ask David Andrews [email protected] or Paul Kennedy [email protected]

Specific questions for which answers are sought: 

Q1: Do you agree that streamlining the FRC's governance and structure will help ensure that:

a) FRC regulation of actuaries and actuarial work is proportionate and properly targeted? 

b) The FRC can work effectively with other UK regulatory authorities such as the FSA and the Pensions Regulator? 

c) The FRC is better able to influence European and international developments? 

d) The FRC is able to maintain its independence from the actuarial profession? 
 

Q2: Do you have any other comments on the proposed reforms?

 

This article appeared in our November 2011 issue of The Actuary.
Click here to view this issue
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Topics
Regulation Standards

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