The FRC sets out principles for ARGA's public interest test
The Financial Reporting Council (the "FRC") has published the set of principles that its replacement regulator the Audit, Reporting and Governing Authority ("ARGA") will use when assessing whether it is in the public interest for it to take regulatory action. This 'public interest test' will help ARGA shape its regulatory perimeter, impacting the types of regulatory action taken by the regulator, including supervisory engagement and enforcement actions. Public interest considerations are not new to the FRC’s decision-making, so query whether this reformulation will lead to a significant change in approach.
Following the White paper on Restoring Trust in Audit and Corporate Governance, the UK government committed to widen the definition of public interest entities ("PIEs") beyond listed companies, credit institutions and insurance undertakings (as currently defined) to capture large private companies with 750 or more global employees and an annual turnover of at least £750m. The FRC has stated that it expects that the scope of the majority of ARGA's work will be focussed on PIEs but that there will be circumstances where ARGA will be expected to take regulatory action outside its primary regulatory focus where it is in the public interest.
The public interest principles that ARGA will take into account are available here and consist of three high-level questions that the regulator will ask itself when determining whether taking action is in the public interest. The questions broadly require the regulator to consider: (i) whether the action is needed to 'maintain justifiable public confidence', (ii) whether the nature of the matter gives rise to 'serious public concern' and (iii) the proportionality of taking action. The questions are non-exhaustive and need to be assessed together. When applying the public interest test, the regulator will also have regard to other factors, such as the principle of good regulation contained in the Regulator's Code.
The principles are relevant to all regulatory, supervisory or enforcement work that does not clearly fit within ARGA's primary regulatory focus. Whilst the principles are not intended to be applied to other public interest decisions, the FRC has stated that they may also be used as starting point when considering the public interest in the normal course of business.
The FRC has committed to producing annual reporting on how its primary regulatory scope applies to each of its functions and highlight where it has taken decisions that go beyond it.
For further information, see the FRC's press release, available here. Further information on the UK government's plans for audit and corporate governance reform is available here.