The FRC's latest consultation, focussing on internal control, assurance and resilience, represents the latest indication of their intended direction of travel with regards the UK Corporate Governance Code, a benchmark (that sits alongside regulatory requirements) frequently used to assess the adequacy of governance frameworks in Financial Services firms.

The strengthening of the Code by the FRC, in alignment with its supervisory regulatory priorities - . corporate reporting, climate risk and ESG, risk management, resilience - confirms the importance that the regulator has placed on companies maintaining an effective governance and controls framework. As a result, Board members and senior management will need to have increased focus on managing risk and developing resilience, including threats to business continuity, supply chain and cyber security. We expect that there will also be implications for firms and Boards that do not provide greater transparency to investors within annual reports and other disclosures.

The FRC is looking to apply the revised Code to accounting periods commencing on or after 1st January 2025.

Late last summer, BDO published an articlehighlighting the Financial Reporting Council's ("FRC") position paper outlining the next steps towards strengthening corporate governance in the UK. In May, the FRC has published its latest consultation document, "UK Corporate Governance Code: Consultation document" , focussing specifically on proposed governance and legislative government reforms, as well as the FRC's transition into the Audit, Reporting and Governance Authority ("ARGA").

The proposed changes focus on the need for firms to have in place robust risk management and internal control frameworks, as well as the need to be able to report, and demonstrate, the effectiveness of these frameworks. In addition, in common with broader developments within the financial services regulatory landscape, the revisions reflect wider board and audit committee responsibilities over ESG reporting and assurance. The Consultation also highlights the preparation of new draft legislation, requiring firms with high employee turnover rates to produce Resilience Statements.

Importantly, following the FRC's Review of Corporate Governance Reporting, the Council has proposed the addition of a new Principle to the Code, emphasising the role of reporting in demonstrating the outcomes of firms' governance activities.

Whilst a number of key changes are being proposed, the FRC are seeking to maintain the clarity and structure of the existing Code. Below, we have summarised the key changes to each of the five core areas of the Code, highlighting pertinent areas for firms to consider as they continue to review their governance arrangements. The most significant proposed areas of change apply to Section 4 (Audit, Risk and Internal Control).

1. Board Leadership and Company Purpose

Most significantly within this section, the FRC has proposed introducing a further principle, setting out the expectation that companies should, when reporting on governance activity, focus on activities and outcomes to be able to demonstrate the impact of governance practices. A number of other changes within this section are also expected to follow, including those to ensure consistency with amendments made elsewhere within the Code.

2. Division of Responsibilities

The FRC has highlighted increasing investor concerns around the number of board positions held by directors of UK-listed companies, with the existing provision covering this being Principle H (specifying non-executives should have sufficient time to meet their responsibilities). Rather than introduce a cap on the number of board appointments that may be held by directors, the FRC is now making two proposals in this area:

  1. Specifying (within current Principle L) that the annual board performance review should consider each director's commitments to other organisations, including how directors are able to make sufficient time available to carry out their role effectively; and
  2. Specifying (within Provision 15) that annual reports should include more information on directors' other commitments and how they manage these.

3. Composition, Succession and Evaluation

Within Section 3, the FRC is looking to strengthen the Code, in particular in support of the FCA's April 2022 Policy Statementon diversity and inclusion. As such, the following amendments are being proposed:

  • Including a reference to inclusion, and giving equal weight to all protected and non-protected characteristics, within current Principle J;
  • Reflecting FCA targets without introducing additional, duplicative targets or regulations; and
  • Clarifying company approaches to succession planning and senior appointments within Provision 23, including the reporting of these arrangements.

In addition, the FRC are looking to implement a number of recommendations made by the Chartered Governance Institute ("CGI") within their 2021 review, including adopting the term 'board performance review' instead of 'board evaluation', and updating the guidance around reporting on Provisions 21 and 23 of the existing Code. The FRC are also looking to clarify the duty of Chairpersons to commission (as opposed to consider) board performance evaluations.

4. Audit, Risk and Internal Control.

The most substantial proposed changes to the Code are likely to feature within Section 4 on Audit Risk and Internal Control. In particular:

  • Aligned with Government plans, the FRC is proposing Code companies develop Audit and Assurance Policies, to be led by firms' audit committees;
  • Referring firms to the FRC's Minimum Standard for Audit Committees in relation to external audit;
  • Reflecting wider responsibilities of boards and audit committees for sustainability and ESG reporting, including the responsibility of audit committees for describing their work in this area, within firms' annual reports;
  • Enhancing boards' responsibilities for reporting to shareholders on their work to maintain effective risk management frameworks;
  • Including a new provision asking boards to declare whether they can reasonably conclude risk management and internal controls have been effective; and
  • Asking boards to explain in their annual reporting how it has assessed their firm's future prospects (e.g., via a Resilience Statement).

5. Remuneration

In recent years, remuneration has remained a key regulatory focus for financial services firms, with the FRC proposing a number of amendments to the Code to strengthen the requirements of firms in this regard. Here, key changes include:

  • Strengthening the links between companies' remuneration policies and broader corporate performance;
  • Emphasising the importance of transparency and the linkages with long-term sustainable success;
  • Considering wider workforce pay and conditions when determining executive pay;
  • Including details of malus and clawback provisions within remuneration reports; and
  • Probing as to how firms' executive remuneration structures support company strategy and ESG objectives.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.