Audit watchdog set to shake-up stewardship code to focus on ‘growth’

The audit watchdog is set to shake up the so-called stewardship code governing the UK’s top investors as pressure mounts on regulators to strip back red tape and support “growth and the UK’s competitiveness”.

In a statement this morning, the Financial Reporting Council said it was “undertaking a fundamental review” of the code last updated in 2020, in the latest sign of efforts to rein in the reporting and regulatory burden on companies operating in the UK.

The code is part of company law in the UK and requires top investors to monitor areas like corporate governance and environmental, social and governance [ESG] standards within their investments.

While it has previously focused on promoting accountability, the government has been piling pressure on the Financial Reporting Council to strip back red tape from the market and ensure its rules are promoting growth.

Business secretary Kemi Badenoch told the watchdog to consider the UK’s competitiveness in all of its work last year, and the government shelved the watchdog’s plans for a wholesale shake-up of audit reform which would have increased the rules burden on firms.

In a statement this morning, the FRC said it was the “opportune moment” to ensure that the code was “still driving the right stewardship outcomes for investors while not unduly contributing to reporting burdens”. 

Under the scope of the new shake-up, the FRC said it would look to ensure the code “supports long term value creation” and “drives issuers’ prospects and performance”, as well as it has not led to short-termism in targets for companies, the FRC added.

The FRC is now speaking with firms about the potential changes before a full consultation over the summer, with updated rules expected from around 2025.

The review signals the FRC is falling in line with ministers’ desire for a more slimmed down rulebook after a number of pain points over the past year.

Then City minister Andrew Griffith cheered last year when the FRC dropped its sweeping changes to audit reform, saying the lighter tweaks were a more “pragmatic and proportionate” approach.

“The UK’s rightly enjoys a strong reputation for high governance standards but it’s important that we don’t burden our best and brightest companies to the extent that it’s not a level playing field versus our international competitors,” he said.

The future of the FRC itself is now uncertain. Plans had been made for it to be rolled into a new audit watchdog, ARGA, to be based in Birmingham.

However that requires parliamentary approval, and there is no sign of that emerging this side of the next election.