How the accounting watchdog is looking to unleash the City

As Richard Moriarty gripped the sides of a podium and spoke freely from a sheet of bullet points at the London Stock Exchange in September, a warmth was stirring among certain City executives in the room.

The tie-less career regulator, boss of the audit watchdog, the Financial Reporting Council, laid out his plans to shake up the codes governing investor and companies’ behaviour, eulogised a “shared goal” of boosting growth in the Square Mile and pledged to work in partnership with the firms in his remit.

“It is important to acknowledge the importance of well-informed risk taking and its relationship to growth,” he told the conference, an annual get together hosted by a crack squad of City grandees, the Capital Markets Industry Taskforce.

It is rhetoric that has won Moriarty admirers in unlikely places since he took over the FRC from Sir Jon Thompson in October last year. 

After his predecessor launched a government-sanctioned crackdown on slack audits following a string of corporate collapses, Moriarty found himself at the centre of a row as the City and Westminster sounded the alarm over mounting red tape. 

Just weeks after taking over, he shelved a host of reforms that would have increased reporting requirements for London-listed companies and pledged to steer the regulator toward “supporting growth and the UK’s competitiveness”.

Then-City minister Andrew Griffith praised the changes as a more “pragmatic and proportionate” approach.

“I don’t think people understand the scale of what he’s proposing,” one FTSE 100 chief told me after his recent conference speech.

Moriarty’s role has been to push his regulator back into favour after a period of simmering hostility with the City. His casual delivery and conversational tone at the conference – whether knowingly or not – pointed to the regulator’s change in direction and approach with the companies within its perimeter. Has he deliberately tried to change the aura around a watchdog regarded as one of the City’s more fastidious?

“I don’t think too much about the optics,” he tells City AM at the FRC’s office in the City.

“It is part of my style that I bring to regulation, that I am keen for us to have an open door, be approachable. There is an element of informality to it, I guess.”

But, he adds, “no one should mistake that for the fact that when we do need to take action, we will indeed take firm action.”

Accounting for growth

The comments point to the tightrope that Moriarty has to tread: embrace a new regulatory mandate that includes boosting competitiveness and growth – brought in by then-business secretary Kemi Badenoch last November – while restoring confidence in an industry rocked by the collapse of firms like Carillion, BHS and Patisserie Valerie.

Moriarty’s predecessor Sir Jon Thompson took over the regulator on the heels of a damning report into its role by Sir John Kingman in 2018, which noted that having spent “most of its institutional life largely in obscurity”, the FRC found itself “subject to tough and persistent criticism”.

“Two major Select Committees have accused it, in the strongest terms, of timidity, a lack of pace and excessive closeness to those it regulates. These criticisms have put the FRC under an unprecedented spotlight,” Kingman wrote in the report.

Thompson swung the FRC into a clampdown to boost standards and stamp out scandal. He led an effort to strengthen competition and break the competitive dominance of the ‘big four’ – EY, KPMG, PwC and Deloitte.

All four finalised the split of their non-audit and audit practices last month.

But Moriarty now has the task of edging the regulator back into a Goldilocks middle ground. 

“We’ve come from a dark place in 2018. Audit quality has improved. But not all auditors should be defined by the actions of a few,” he says.

“We still have a role to make sure that audit – particularly audit – is done to a high standard and where it’s not, there is appropriate remedy, including holding people to account.”

But, he says, “all regulators need to think about how regulation contributes to growth and investment in this country.”

‘At the CAA, we put people in prison’

Moriarty draws on his background in that regard. Despite heading the accounting watchdog, he is not a beancounter by trade and spent 20 years bouncing between senior roles at regulators including Ofgem, the Social Housing Regulator and the Postal Regulator.

Prior to joining the FRC, he was chief executive of the Civil Aviation Authority, where he said he learnt the craft of balancing tough oversight with boosting innovation and growth.

“At the CAA we put people in jail. Sometimes we took away people’s licences. We grounded them. We were one of the first countries in the world to ground the Boeing plane and put it back into service after the tragic accident. So some really profound, important decisions,” he adds.

“But we could also work alongside folk to grow the industry, create the pipeline of talent, innovate.”

I ask whether Ryanair’s chief Michael O’Leary proved a more fearsome adversary than some of the firms that currently fall within his remit.

“Michael was a pleasure to deal with,” he laughs.

Theories of regulation

The principles of his regulatory approach are transferable, he says: namely, engagement with industry and being pragmatic rather than leaning on “theories of regulation”.

It is those that have shaped the FRC’s approach to reforming two other key areas of its remit: the corporate governance code and the stewardship code.

The two provide a template for best practice in the governance of big listed companies’ and the institutional investors that back them. Both are, in theory, voluntary. But they have become red tape battlegrounds in the City and a supposed principle of ‘comply or explain’ has been interpreted by many as ‘comply or die’.

Companies warned that planned changes to the governance code under Thompson would have laden boardrooms with mountains of additional reporting on areas like environmental, social and governance [ESG] and eroded the appeal of the UK as a listings destination, just as it was trying to recover from a drought.

Ministers in the previous government were privately damning over the direction of travel and shelved legislation that would have tightened governance rules, as well as scrapping plans for a newly beefed up accounting and boardroom regulator.

It was these reforms that Moriarty dramatically pruned in one of his first acts in charge – much to the pleasure of some in the City. 

“I think the reception we got in the corporate governance code was very favourable in that regard. We had corporate support in it, we had investors supporting it and actually, the debate has now moved on. People aren’t talking about the principle of what we did,” he says.

“Politicians will naturally be sensitive to anything that gets in the way of growing the economy. I’m very sensitive to that. But I don’t think it is right to present this as a false binary when there are some people that rely heavily on our regulation being in place, particularly to provide their capital.”

Next on his agenda is overhauling the stewardship code, which governs the “responsible allocation, management and oversight of capital” in the UK.

As City AM exclusively reveals today, the FRC is consulting on changes to ditch any reference to benefitting “environment” and “society” in its new definition of stewardship, instead referring to a duty to create “long-term sustainable value for clients and beneficiaries”.

Does it suggest a softening of environmental considerations for investors?

“It’s a conscious change. But I will challenge the observation that it’s a dilution, far from it. I think this is an enhancement,” Moriarty insists.

This iteration, he says, will allow investors to “define their view of sustainable value creation, report on it and to be held accountable for it”.

“The risk of a definition that says, ‘you need to do this, and you need to do that, and you need to do that’ is actually we infantilise people, rather than [get them] to think for themselves,” he says.

Among the other changes will be the removal of reporting expectations that do not “add additional information or additional transparency” and a new guideline that its principles “should not be seen as a ‘tick box’ or compliance exercise”.

Swings and roundabouts

It will mark the latest step in a programme that has won favour from those looking to revive the appeal of the City of London on the international stage.

The Capital Markets Industry Taskforce, headed by the London Stock Exchange’s Julia Hoggett and a host of City bigwigs including Schroders’ Peter Harrison; Phoenix chair, Sir Nicholas Lyons; and capital markets lawyer, Mark Austin, wrote to the FRC in August calling for it to push on with its focus on growth and competitiveness.

“Richard and his team at the FRC are doing a great job,” Austin tells City AM.

“They are being clear that the definition of stewardship has to be focused on creating long term sustainable value, which is absolutely right, and what they are doing is to be welcomed as it is good for UK growth and investment.”

For a career regulator, particularly one that has grappled with the feisty executives of some of the UK’s biggest airlines, praise is a rare treat.

Moriarty is gearing up now for a change of his remit after the Labour government revived plans to transform the FRC into the beefed up Audit, Reform and Governance Authority. Badenoch, far from a great champion of regulation and the FRC while business secretary, has taken over as leader of the opposition.

Moriarty insists he’s under no illusion that praise will be the norm.

“I’ve been around long enough to see the swings and the roundabouts of this,” he adds. “I think the best thing we can do is earn our spurs by our actions.”