UK Finance responds to FRC’s proposals to revise its Corporate Governance Code (the Code)

Following the consultation on Restoring Trust in Audit and Corporate Governance in 2021, the government invited the FRC to strengthen the Code in specific areas.

This limited revision aims to enhance the Code's effectiveness in promoting good corporate governance, some of the changes include:
• Setting out a revised framework of prudent and effective controls to provide a stronger basis for reporting on and evidencing their effectiveness.
• Improving the functioning of comply-or-explain, taking account of recently published FRC research and reports.
• Making necessary revisions to reflect the responsibilities of the board and audit committee for sustainability and ESG reporting, and associated assurance in accordance with a company's audit and assurance policy.
• Updating the Code to ensure that it aligns with changes to legal and regulatory requirements as set out in the Government's response to the White Paper, including strengthening reporting on malus and clawback arrangements.


In our response, amongst other matters, we commented on:

Overall adverse impact on UK competitiveness: While we generally support the overarching principles and objectives of the UK government’s corporate reporting and aspects of the FRC’s Code proposals, we are concerned that the proposals, taken together, could significantly reduce the attractiveness of the UK as a location for business.

• Comply or explain: we highlighted the difficulties caused by the external perception that the Code is based on the principle of ‘comply or else’, and that in many cases disclosure of the reasons for a company not complying with the Code provides more helpful disclosure than boilerplate compliant disclosure. We believe that the concept of ‘comply or explain’ is fundamental to the Code’s success and that the FRC should use this revision of the Code to strongly reinforce that an insightful disclosure of the reasons for not providing a Code disclosure can be the better option.

• Timing: we discussed the volume of work that companies will need to complete to comply with the new requirements and that the proposed effective date of 1 January 2025 presented challenges to both companies and the FRC (in terms of producing its Guidance). There is a significant risk that the proposed effective date will result in a poor implementation of the revised Code, damaging the UK’s global standing and competitiveness. We firmly believe companies need more time to plan and subsequently dry-run processes in a considered manner. This will lead to better corporate governance and disclosures, further enhancing the Code’s global reputation.

• Continuous reporting: the Code should explicitly state that control assessment should be aligned with the balance sheet date, in line with annual report and accounts (ARA) process and expanding the scope of assessment to the period between the balance sheet date and the signing of the ARA would not be appropriate.

• Group exemption: Companies that have only listed debt, including subsidiaries of premium listed companies, do not currently have to comply with the Code. There is no value in subsidiaries each separately complying with the Code. The FCA is currently reviewing the categories of listed entities and it is important that the wording of the scope of the revised Code in combination with any changes to the Listing Rules made by the FCA does not have the unintended consequence of subsidiaries coming into scope of the Code.

• Controls & Audit & Assurance Policy (AAP): We believe that the corporate reporting reforms being implemented through the UK government’s secondary legislation and the FRC’s Code will provide greater value to investors if they are aligned. In particular, we believe that the scope of the directors’ declaration on reporting controls should be limited to those that are relevant to disclosures within the scope of the annual report and accounts.