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FRC launches consultation on ARGA funding

Author: ICAEW Insights

Published: 26 Aug 2022

The Financial Reporting Council is running a consultation on plans to fund the new Audit Reporting and Governance Authority.

The Financial Reporting Council (FRC) has invited views of the high-level principles on which the funding model for its successor should be based.

The FRC set out a number of proposals in its previous white paper on the Audit Reporting and Governance Authority (ARGA), based on core principles of fairness, transparency and proportionality, saying: “There should be a clear line of sight between ARGA’s objectives, its annual plan and budget and the amounts levied from each funding group.”

The FRC has proposed that ARGA’s expenditure and funding arrangements should operate in line with the government’s Managing Public Money principles. The budget set for its regulatory responsibilities are defined as ‘activity blocks’, allocated to prescribed groups of market participants responsible for funding each activity block, through annual levies. The proposed market groups are:

The auditors of Public Interest Entities (PIEs)

Auditors of PIEs would fund audit regulation, including standard-setting, supervision and enforcement. Their annual levy would be based on their fee income from PIE audits.

Recognised supervisory bodies (RSBs)

RSBs would contribute to the costs of setting auditing standards, and would meet the costs of overseeing regulatory functions along with recognised qualifying bodies (RQBs). The professional bodies should pay an annual levy based on the size of their membership.

Accountancy professional bodies

Professional bodies would meet the costs of overseeing the performance of their regulatory roles.

Listed companies, large private companies and other entities falling within the definition of PIEs

PIEs would fund the costs of regulating corporate reporting, including reporting and audit standard-setting, monitoring, and enforcement against directors. Listed companies would fund ARGA’s work regarding corporate governance and audit committees. This would be done through an annual preparers levy based on their market capitalisation; other PIEs would pay a levy based on turnover or “equivalent measures of size”.

Institutional investors

Investment managers and insurance companies authorised and regulated by the FCA would pay a levy aligned with FCA fee methodology and structure. Pension schemes would contribute through a separate levy.

Actuarial professional bodies, insurers, large pension schemes and funeral plans

Actuarial regulation undertaken by ARGA would be funded by actuarial professional bodies and the main intended beneficiaries of actuarial regulation.

The FRC has proposed that overheads and corporate costs would be allocated proportionally: “In determining who should contribute to ARGA’s funding within the terms of these arrangements, we have considered the purpose of the government reforms that have led to its proposal, its intended regulatory roles as set out in the government response, and the public interest in its work.”

Where some entities fall into more than one category, they would be “levied accordingly”. Where some entities have cases brought against them by ARGA, they will likely have to contribute to the cost of those cases.

“As Sir John Kingman had flagged in his review of the FRC, it’s essential that ARGA has a sound statutory footing for its funding,” says John Boulton, ICAEW’s Director, Policy. “It makes sense that those who benefit from its oversight should all contribute proportionately to its costs. Funding should go hand-in-hand with transparency, both of budgets and of outcomes.”

ARGA is at the centre of a wider ecosystem regarding corporate reporting in the UK, of which professional bodies are a vital element, says Boulton. “It’s good that the funding model reflects the multifaceted nature of that ecosystem and we hope through the consultation that a solution is reached which recognises the optimum contribution that each party can make to a well-functioning system.”

The FRC intends to run further consultations on detailed aspects of the establishment of ARGA.

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