One year on: In Conversation with FRC CEO, Richard Moriarty

Published: 21 October 2024

19 minute read

Richard Moriarty reflects on his first year leading the FRC in this In Conversation podcast episode, hosted by Kate O'Neill, Director of Stakeholder Engagement and Corporate Affairs. Richard and Kate discuss the FRC’s milestones from the past twelve months, the UK’s evolving landscape of corporate reporting and governance and Richard's vision for the FRC's future strategy and regulatory approach.

You can also listen on Apple Podcasts and Spotify.

Transcript

0:09
Hello there and welcome to another FRC in Conversation.

0:13
My name is Kate O'Neill.

0:14
I'm the Director of Stakeholder Engagement and Corporate Affairs here at the FRC.

0:18
And today I'm joined by Richard Moriarty, the FRC's Chief Executive Officer.

0:23
And it's a particularly important In Conversation podcast because this marks Richard's one year anniversary at the FRC.

0:31
And given his last podcast was in January of 2024, we thought it'd be a great idea to catch up with him the year in.

0:39
At that time, he was only 3 1/2 months in.

0:42
So Richard, welcome.

0:43
And I know that I have a lot of questions, not just about the last year, but really setting a scene for our listeners for the "what's next".

0:51
As we are in a new school year, I think it'd be great to talk about what's on your mind for the future.

0:57
So yet again, welcome.

0:59
Great to be here.

1:01
Richard, I re-listened to the podcast in January and it reflected those busy first few months of your time as CEO at the FRC.

1:09
I guess it'd be great for our listeners to really hear from you.

1:12
Over the past year, have you thought about the FRC's work and remit and its influence and impact?

1:19
Did it surprise you?

1:20
Did it build on what you're already getting some sense of back in January?

1:25
Thanks, Kate.

1:26
I was really keen to use my first few months to get out and about and talk to our stakeholders and hear their views on their priorities for the FRC and how we supported the public interest for corporate reporting, financial reporting and governance and audit whilst underpinning economic growth in the UK and our competitiveness.

1:47
And I was quite assured from those conversations that the FRC's role does have real relevance for those objectives.

1:56
For instance, the UK has a really good track record of encouraging global capital to these shores based on the good governance and the high quality of audit that we have in this country.

2:09
So this is a strong platform on which to build.

2:13
I've also been pleasantly surprised by how much our core stakeholders actually agree with each other.

2:19
We often focus on the differences between us, but actually there is an awful lot that unites us, and particularly around the public interest and UK economic growth.

2:29
And then finally, when it comes to my colleagues at the FRC, I've been really humbled by the passion and the dedication that they've shown.

2:38
We may not always agree with our stakeholders, and that's a fact of regulatory life, but I've been really impressed by how FRC colleagues go about their work with that overall public interest at heart.

2:50
Richard, when you talk about the public interest, I mean, it can be quite an overused term, but it is at the heart of the FRC's purpose.

2:58
How would you bring it to life to people who don't really understand?

3:01
How can a regulator with our broad remit really work in the public interest?

3:06
What we're about is making sure that the public and investors and others can have a high degree of trust and confidence in corporate governance, audit and financial reporting in the UK.

3:19
And after all, these three things are really important for access to capital to allow businesses here to build, to scale, to grow and to prosper.

3:30
So our work is directly relevant to supporting UK economic growth and competitiveness.

3:36
Those type of things like growth and competitiveness, they were specifically laid out in the remit letter sent to you by the then Secretary of State in November last year.

3:46
I mean it's sent to all regulators, isn't it?

3:48
It isn't a particular FRC-specific remit.

3:51
How do you see a regulatory approach helping those areas of growth and competitiveness, quite apart from the specific remit of the FRC?

4:01
Point to four things that I think regulators might focus on, which I do think are applicable to the FRC.

4:08
The 1st is in our core role, which is to provide that trust and confidence to investors and the public and broader markets that financial numbers and corporate governance and audit can be trusted and relied on to provide access to capital.

4:22
That really does support economic growth because without that the cost of capital becomes uncompetitive and we will lose out.

4:30
So our core work is really important to economic growth.

4:34
Second thing I would say is how we go about that core work.

4:38
It's important that we think about the regulation and the expectations that we place upon businesses to make sure they are necessary and they are proportionate.

4:48
And I think the best way of doing that is to talk to those businesses, those stakeholders, effective and often we can find a way through.

4:57
I think the third thing for me is those regulatory processes that the outside world relies on to allow them to enter markets and grow - certain authorisations, certain certificates, certain permissions that are needed by the regulator -

5:12
It's really important that we have slick, efficient and responsive processes and we meet our own high standards for service delivery.

5:20
And then the final and 4th point I would add, and I think this is a particular point to the audit sector and industry, is to think about skills.

5:29
It's really important that if we want a vibrant, a healthy and a growing industry, we have got to have people and talent come into it and stay within it.

5:39
So the future of the profession is an important issue to support growth.

5:43
I appreciate the professional bodies and the firms are on the frontline here, but I think the regulator must also be interested in the future of the profession.

5:52
After all, if we don't have talent in the pipeline and remaining in the profession that will show up as a risk to our core mission pretty quickly. It won't serve the purpose, as you've pointed out, of all stakeholders who rely on a well run and resilient system.

6:08
Because you've often mentioned audit should be better understood as a noble profession.

6:12
I guess not every profession has public interest at its heart, unlike the audit profession.

6:19
I'm often surprised that when people talk about noble professions, they often mention doctors, they often mention solicitors and barristers.

6:28
I think they should also be mentioning auditors too because it's really important that auditors first of all earn -

6:34
And I think I stress that earn and maintain - public trust and confidence that in doing their work they are taking into account the public interest.

6:43
And after all, being accountable for high ethical standards is core public of what a profession is.

6:50
Otherwise they are just a service delivery industry like anyone else.

6:55
So I do believe that auditors are a noble profession.

6:59
The role of the FRC is naturally to set and uphold high standards and like any large population, and it's the same with doctors, it's the same with solicitors.

7:08
There may be some people that let the side down and appropriate action needs to be taken, but this shouldn't be allowed to tar the entire profession, most of whom are very professional and very diligent.

7:21
You've been very clear in saying since you joined the FRC that the creation of ARGA and a bill to make that happen, being brought by the government isn't a destination nor a place to define success for the FRC.

7:35
And I guess then since the last broadcast, it was pleasing to see that the Draft Bill to create ARGA was in His Majesty's speech at the opening of Parliament.

7:45
How are you thinking about that?

7:46
Because I guess it was great to see and perhaps a bit of a surprise.

7:50
How do you want our stakeholders and listeners to really balance their incredibly busy dance card of the FRC on BAU work?

7:57
And what's an important bill to modernise those powers that you were very eloquent about in your appearance before the DBT Select Committee in March this year? Really pleased and very much welcome the government bringing forward the Draft ARGA Bill in The King's Speech.

8:16
I think it is needed, but as you said Kate, it is not a destination.

8:21
What it will give us is a more modernised toolkit to do the job properly and reflect how modern business in the UK is currently undertaken.

8:31
So I believe that there is a high level of stakeholder support for this bill.

8:35
Naturally when the detail gets published folk will have views on that, but the core foundations of the Bill, I am pleased, command quite broad spread stakeholder support and I think it is important that we keep our eye on the prize to try and get this on the statute book and support the government and Parliament in getting it on the statute book as soon as possible.

8:55
In the meantime, my key message to everyone at the FRC and indeed our stakeholders is let's not get distracted.

9:03
Let's absolutely make sure that we do a great job of the day job.

9:07
After all, for the FRC our day job is important for the public interest.

9:12
So we really can't take our eye off the ball and get distracted.

9:15
But alongside that I am keen to make sure that we do everything possible to help the government and Parliament get this on the statute book.

9:23
It is in my view long overdue. Since that's been announced, Richard, it's a bit wait and see as far as the draft fill the speed and what its contents would be.

9:34
So while we wait for things to take shape and of course the bills preparation is run by the Department of Business and Trade, not the FRC.

9:43
If someone said to you pick out for us during the last year, Richard, a few really stand out moments or stand out achievements that you really felt.

9:50
Wow, this shows the breadth and depth of the FRC's influence and importance.

9:55
What we what would you say?

9:56
I would draw out a number of things, Kate, which I think are really important to our core remit.

10:02
First thing I would call out is how we landed the update to the UK Corporate Governance Code.

10:08
Following the largest ever consultation that we had undertaken, We honed in on the important subject of internal controls.

10:17
I hope our stakeholders believe that we landed that in a very proportionate and targeted way.

10:22
We listened to feedback, but we weren't deflected from the core principle, which was boards needing to be accountable for how they view the effectiveness of their own internal controls.

10:36
We did use that as an opportunity, I think, to change the narrative around some of the framing of the corporate governance Code.

10:43
So it was important for me to get across this message that when we say comply or explain, we really do mean that Boards should feel empowered to explain where they have a cogent reason and they can transparently account for that.

10:57
And I've spent a lot of time with boards over the past few months trying to hammer that message home.

11:03
We also took the opportunity to reduce the amount of guidance associated with the code.

11:08
I was very concerned that some boards were misinterpreted or being led to believe by advisors to misinterpret the guidance as requirements from the FRC and that was not the case.

11:20
So it's really important that we strip back some of that guidance.

11:24
The second thing that I was proud we did this year was launch the review of the stewardship code, which pertains to asset owners, asset managers and some investment service providers, really important code, this which governs the interrelationships between important parts of the investment ecosystem.

11:42
We have listened a lot to partners and stakeholders as we go through this and I'm pretty confident that we will land an update of that code in a way which will command confidence.

11:54
A third thing we've done unashamedly given that we are the audit regulator is really shine a light and drive performance on audit quality.

12:02
This is absolutely essential across the market.

12:05
I am pleased that we have seen particularly the BIG Four consistently over the last few years improve their audit quality, but there are gaps starting to emerge between the Big Four and the rest of the market and that is something that we will need to look into.

12:20
And Richard, on that point, you've talked a lot about the whole of the market.

12:23
Is that what you mean, the difference between these different tiers and the rest of the whole of the audit market, which does obviously offer services to a lot of different sized companies? Right Kate.

12:35
I am conscious that the FRC is the regulator for the whole audit market and I think we need to be as interested in what happens with SMEs as we are with the FTSE 100.

12:45
Now undoubtedly the FTSE 100 are very important and significant, not least in terms of their systemic interest to the UK economy.

12:54
But I am keen to shine a light and understand more how the audit market works and whether there are things we can do to make it work better for the SME part of the economy.

13:06
Thanks Richard, I interrupted you.

13:08
You were going to come to a couple of more stand out moments or things you'd like to really reflect on as being part of a great first year.

13:15
One of the thing that I would highlight is we have thrown ourselves in to try and do whatever we can to help government reduce the backlog in local audit.

13:25
I was quite keen to use our capabilities and our skills and our resources to try and help government, as the system leader, pull together a clear way forward and road map with our other partners.

13:37
And I was quite pleased when ministers laid before Parliament the statutory instruments for the backlog.

13:43
This is a difficult issue and it has been years in the making, but back to what drives us, which is our public interest.

13:50
I do believe it's important for the public interest that the audit regulator that does whatever it can to help government get into a better position when it comes to local authority backlog.

14:01
And as you say, Richard, it's not a quick fix or an easy solution, but obviously one attracting a lot of media and council taxpayer interest.

14:11
OK, If I could just be greedy and add one more.

14:14
I've been really pleased this year that we have done an awful lot of work on our role in terms of setting actuarial standards and regulating that sector, Richard, A lot of people wouldn't even maybe appreciate that that's part of our remit.

14:30
Do you think that sits neatly alongside the other professional standards that we set and supervise? Do quite strongly because in terms of the regulatory model, they're setting standards, there's supervising and working with partners to improve quality, and then there's holding to account when things don't meet the mark.

14:51

I think it's important though to recognise that auditors and actuaries are different and they do different things, but actuaries are very systemically important to our economy and indeed all of us as favours into pension schemes.

15:05

So I've been really pleased and I welcome the work that we've done in setting standards and working with government partners, particularly around developing the pension dashboard, which hopefully will really help millions of us in this country make more transparent decisions around our pension schemes.

15:25

It's really important to me that the FRC does not operate in a vacuum or on an island with splendid isolation, but is well plugged into a broader system and particularly when it comes to public sector and regulatory partners.

15:40

So it's important that we spend time with our FCA colleagues, our pension regulator colleagues, and also government departments like Treasury, DWP and the Ministry for Housing and Local Government.

15:51

Richard, you sent a letter to the audit firms just recently on the topic of private capital.

15:58

What prompted that letter and why did you feel that it was timely to do it now?

16:03

I think it's really important for regulators to horizon scan and look at things that might impact and affect their industries over the years to come.

16:14

And when we look around the world, particularly in the US, we do see private equity interest in the advisory and audit market and although the UK market is dominated by a 100% partnership owned firms.

16:28

We can't be blind to the fact that there is interest in this area.

16:32

And I think it's important that we as the regulator understand the opportunities and the risks.

16:37

And that starts with engaging with the firms and potential investors very early and to be clear what the regulatory expectations are, because audit isn't like any other commodity market.

16:51

There is a keen public interest dimension.

16:53

There are important safeguards around independence, ethics, et cetera.

16:58

And it's important that anyone looking to come into this market is able to do so in a way that would uphold those outcomes that the public and investors would rightly expect.

17:10

There are potential upsides if extra capital is additive and it brings extra know how, potentially leads to some consolidation and some growth that may lead to greater choice and innovation in the market.

17:23

But equally, it's important to recognise and be alive that there may be some potential risks that need mitigating.

17:31

And not all forms of private equity or private capital are the same.

17:36

They do come in different shapes and sizes and I think it's important that we start by engaging to understand expectations and that's one of the reasons why I was keen to publish the letter, to make it clear that our door is open for those conversations, but there is a expectation that people will come and talk to us at an early stage.

17:57

I guess also so many of the firms are part of the global network where different jurisdictions have different points of view on ownership and independence.

18:06

But the ownership issue is really important for auditors, as you said, because the current requirements is that the majority control has to be in the hands of qualified auditors.

18:15

So you can't just appoint private equity backed individuals as happens in other industries to run an audit firm.

18:22

That's right, Kate.

18:23

And that isn't in our regulation, that's actually in the law.

18:26

So that is an important point for anyone looking to come into the market to understand.

18:33

And I think it's also important that we, in our conversations with potential investors and firms, make it clear that we are as interested in the economic substance of any transaction as well as the legal form when it comes to that important issue of the law with regard to the control in rights of a audit firm.

18:55

Turning our attention just internally for one moment, we've undertaken a review of our governance structure and looked at how we could create a more transparent decision making process in line with what we, I suppose, demand of the entities we regulate.

19:10

I mean, how do you think that's going to help the way in which the FRC as an organisation operates and grows as it leans into its future with potentially new legislation coming down the track?

19:23

Well, partly, Kate, this has been driven by my very firm belief that regulators must always be learning, they must always be trying to improve, often by talking to partners and stakeholders about how they're perceived and what their interests are.

19:38

But when it comes to our internal changes, I basically was keen to think about the right governance and right structures we need for the future that applied to the FRC.

19:50

So for me, building on that strong legacy and foundation since the John Kingman review, I want to think about how do we evolve as an organisation over the next three to five years.

20:02

And I'm also keen that when it comes to how the organisation feels to the outside world, there's not a big discontinuity when we become ARGA, but actually the core principles of engaging deeply, of being proportionate, of having the public interest and UK economic growth at the centre of our decision making.

20:23

These are themes of continuity that people will see reflected not just the future trajectory of the FRC, but also as we enter the ARGA transition.

20:35

You've talked a lot about future proofing and fit for purpose, so this review of our governance model sounds like that was a great part of that foundation for the next few years.

20:45

And leading into that, you mentioned that we're going to be publishing our three-year strategy for consultation in mid-December.

20:53

This will be your first strategy document at the FRC.

20:57

Seems pretty timely a year in that you've had this chance to really understand the organisation and our stakeholders.

21:03

What are the type of things you think the strategy going to be looking at?

21:07

Because we're at that interesting Inflexion point, I guess, with the possibility of a bill in the future.

21:12

But what are some of the things you'd want the strategy to be reflecting as an organisation?

21:18

But also, as you've said many times, our aspiration to be best in class regulator.

21:24

Kate

21:24

I think it's important that we start with the central vision and mission for the FRC, which is to encourage high standards of corporate governance, financial reporting and audit.

21:36

And we do that because it's in the public interest, it supports UK economic growth and competitiveness.

21:41

And also, and it's a really important point, this there are a great many other people up and down the country who rely on good quality governance, financial reporting and audit, whether they be investors, pensioners, communities, creditors.

21:55

So it's really important that we start with that vision in mind.

21:59

I think it is important for the FRC to also challenge itself to be the best regulator it can be.

22:06

And partly that's about making sure that we're effective, we're proportionate, we're highly engaged with those who have an interest in our work.

22:13

And I am keen to understand how we might evolve our regulatory approach to make sure that it is fit for the challenges of the future.

22:24

If I take one example, our supervisory regulation for the audit market that was built to answer a particular set of challenges in 2018 that was laid down by the seminal report of Sir John Kingman.

22:38

We've implemented all of those recommendations from Sir John and we've embedded it.

22:43

And I think we've delivered better outcomes to focus on quality in the market and focus on consistency.

22:50

But I think now is the right time for us to think about what regulatory model we need for 2028 and beyond building on what we've done from 2018.

23:00

So it is a forward-looking look at what sort of regulator we want to be in the future.

23:06

Building on the success to date of our trajectory from 2018. What are some of the successes that you point to saying that's taken our supervisory model to a better place?

23:19

Without a doubt, the regulatory model since 2018 has driven a much sharper focus on audit quality in the UK.

23:28

All the firms have responded to that.

23:30

They've invested in quality, They focused on quality.

23:33

The large firms have undertaken operational separation between advisory and consultancy work and audit to give much greater clarity and less potential conflicts of interest to the audit parts of their business.

23:46

And audit inspection scores, particularly of the larger firms, have improved and compare very favourably by international standards.

23:55

But I'm keen now that we consider where we might take the model in the future.

24:00

Undoubtedly they will continue to be a need for robust inspection and for the regulated, shine light on the performance of the firms and report on that for the public and investor interest.

24:13

But I'm also keen to leverage some of the tools that already exist for the firms to take greater ownership themselves of their own continuous improvement journey.

24:23

There is a format in the regulation called ISQM1, which basically asks firms to have their own quality management system and for the regulator to attest the probity and the integrity and the effectiveness of those firms internal quality management systems.

24:41

I think that opens up a rich vein of conversation between us and the firms for them to take ownership themselves of their own journey and for us to have a blend in our approach between inspections and also a view as to the effectiveness and how serious the firms are taking their own internal assurances and control systems.

25:04

So Richard, do you have a vision for what this new supervisory model could look like, feel like?

25:09

Or is this something you want to evolve through the new 3 year strategy and the coming year?

25:15

Well, I think the vision will be a continuation of the journey we've been on in terms of making sure that we have a system that commands a really high level of public and investor trust and confidence in audits in the UK.

25:31

And also the broader stakeholder groups that we work with are highly engaged and highly driven by that vision and outcome.

25:40

I'm very encouraged that when I talk to people in this market at the big picture level, we share that common vision.

25:47

The professional bodies want high quality audit, the firms want high quality audit, investors want high quality audit.

25:54

So at that big picture, there is an agreement between the principal actors.

25:58

It's now about us working on how we get there. Richard, on the Stewardship Code, which as you've said, is progressing at pace and has been a very interesting exercise, as you've said on many occasions, a little bit of therapy, a little bit of everybody downloading about a lot of the investment chain in the capital market.

26:18

But we're not the only regulator involved in this.

26:21

I mean, obviously the FCA and the Pensions Regulator have a role to play in this as well.

26:26

What do you say to people who are expecting it to solve all of the issues, confrontations, pensions in the UK capital markets?

26:36

Well Kate,

26:36

The stewardship code is a really important code.

26:40

It's a voluntary code, but it will not solve all issues that people have got.

26:44

But I think it is important to step back that it has had a high degree of take up.

26:50

We've got 275 signatories representing 45 trillion assets under management and it has from our engagement with asset owners, asset managers and corporates alike, there is a consensus that it has driven better stewardship outcomes and of course it has been replicated around the world.

27:08

But I think it is important to periodically review it to make sure it remains match fit to support the growth and the competitiveness for the UK and also drive the right behaviours and not have unintended consequences.

27:22

So I'm pleased with the engagement we've had so far.

27:25

We have not rushed to print with an updated code.

27:28

What we've wanted to do is explore the agenda with asset owners, asset managers and corporates and others with round tables with one to one engagement.

27:38

But I think there is an emerging agenda that will shape our updated draught code for consultation that we will issue before Christmas.

27:47

The first area that I would pull out is there is a conversation to be had about the definition of stewardship that's used for the code and really shining a light on the importance of underpinning sustainable long term value creation for beneficiaries.

28:03

Richard, beneficiaries, I'm not sure all of our listeners will really get the nuance.

28:07

Who are the beneficiaries of good stewardship?

28:10

There's many beneficiaries of good stewardship, but one great example is those that have an interest in a pension fund in this country and saving for their retirement years.

28:22

It's really important to me that there is a recognition that the beneficiaries of good stewardship go way beyond financial institutions, investment management professionals and the businesses that they invest in.

28:36

So it's really important that we get this right and recognise that broader public interest that comes from good stewardship in driving sustainable long term value for beneficiaries.

28:49

The second thing that's come through in our conversation with people around the revision to Stewardship Code is a need to, or at least a desire to streamline some of the requirements and really think about some of the unintended consequences from how the code is operated in practise.

29:07

Some of that is around engagement between various parties and the need for us to support quality of engagement to drive good stewardship outcomes and conversations, not engagement for engagements sake or acrimonious or friction based engagement.

29:25

And there's also an issue in terms of reporting and can we streamline the reporting requirements.

29:30

And then finally, an agenda item which has emerged is making sure the stewardship code is updated and reflects the dynamics of the capital markets today and expected in the future, not just looking back in the rear view mirror.

29:44

And in particular, updating the code to reflect the importance placed in the ecosystem of index funds and proxy advisors.

29:53

And on proxy advisors, Richard, there's a lot of concentration on them, how they operate, how they work in the system.

30:01

But there's review of the stewardship code is not just about making people like proxy advisors better or getting them to act differently.

30:09

It's got to be about these underlying beneficiaries that you spoke about.

30:13

We have to keep bringing it back to what are we trying to achieve here, and what we're trying to achieve is a code that people can coalesce around that really drives good stewardship outcomes for beneficiaries and ultimately supports UK economic growth and competitiveness.

30:29

The role of index funds and proxy advisers has come through in our conversation partly to recognise that they are an important part of our ecosystem and they provide a service for their clients.

30:41

Recognising that important role that they play.

30:44

I do think the code should reflect that and provide a baseline of expectations as to what is expected from proxy advisors going forward.

30:56

Richard, if you're going to say to our listeners, what do you think is the least well understood thing about the FRC, whether it's it's remit, it's powers, it's reach, do you think there's anything that you'd love to just bust that myth on with the listeners today?

31:10

Been around regulation in the private and public sector for more years than I care now to remember.

31:16

The thing about the FRC, which is a standout compared to any other regime, is how often even stakeholders that are close to the FRC misunderstand our role or rely on an interpretation of what we're doing by a third party.

31:32

And I'm really keen to put a human face to the FRC.

31:35

If anyone hears anything about what we're doing and thinks that doesn't sound right, please pick up the phone and talk to us and we will engage.

31:43

There's an awful lot of mythology and folklore out there around the role of the FRC and I spend a good deal of my time doing a lot of myth busting with external stakeholders.

31:54

So the message is come to the source and don't rely on perhaps what you've been told and help us us some moments with stakeholders.

32:03

Richard, thank you for your time today.

32:05

I think listeners are going to find this very interesting and certainly listening to you.

32:09

This has been an incredibly busy first year and I think we'll have you back perhaps after the three-year strategy has been done and dusted and consulted on with our stakeholders in the early new year.

32:20

So congratulations on your first year.