Sections

Accounting Matters: Wasted time on reclassification

• The FRC appears to have given up its 13-year campaign to become a private-sector body

When the UK Financial Reporting Council (FRC) released its corporate plan for 2007-08, anyone who read it might have thought it was rather dull. For example, on the subject of the FRC’s working relationship with the UK government, it declared: “No significant projects planned in this year.”

What we now know, however, is that behind the scenes, the FRC, backed by a small army of civil servants, had embarked on what became an increasingly desperate bid to become a private-sector body. Its two co-conspirators were HM Treasury (HMT) and the Department for Business, Enterprise, Innovation and Skills (BEIS)  – known variously along the way as the DTI, BERR and BIS. 

The story begins at the end of 2004 with a dry exchange between staff at the Office for National Statistics (ONS) and HMT: “In conclusion, as the FRC is public sector controlled and a non-market body, it is classified in the National Accounts as part of central government.” That email came to light, along with several hundred pages of correspondence, files notes, studies and legal papers following a Freedom of Information request to the ONS.

The ONS’s focus was on where the FRC should appear in the national accounts. The exercise was a clear signal to Whitehall civil servants that they had a problem. An email dated 4 January 2005 from the DTI to the Cabinet Office reads: “The policy context of FRC’s status remains central to not classifying it within the Central Government Sector.… [S]uch a designation would significantly change the balance of the collaborative relationships which are at the heart of the FRC’s work.” 

The solution, in theory, was simple enough: either HMT or BEIS had to persuade the National Accounts Classification Committee (NACC), which is the ONS body that classifies areas of government activity for accounting purposes, to rule that the FRC is a private-sector body.

Things did not start well, as tempers quickly frayed. In one email, an apparently rattled DTI official wrote: “Given Ministerial indications that the review should be completed this year, we MAY need to go to Ministers with a draft which indicates areas where there is continued dispute, but we are not going to pretend contentment where it is absent.”

Nonetheless, two requests – one in August 2005 and a second in May 2006 – to the NACC stalled. However, opportunity was about to knock with the FRC’s 2007 corporate governance review. And so on 18 December 2006, HMT asked the ONS to look again.

“The FRC, backed by a small army of civil servants, had embarked on what became an increasingly desperate bid to become a private-sector body”

And this time, Whitehall pulled no punches. In one of the scores of emails released to IPE, an ONS official reveals: “There has clearly been some breakdown in communication between us and the DTI via the Treasury. Otherwise I wouldn’t be getting calls from a DG [director general] in DTI [name censored] and [censored] wouldn’t have been approached by the DTI perm[anent] sec[retary] asking why ONS was taking so long/holding up the process.”

It continues: “As you will be speaking to DTI on Thursday it might be an excellent opportunity to tell them about our protocol and the fact that we consider classification cases when arrangements have been finalised. They have wasted enough of our time already.” They were to waste yet more. 

Throughout 2007, in a bid to cleanse its board of past links to the public sector, the FRC convened an appointing group to select a temporary nominations committee (TNC). This body, in turn, appointed a new FRC board – albeit one that was practically indistinguishable from the one it replaced. 

The point was not lost on the ONS when, in 2010, the NACC ruled that the TNC, which had been brought in as a fire break between the public and private sectors, had made the FRC “a public sector body as it was appointed via the public sector appointed board.” 

It seems that the statistics watchdog had the FRC’s number. In an email dated 6 February 2007, one ONS official writes: “On the first two occasions (August 05 then May 06) we have put the case document together and been almost ready to consult NACC when the request has been ‘pulled’ because the arrangements ‘might be changing’. (Usually following requests for further information from us that might have led them to believe that a public sector classification would result).”

 During the course of 2011, both HMT and BIS invited the ONS to think again – unsuccessfully. One sticking point, it appears, was the FRC’s habit of sounding as if it were part of government.

“The board noted that, having sought input from external solicitors, there is no scope to challenge the current classification or to seek reclassification and consequently considered accepting the 2014 decision”

Minutes from a FRC meeting on 24 May 2017

In particular, the ONS noted that a 2012 joint BIS/FRC consultation on the future role of the FRC “contains lots of references to ‘the Government and the FRC believe / seek views / consider / are considering’.… The very fact that a joint consultation is on going and some of the wording implies that the government does have a degree of control over the FRC…”.

Another ONS document dated 22 March 2013, shows BIS had one last throw of the dice. This time, it claimed that the FRC was a private-sector body because in July 2008 the ONS had relaxed its in-perpetuity rule – the proposition that where a person is appointed by the public sector, all subsequent appointments of that person are public-sector appointments. BIS now claimed that appointments made by the TNC were private-sector appointments. Again, the NACC disagreed.

But just how much of this was apparent to the wider public? The FRC’s November 2007 summary board minutes contain the observation that: “The Chairman referred to the process for meeting the requirement (imposed on the FRC as a condition of obtaining reclassification of its NDPB status)…”, while its June 2016 minutes make reference to “a debate with HM Treasury regarding the FRC status had reopened.”

Fast forward to December 2016 and those board minutes helpfully explain that the watchdog’s executive was liaising with BEIS and the Treasury to “clarify” its status and to make “relevant stakeholders.… aware of the issue” – albeit without spelling out what the issue was.

Ultimately, despite hopes expressed in the February 2017 minutes that the FRC might become a “public non-financial corporation” – meaning less direct government oversight – on 24 May 2017 the FRC finally gave up. Minutes from that meeting reveal: “The board noted that, having sought input from external solicitors, there is no scope to challenge the current classification or to seek reclassification and consequently considered accepting the 2014 decision.”

It had taken the FRC 13 long years to end up where it started. Following the release of the ONS files, Sharon Bowles, a member of the UK parliament’s upper house, tabled dozens of forensic questions in Parliament. Then in March, Greg Clark MP, the business secretary, ordered a wide-ranging inquiry into the FRC under former HMT civil servant Sir John Kingman. Among the options now on the table is closing down the regulator. 

Civil servants at HMT knew the risks they were running. In an email exchange from 2011, one of them observes: “[I]n the event that the ONS do not agree to reclassify, then we face a real issue that will need a considerable amount of time to tackle.” Seven years on, we are finding out just how much.  

The FRC has not responded to a request for comment.

Have your say

You must sign in to make a comment

IPE QUEST

Your first step in manager selection...

IPE Quest is a manager search facility that connects institutional investors and asset managers.

  • IN-2454

    Closing date: 2018-08-01.

Begin Your Search Here