The Local Authority Pension Fund Forum (LAPFF) has called on the UK government to give “serious consideration” to winding up the UK Financial Reporting Council (FRC).
In a hard-hitting attack on the UK audit and corporate governance watchdog, the LAPFF called for the FRC to be replaced with an independent companies commission.
The LAPFF said: “One reason why the FRC is failing is because it was never set up properly in the first place. The Treasury Select Committee described the position of the FRC as ‘inexplicable as it is unacceptable’.
“We agree and believe that Downing Street needs to take an active interest in the position of the FRC; it falls so far short of the standards expected in public life, it warrants intensive investigation.”
LAPFF also noted that, despite being a public authority, the FRC is not fully subject to the Freedom of Information Act.
The call came as part of LAPFF’s submission to a consultation on corporate governance from the Department for Business, Energy, and Industrial Strategy (BEIS). The consultation on the BEIS green paper closed on 17 February.
The green paper sought comments on executive pay, strengthening the employee and customer voice, and corporate governance in large private businesses.
The LAPFF believes that the FRC has failed to enforce the Companies Act 2006 in respect of both the ‘true and fair’ accounting requirement and, more recently, in relation to the duty on directors to report compliance with s172 of the Companies Act. This requires company directors to act in the best interests of the success of their company.
It says a director must “act in the way he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole.”
The watchdog recently told IPE that it needs additional powers to force directors to report on how they have complied with s172.
In its submission to BEIS, it repeated its call to be given more powers.
The LAPFF, however, claims that the FRC has got the law wrong.
The forum told BEIS: “First, the FRC has cited a lack of prescriptive reporting methods in the legislation as the means to deny the prescribed purpose of the legislation.
“The falsity of that argument is betrayed by the green paper itself, which sets out that the lack of prescriptive methods is deliberate to enable flexibility in delivering the prescribed purpose.”
The LAPFF also argued that the FRC has misread s414(1) of the Companies Act and overlooked the fact that it already has the power to enforce reporting under s172.
Meanwhile, the Department for Work and Pensions (DWP) also weighed into the debate over s172 in the wake of the BHS Pension Fund scandal.
In its consultation response, the DWP said it wanted company directors to be forced to take specific account of both past employees and pensioners when discharging their duties.
In support of its call, the DWP noted that Legal & General had warned that the BHS collapse was “perhaps more to do with the application of directors’ duties by those directors in question” than deficiencies in legislation.
The DWP also noted that Legal & General had suggested that there was “scope for the application and enforceability of directors’ duties to be scrutinised through the courts” rather than through further prescription at this stage.