The Financial Reporting Council plans no additional staff hires in the next 12 months as it reins in costs after double hit from ‘unexpectedly high’ public sector pay rises and next year’s national insurance hike
In a change of direction and in line with successive governments’ desires to move the regulator out of London and reduce its London-centric focus, the FRC will build up its dual-centre operation with an expansion of the new Birmingham office, adding that it would ‘skew’ its recruitment policy towards hires outside of London.
The regulator plans to move offices when the 10-year lease on its space in London Wall in the City of London expires next year, relocating to Harbour Exchange in Canary Wharf. The last time the FRC relocated in 2014 the move cost £500,000 due to capital costs and fitting out the space.
The annual budget for 2025-26 will be £74m, up 3.5% from £71.5m year on year, including running costs for the UK Endorsement Board (UKEB).
Headcount will be cut to 486, marking a 3% reduction in staff numbers, while FRC noted that it was affected by ‘an unexpectedly high public sector pay settlement’ which hiked pay increases this year.
In addition, the FRC said its budget had been ‘impacted by the change to employer’s NICs from April 2025, so to keep our overall 2025-26 budget increase as close to inflation as possible we have also sought savings in non-staff costs’.
The FRC has allocated £3m in the budget for 2025-26 to cover the higher staff costs.
The 2025-26 financial year will see a 9% increase in fees for levy payers in 2025-26, according to the FRC’s draft annual plan and budget, which has been issued for consultation with stakeholders.
Despite the above inflation levy increase, the FRC stated: ‘The FRC remains mindful of the current economic environment and is committed to avoiding unnecessary cost increases for levy payers’, adding that the rise in the levy reflects the ‘costs of core regulatory functions, in particular our corporate reporting review programme’.
For listed entities, the levies are calculated based on their market capitalisation at the end of September 2024, while latest turnover figure is used for other entities.
In terms of priorities for the next three years, the FRC said transition to a new, powerful regulator with statutory powers as the Audit, Governance and Reporting Authority (ARGA) would be pivotal. It also stressed that it would be pursuing an ‘evolved approach to supervision of audit firms and a review of enforcement procedures’.
‘To be effective we need a modernised set of statutory authorities and powers. John Kingman’s 2018 review shone a light on the serious gaps within our current authorities and remit,’ the FRC stated.
‘We welcome the government’s commitment in the July 2024 King’s Speech and we will work with DBT as they bring forward draft legislation for pre-legislative scrutiny. Our strategy has been developed to remain relevant regardless of the timing of legislation.’
The government is expected to release final plans for sweeping audit reform by the end of March 2025, but recently confirmed that ARGA will not be in place until 2028 at the earliest.
A key priority will be improving the quality of audit outside Big Four and Tier 1 firms, with an emphasis on closing the gap between the largest audit firms and the challengers ranked as Tier 2 and 3 firms, which has widened, not narrowed, in recent years. But the FRC warned that ‘the largest firms, which have in recent years enhanced their audit quality, cannot rest on their laurels’.
It will also keep close watch of the growing prevalence of private equity investment in the accountancy sector and how this affects quality and resilience of firms, and whether this is affecting the overall quality of audit. Despite this consolidation driven by private equity, the FRC warned that audit competition was limited and it will be monitoring this closely, adding: ‘Even the largest [firms] continue to face challenges competing head on with the Big Four owing to their scale, deeper pools of expertise and access to investment’.
Going forward, there will also be a focus on technology to improve productivity and effectiveness, with investment earmarked for artificial intelligence (AI) and technology, and expansion of the Sandbox initiative to develop innovative approaches to audit work.
‘We want a step change in this period in how we use and exploit technology, data and information management within our organisation,’ according to the FRC strategy plan.
The head of the FRC, Richard Moriarty said: ‘Since taking on the role of CEO a little over a year ago, I have focused on ensuring the FRC is restless at seeking to improve the way it delivers its public interest purpose and supports UK economic growth and investment. Our draft three-year strategy and draft plan and budget for 2025/26 embody this approach.
‘The strategy includes the FRC’s continued commitment to uphold high standards of corporate governance, corporate reporting, audit, and actuarial work to ensure trust and confidence in businesses across the UK.
‘This in turn enables them to attract investment and grow as well as maintain broader stakeholder support.
‘The strategy also includes important commitments to review our regulation to ensure it is effective, proportionate and best designed for the future.’
Sara White Business and Accountancy Daily
