The Local Authority Pension Fund Forum issued this press release this morning. I endorse it but although I advise the LAPFF on tax was not involved in this issue:
Press release IMMEDIATE RELEASE
1 September 2016
"Disregard the FRC. The government did not back the financial regulator” says LAPFF to Chairs of FTSE 350 companies - FOI reveals the government refused to back the Financial Reporting Council’s position, despite claims it had
LAPFF has been challenging the regulator the Financial Reporting Council (‘FRC’) for the last 4 years, raising questions as to whether it is up to the job. The FRC has consistently refuted the LAPFF position despite the weight of evidence that the FRC is wrong. The ongoing battle led to LAPFF engaging top silks; in company law, George Bompas QC and public law Cherie Blair QC. In that period the FRC has been criticised by others including committees of Parliament. The European Parliament came on side with the LAPFF position in April 2016. The Treasury Committee is currently concerned about the approach of the FRC in the context of the collapse of HBOS (see notes). Key to the FRC’s position has been its assertions that the government agreed with it.
As a result of information obtained under the Freedom of Information Act (‘FOI’) LAPFF has today written to Chairman of FTSE 350 companies drawing attention to the fact that they should disregard the regulator in their own interest because the wrong impression has been given that the government was backing the FRC’s position:-
Kieran Quinn Chair of LAPFF said:
“LAPFF believes that the FRC has been doing its job badly because it’s been reading the law wrongly. What matters to investors is that companies do the right thing. We have today re-written to FTSE 350 companies advising them to disregard the FRC on this matter so that they comply with the law with no risk of illegal outcomes.
“To do that it is safer to follow the advice of LAPFF and George Bompas QC. We have had to make clear that the FOI reveals that the government did not agree with the FRC position.
"We were surprised by FRC claims that the government agreed that LAPFF and Mr Bompas was wrong. The FOI reveals that it didn’t. It’s time the FRC did its job properly by regulating in accordance with the law.”
Background to the FOI
Mr Bompas gave a clear legal opinion for LAPFF in August 2015 stating that the FRC is wrong on how crucial capital and solvency law set a basic standard for company accounts under “the true and fair view” test. The FRC’s system omits this key investor and public interest safeguard. LAPFF then wrote to the Chairs of FTSE 350 companies in November 2015 setting out a position they should follow to discharge their duties properly with no risk of illegality. Subsequently, the FRC has said that LAPFF and Mr Bompas were wrong and led companies to believe that the government agreed with the FRC.
The correspondence obtained under the Freedom of Information Act (‘FOI’) (see notes) shows the FRC constructing a press statement to have the government say that LAPFF was wrong. The FOI reveals that the government refused to agree to this, the government indeed confirmed to the FRC that it has never said LAPFF or Mr Bompas was wrong.
LAPFF notes that the FRC has never revealed the true government position as set out in their correspondence. Indeed, some of what was cited in the press was still misstating the government position.
Crucial functions for investor and public protection – solvency, lawful distributions and the audited accounts
Some critics have said that LAPFF is focussed on an anodyne, narrow point of law. However, that entirely misses the point which is extremely serious. It matters to all who own shares or have a pension. The law sets down objective functions for accounts that have tangible negative outcomes when there is a failure of that function, being unlawful distributions and insolvency. There are also risks to pension funds if the accounts of the sponsoring company are signed off when they should not have been The matter is particularly relevant to banks and should underpin, and not undermine, effective banking regulation.
The FRC has no mechanism to deliver the correct functions in its standards that companies and auditors follow, and no inspection criteria to inspect for it in accounts or audits. That means that when a company avoidably due to an accounting problem, pays an unlawful distribution, or jeopardises its pension scheme the FRC is in a weak position to pursue these mischiefs. The FRC is avoiding those parts of the law that would give it most power, were it to be doing its job properly. The FRC has neutered itself.
Following the FRC position will be particularly problematic for directors if a company later becomes insolvent, or has an unfunded pension fund deficit, after periods in which distributions were made. Since LAPFF identified issues in this area several FTSE 100 companies have had to rectify dividends that have been illegal.
Information for Editors
The Local Authority Pension Fund Forum (LAPFF) is a voluntary association of 71 UK public sector pension funds with combined assets of approximately £175 billion. It exists to promote the long-term investment interests of member funds, and to maximise their influence as shareholders to promote corporate responsibility and high standards of corporate governance amongst the companies in which they invest. PIRC is the Research and Engagement partner to the Forum, www.lapfforum.org
- The Freedom of Information request – obtained due to suspicion the FRC was getting things wrong
One reason for using FOI to see precisely what the Department for Business Innovation and Skills ‘BIS’ (now BEIS), the FRC’s sponsoring department, had said to the FRC was the observable fact that FRC publications were transcribing the words of legislation wrongly. LAPFF was therefore alert to the fact that the FRC might also be citing the position of BIS wrongly. The FOI disclosures, obtained from BIS, reveal that on 2 December 2015, in attempting to rebut LAPFF and Mr Bompas, the FRC sent BIS an email proposing a press statement with the words in its first paragraph as follows:-
“The FRC and the government have confirmed that the views of LAPFF on this matter are incorrect and may be disregarded”.
The FOI disclosure reveals BIS rejected the FRC position saying:-
“I am very concerned about the wording in the first paragraph. We have never said that the views are “incorrect and may be disregarded”. What we have said is that the Companies Act 2006 does not require the separate disclosure of a figure for distributable profits. Ultimately, whether the views of the LAPFF are incorrect would be a matter for the courts”.
The FRC then replied with a minor amendment which ignored what BIS had said to it:-
“The FRC and the government have confirmed that the views of LAPFF on this matter are incorrect”.
Given that, BIS came back to the FRC again and said:-
“I really think that this should be kept factual”.
The FOI material then shows that BIS itself intervened to rewrite the FRC text, excising all reference to LAPFF being incorrect. Despite that some of what appears in the press is still citing the government position wrongly.
- The Treasury Select Committee
The Treasury Select Committee has recently been very critical of the FRC in its report of July 2016 into the collapse of HBOS (see note). It said this:-
“The Financial Reporting Council (FRC) decided not to investigate the auditing of HBOS in 2013, well before the completion of the final HBOS report. This was a serious mistake. The process by which it reached its decision suggests a lack of curiosity and diligence. These failures are all the more concerning given the scale of the problems at HBOS, and the clear public interest at stake. It is extraordinarily unhelpful that the FRC has taken so long and has belatedly reconsidered its position, only after considerable pressure from Parliament and the Treasury Committee. Following its preliminary inquiries, the FRC has now finally commenced an investigation into the auditing of HBOS.
“The auditing of HBOS is the one major element of the HBOS affair that has yet to be subject to adequate scrutiny. The Committee will expect the FRC to undertake an extremely thorough analysis of the HBOS case. Regardless of the outcome of the FRC’s investigation process, it is likely that the Committee will want to consider its work and regulatory approach in more detail. The investigation announced on 27 June 2016 is better late than never. But the very tardy response by the FRC appears to be as inexplicable as it is unacceptable.”