The Financial Reporting Counsel (the FRC) has launched a consultation on plans to fund the new Audit Reporting and Governance Authority (ARGA).

The ARGA will be the successor to the FRC, and its role will be to protect the interest of investors, other users of corporate reporting and the wider public interest. The government intends to give ARGA statutory powers to raise a levy so as to fund its activities on an independent and durable basis. The government has asked the FRC to consult on how the ARGA levy should operate in order to ensure that levies are proportionate and that the proposed arrangements comply with the Regulator’s Code.

The consultation invites views on the high-level principles on which ARGA’s funding models should be based and follows on from the approach set out in the White Paper, “Restoring trust in audit and governance”. The intention is for the levy to be paid by various market participants.

The proposed market groups for funding are as follows:

Recognised supervisory bodies (RSBs). RSBs would fund the supervising regulatory functions and recognised qualifying bodies, as well as contributing to the setting of auditing standards. Their annual levy should be based on the size of their membership.

The auditors of Public Interest Entities (PIEs). PIE auditors would meet the costs of audit regulation, standard-setting, supervision and enforcement. They would pay an annual levy based on their fee income from PIE audits.

Accountancy professional bodies, who would fund the costs of overseeing the performance of their regulatory roles.

Listed companies, large private companies and other entities that constitute PIEs. Listed companies would fund corporate governance and audit committees through an annual levy based on market capitalisation. PIEs would fund the regulation of corporate reporting and enforcement against directors. PIE entities would pay a levy based on turnover or equivalent measures of size.

Actuarial professional bodies, large pension schemes, insurers and funeral plans. Actuarial professional bodies would fund ARGA actuarial regulation, along with the main intended beneficiaries.

Institutional investors, such as investment managers and insurance companies that are FCA authorised, would pay a levy in line with FCA methodology and structure. Pension schemes would contribute through a separate levy.

Therefore, most of the entities that currently contribute to the FRC will be subject to the ARGA levy, although some entities won’t be included, such as AIM listed companies. Some entities will fall within more than one group, and the paper states that they should be ‘levied accordingly’. Equally, entities which ARGA brings cases against are likely to have to contribute to the cost of those cases.

The consultation closes in October 2022, following which the FRC aims to run further consultations on detailed aspects of the proposed arrangements. As such, we will wait and see what proposals are put forward regarding the funding model for the new regulator.