Examining the UK Government’s proposals for widening the definition of a public interest entity (PIE)
James Barbour CA looks at the Government’s proposals for widening the definition of a public interest entity (PIE) following the recent publication of its feedback paper to its 2021 white paper ‘Restoring trust in audit and corporate governance.’
It should be highlighted that although widening the scope of companies to be included in the definition of a PIE certain smaller PIEs will be excluded from parts of the regulatory burdens that would normally apply.
Large private companies threshold
In its white paper the Government put forward the following two options for including large private companies as PIEs:
(i) All companies with either:
- more than 2,000 employees; or
- a turnover of more than £200 million and a balance sheet of more than £2 billion.
(ii) large companies with both:
- over 500 employees, and
- an annual turnover of more than £500 million.
The Government has concluded that a variant of Option (ii) above, strikes the best balance for the widening of the PIE definition, being proportionate whilst ensuring those companies which are economically important and systemically important are within scope. Therefore, the Government intends to expand the PIE definition to large companies with both:
- 750 or more employees, and
- an annual turnover of £750 million or more.
The Government intends to continue to use the global employee figure, for three key reasons:
- Employee figures (unlike workforce numbers) are routinely disclosed on a comparable basis;
- It is important that the corporate governance of major UK headquartered companies is robust, regardless of where in the world their activities take place; and
- Some companies might move their workforce offshore to avoid the need to comply with a UK-only requirement.
Companies quoted on Multilateral Trading Facilities (MTFs) such as AIM
The Government will include companies traded on MTFs such as AIM in the PIE definition only where they meet the same size threshold as for large private companies (see above). This recognises the role of MTFs such as AIM as incubators for innovative companies and the fact that these facilities have deliberately been developed as a less regulated marketplace.
The Government’s intention, post the Kingman review has been that the PIE definition should largely set the focus of ARGA’s work. Since only the very largest MTF-quoted companies will become PIEs in future, ARGA’s activity would potentially reduce. Currently, all AIM companies are within scope of the FRC’s Corporate Reporting Review function and those with market capitalisation over €200m are within scope of its Audit Quality Review. The Government will undertake further work with the FCA, the FRC and the London Stock Exchange to explore whether there is good justification for ARGA to continue certain aspects of FRC scrutiny of all or some companies traded on MTFs even though they will not become PIEs and, if so, on what basis.
The Government has concluded that Lloyd's syndicates should not be included as PIEs.
The Government intends to include only third sector entities that meet the new 750:750 size threshold (see above).
The Government intends to include all LLPs that meet the new 750:750 size threshold (see above).
The Government does not intend to include local authorities that are not already included as PIEs (for example, because they have listed debt) if they only meet the 750:750 threshold. The Government also intends to exclude other public sector bodies from the 750:750 threshold, as appropriate (for example, because they are already subject to similar requirements).
Newly listed companies exemption
The Government does not intend to provide temporary exemptions from PIE requirements for newly listed companies.
Time to prepare and phased introduction
To allow businesses and their auditors time to prepare for, the Government will allow an adequate
period between an entity exceeding the new 750:750 threshold and being subject to any new requirements. This will be at least a full annual reporting period.
Qualifying and ceasing to qualify as a PIE
The Government intends to introduce a smoothing mechanism which will mean that entities will have to continue meeting requirements for a set period after they qualify as a PIE, even if they drop below the 750:750 threshold. Details of the mechanism will be included in legislation.
Group and subsidiaries
Where a UK parent company prepares consolidated accounts for a group, and that group when aggregated meets the size threshold, then the parent company of that group will become a PIE. The Government’s intention is also that where an entity that is a PIE by virtue of the new size threshold is a subsidiary of a UK-incorporated parent, the parent will also qualify as a PIE. The Government will consider a mechanism to remove or reduce this risk of duplication of reporting ahead of introducing primary legislation e.g. either reporting at subsidiary level or reporting on a consolidated group basis.
Establishing a tiered approach
To help ensure proportionality the Government does not intend to apply requirements to have an audit committee, to retender the audit every 10 years and to rotate auditor every 20 years to entities that are PIEs because of the new size-based threshold. These are also the costliest requirements for PIEs, therefore, as far as possible, the Government does not intend to extend these requirements at this stage to size-based PIEs.
While in general ARGA's remit will extend to all PIEs in view of their substantial public interest, the Government believes smaller PIEs should not be subject to the new corporate reporting requirements, in order to minimise burdens and ensure a proportionate approach.
This is in line with the Government’s determination to make the UK listings market even more attractive, both to UK companies considering an IPO and to overseas companies considering where to list.
The Government therefore intends to introduce a tiered approach to reporting: to apply the new corporate reporting requirements i.e. Resilience Statement, Audit and Assurance Policy, directors’ statement on fraud measures and the new disclosures about dividends and distributable reserves only to PIE companies with 750 or more employees and £750m or more in annual turnover.
UK listed companies below the threshold would still be subject to the FCA’s Listing Rules (including the need to have adequate systems, controls and processes in place) and to Companies Act requirements on risk reporting. Likewise, credit and insurance companies not meeting the threshold would still be subject to regulation by the FCA and the Prudential Regulatory Authority (PRA). There is precedent for excluding smaller PIEs from reporting requirements: for example, the requirement for a nonfinancial information statement, introduced in 2017, applies to PIEs with more than 500 employees.
Creating scope for deregulation and fine-tuning of PIE audit requirements
The UK is no longer legally required to follow the EU’s PIE definition, and this provides an opportunity to review the PIE framework to remove any undue burdens. For example, since current PIEs are generally either subject to the FCA’s Listings Rules or regulated by the PRA and FCA, there may be some scope for removing duplication between some of these regulatory regimes and the additional requirements applied to PIEs, particularly to smaller PIEs under the current definition. There may be other examples where the Government could choose to reduce burdens for PIEs. In line with the approach set out in The benefits of Brexit (January 2022), the Government will review the existing regulatory framework for PIEs to identify further deregulatory opportunities.
Going forward – greater flexibility
The Government intends to legislate so that Ministers can disapply PIE requirements from particular entities or categories of entities in secondary legislation, according to further consideration of the potential benefits and disadvantages of a more targeted approach.
The Government recognises that ‘public interest’ may evolve over time, and that the PIE definition may need to evolve with it. Therefore, the Government intends to legislate so that Ministers can amend the size threshold by secondary legislation in future, as well as including or excluding groups with specific characteristics such as sector or company type, if it proves necessary. These delegated legislative powers would be subject to Parliamentary scrutiny.
Share your views
If you have any views on the above, then please send these to James Barbour CA, Director, Policy Leadership.