Episode 36: Regulating large and small firms

In this month’s Institute of Regulation podcast, Marcial Boo speaks with Charity Commission CEO David Holdsworth and FRC Executive Director Mark Babington about how regulators can be both consistent and fair when overseeing organisations of very different sizes. They discuss the challenge of applying the same rules to entities ranging from sole traders to global firms, and how proportionate regulation, clear guidance, and an understanding of smaller organisations’ needs can support fairness. The conversation explores how regulators assess risk, reduce administrative burdens, and maintain public confidence, while keeping regulation stable and under review. They also highlight the value of collaboration between regulators.

Keywords: UK regulation, regulatory fairness, proportional regulation, Charity Commission, Financial Reporting Council, Institute of Regulation, risk assessment, balancing regulatory standards, reducing regulatory burden

Transcript

01:08.12
Marcial
Welcome to the regulation podcast from the Institute of Regulation. My name is Marcial Boo, chair of the Institute and a regulator myself. The topic of this month's podcast is relevant to every regulator because we all regulate a mixed community of organizations, some large and some small, whether they're companies or charities or public bodies.

01:26.78
Marcial
The larger entities we regulate may employ thousands of staff, including teams whose job is to ensure compliance with our rules and regulations. But others we regulate are small, maybe even startups, sole traders or local charities staffed by volunteers. And as regulators, we must apply the same rules to everyone. But smaller organisations can struggle with large data or compliance burdens.

01:53.02
Marcial
How can regulators be both consistent and fair? It's a question that we have two expert speakers to help us to address. David Holdsworth has been Chief Executive of the Charity Commission for England and Wales since June 2024, having previously led the Animal and Plant Health Agency and been Deputy CEO at the UK Intellectual Property Office with senior operational roles in the Immigration Service earlier in his career.

02:19.80
Marcial
David regulates 170,000 charities ranging from parish groups to international aid agencies. Welcome, David.

02:28.50
David Holdsworth
Thanks very much, Marcel. Great to be here.

02:30.94
Marcial
Thank you. And also with us is Mark Babington, the Executive Director of the regulatory of Regulatory Standards at the Financial Reporting Council. Mark is also on the International Ethics Standards Board for Accountants and was previously a Director at the UK National Audit Office and on the Board of the Westminster Foundation for Democracy.

02:50.30
Marcial
The FRC regulates the UK's auditors, actuaries and accountants working in firms of all sizes, who in turn review the accounts of all UK companies from SMEs to multinationals.

03:02.78
Marcial
Welcome, Mark.

03:04.44
Mark Babington
Thank you, Marcial. Looking forward to the discussion.

03:06.97
Marcial
Thanks to you both. Now, before we get into the details, let's ah set the scene for both of your regulators, the work that you do. David, I've said that you regulate charities of all sizes, but tell us a little bit more about their range and their size.

03:20.92
David Holdsworth
Yeah, so as you've said, Marcelle, we regulate 170,000 charities, and between them they generate £100 billion pound a year in income, and they manage just over £300 billion pound in assets. But there's a wide range in the sector, so 40% charities have less than a year's income. And then at the top end, we have some of the world's largest charities, charities like the Wellcome Trust, where they were set up by a wealthy philanthropist in times past.

03:54.37
David Holdsworth
And they obviously have an asset base of £35 billion pound now as a single charity. So we go from very small, less than £10,000 a year, right the way up to some of the world's largest.

04:07.58
Marcial
Well, that's ah that's a massive range, and we're going to come and talk about the implications of that for you as a regulator in a moment. But coming to you, Mark, I've also said that the FRC, the Financial Reporting Council, regulates thousands of auditors and others. um How would you characterise that regulated community?

04:24.61
Mark Babington
So in a way it has many parallels with David's world because there are just over three and a half thousand audit firms carrying out statutory audit in the UK, and they range from global firms like the big four right down to sole practitioners who might be working on providing services to just a handful of clients.

04:46.34
Mark Babington
All of those operating within that sector are following the same standards, the same obligations, they're working in the public interest, but obviously they have very different scope and scale.

05:01.50
Marcial
Well, this absolutely comes to the heart of this question. And as I said at the beginning, it's one that I think pretty much all regulators have to deal with.

05:06.94
David Holdsworth
Oh.

05:11.48
Marcial
So let's come to this. How do you treat your regulated community by size? I said earlier... and you've both hinted at this, that the larger organisations can afford compliance teams and the smallest ones may be the compliance officers, is the same person who's the chief executive who's also the director of finance and HR.

05:31.79
Marcial
So David, on the Charity Commission, working with these entities, what do you do to distinguish charities by size, and how do you support those smaller bodies?

05:45.11
David Holdsworth
It's a really good question and one that we grapple with every day. i think the first thing to say is that, regardless of the scale of the organisation and operations, trustees have the same fundamental legal duties regardless of the size of their charity.

05:59.61
David Holdsworth
So all trustees must, to name just a few of the duties, ah must ensure their charity complies with its governing document.

06:05.96
Mark Babington
So yeah, I'll just have a few questions.

06:07.46
David Holdsworth
ensures that everything the charity does ultimately helps deliver its charitable purposes and that they manage conflicts of interest or loyalty. However, the detail involved and the expectation of us as a regulator on how they fulfil those duties varies. So yeah, a large charity delivering a programme of work in a risky part of the world via a local partner will have to undergo significant due diligence, and we set out in our guidance the levels that we expect.

06:37.75
David Holdsworth
But we wouldn't expect to see the same level of detail from a small charity, considering a joint project with another local charity, for example. But what we do expect as a set of trustees is that they are able to demonstrate how they've considered their duties and how they demonstrate sound judgment.

06:56.51
David Holdsworth
We've worked hard to ensure our guidance is accessible to all trustees. So recently we've undertaken a review of our guidance and produced a series of five-minute guides and videos. So that distils down and enables trustees, you know, perhaps at the start of a board meeting, instead of going straight into the meeting, watch one of the regulators' videos, five minutes at the start, and it gives you a really succinct ah take on what our advice and our regulatory guidance is.

07:23.68
David Holdsworth
In the past, I think it's fair to say our guidance was very long and complex, and we've recognised that. And I think some of that was driven by the fact that we viewed some of our regulated community as the solicitors, the accountants, the advisors to charities.

07:29.74
Marcial
Thank you.

07:38.75
David Holdsworth
We very much now see our regulated community as the trustees, as the senior leaders in charities themselves, and we must tailor that guidance and advice to them. So whilst there's no formal difference, for example, in the legal duties, we apply proportionality, and we do it in a number of ways. We do it via our guidance. We do it via the proportionality test we apply to our casework and the risk framework we have in place, which sets out how we handle different types of issues.

08:09.24
David Holdsworth
And really recently, we've worked with the government to reduce the burden on smaller charities, where we've increased the threshold around accounting reporting from £250,000, which takes thousands of charities out of that more detailed reporting regime.

08:27.49
David Holdsworth
So I think it's fair to say it's an ongoing challenge, as I'm sure Mark would agree. And it's something that you have to really stay on top of as a regulator. Otherwise, you can find that in responding to individual issues, regulatory creep can happen, burden creep can happen.

08:45.72
Marcial
Goodness, that's a lot of really great stuff there. And you've mentioned some things, I think, that Mark's going to reflect on in his own regulatory environment, including risk, the use of judgment, guidance, communications, and proportionality. But Mark, maybe you can then talk to us about what the FRC does to support the regulation of those in financial services, you know, drawing on some of the things that David said.

09:15.48
Mark Babington
Well, again, it's ah it's quite a parallel world, Marcial. You know, we face a number of the same challenges. um One of the differences is that there are some different categories set out in law for audit.

09:30.62
Mark Babington
So, for instance, the largest players in the market generally are those firms that audit public interest entities. So those will be large listed companies, banks and insurers.

09:45.34
Mark Babington
Those we regulate directly. So we inspect their work, we oversee what they do, and obviously, we have a close working relationship with them as the sector regulator.

10:02.58
Mark Babington
However, for the rest of the market, we operate through our delegates, so the professional accountancy bodies, and they will carry out a proportionate approach to looking at the quality of work done and how people meet their obligations.

10:17.94
Mark Babington
But obviously, in a very large firm, we might have a team there who largely work there all the year all the year round. In a small firm, they might be visited once every six years.

10:29.21
Mark Babington
So, you know, it's trying to scale things. But one of the challenges that we have is that we have a responsibility for the health of the market as a whole. So we want the audit market to be sustainable and we want it to be resilient. So one of the things that we have to do as a regulator is work with some of the smaller players to help them scale up and grow, and to make sure that we've actually got a market that is not at risk of collapse, for instance, if you have a major player who decides to walk away for one reason or another.

11:01.28
Mark Babington
So a lot of our work at the moment, and we have a number of different programmes, is really as an improvement regulator seeking to help people who want to expand and develop the work that they do.

11:14.84
Mark Babington
And that's in audit, but obviously, audit is a regulated activity, but in a way, you know, we have oversight responsibilities for the work of the professional bodies.

11:25.69
Mark Babington
They, of course, are looking not just at auditors, but at the work of accountants as well. And in the actuarial space, we have a similar relationship where we work with the Institute and Faculty of Actuaries. So it spreads across all of our work.

11:40.11
Marcial
That's really interesting. So there's there are some parallels there, which I'll come back to. But and but obviously, as you say, Mark, you um you have that responsibility for a market in a way, David, that you don't quite. But the parallel is, is in ensuring public confidence in the sectors that you're regulating. And obviously, on the one hand, Mark, you're talking about that in terms of you know the health of the sector overall, the health of the market. But but David...

12:06.20
Marcial
You want to make sure that people have confidence in the charities that they're giving money to, for example, or that they're volunteering for. And you've both talked about risk. And it's obviously something that regulators focus on. Understanding risk is at the heart of good regulation. Mark, you've talked about regulating directly. Some organisations are using proxies. And David, you've talked about understanding risk as well.

12:31.93
Marcial
Do you think that there is a correlation ah between risk and size? It's a contentious question because some smaller companies or charities may not want to think of themselves as inherently riskier from a regulatory perspective.

12:49.10
Marcial
But is there something to think about, in terms of size and risk? Mark, starting with you first this time, do you think that's the case?

12:56.82
Mark Babington
Well, well, there always is a size consideration because if something goes wrong with a large player in your market, then the impact of that can be very significant. So think back a number of years, for instance, when Anderson collapsed.

13:14.20
Mark Babington
That had waves across not just the market in the UK, but globally. um But the thing is, in common with some of the challenges that David has, you know, this is all about what underpins public confidence in the work that's being delivered.

13:33.59
Mark Babington
And actually, you know, an egregious failure in a small player can actually really concern the marketplace. So, you know, one size does not fit all. And, you know, from a regulatory perspective, we are a public interest regulator.

13:51.80
Mark Babington
And the public interest is not something that you can easily define in a standard way. um The public interest is something that is by reference to the circumstances that you're operating in. So you can have a really significant public interest issue in a small player.

14:09.56
Mark Babington
You can have an issue with a large player that is perhaps a lesser public interest issue. So you have to be, you know, quite responsive to the circumstances you find yourselves in. And you can't just say, well, this is what happens to you because you're here.

14:27.51
Marcial
Well, goodness, David, I'm sure that, that resonates with you, regulating charities. um How do you feel about that relationship between smaller charities and risk?

14:38.25
David Holdsworth
It's fascinating, isn't it? You're listening to Mark, the parallels, despite our different sectors that we regulate, are ah really striking. And I agree with Mark wholeheartedly in that, for us, we actually have a statutory duty baked into primary legislation which says we have to increase public trust and confidence in charities.

15:00.38
David Holdsworth
So, as Mark says, there can be an issue that happens in a large charity, which will have a significant impact on public confidence.

15:10.65
David Holdsworth
Now, when you have a sector like the charity sector, which doesn't rely on the sale of products, but relies on the generosity of the British public to the tune of over 30 billion a year, public trust and confidence are hugely important to its ability to deliver for its beneficiaries and the wider public.

15:14.15
Marcial
Thank you.

15:31.76
David Holdsworth
And when you look at why it is important, you've got to get past just the numbers and look at the difference it makes. You look at, for example, the British Heart Foundation, a charitable health sector organisation. In the last 30 years, the investment in research has been huge, a lot of it from the British public. And that's had a massive difference. 30 years ago, seven in 10 people who had a heart attack died.

15:56.45
David Holdsworth
Today, has switched around. Seven in 10 people survive a heart attack through a mix of research and education. And a lot of that came from the charity sector. But we know when issues happen, if we look at Oxfam in 2016, when there was the scandal around Haiti and Oxfam in 2016, that was the first time we'd measured a drop in public trust and confidence in charities.

16:21.78
David Holdsworth
What you then saw was a direct play through of the ability of the sector to raise money from the public. So we know that direct correlation exists, public trust and confidence, their willingness to spend, or perhaps in Mark's case, their willingness to trust an organisation with their assets.

16:38.74
David Holdsworth
So for all of us as regulators, we must remember the primary duty is the public interest, the public trust and confidence. And the really important thing is how we engage the sector on that. Now our data shows, there is no our casework shows there is no difference in risk between a small and a large charity.

16:58.87
David Holdsworth
But as Mark says, the impact can be different depending on the brand, the reputation, and the scale. But what our data does show is filing compliance, so their submission of their annual reports and account to us.

17:11.60
David Holdsworth
Actually, smaller charities are disproportionately more likely to default. And we need to understand why that is, which is what we're exploring at the moment, how we can enable those smaller entities to comply with their duties without it being overburdensome.

17:27.58
Marcial
Okay, that's really helpful. So it's not, what I'm hearing is it's not a very simplistic, obviously, as you'd expect, not simplistic correlation between size and risk.

17:38.01
Marcial
But size does matter. And particularly in respect of the burdens that some small entities experience from the regulator. So let's move on and talk about that. Because obviously, this current UK government, like its predecessor, wants to cut regulatory admin burdens, quite rightly so, um because regulation needs to be efficient as well as effective.

17:59.74
Marcial
But as you've as you both mentioned, even limited regulatory burdens can weigh more heavily on smaller businesses and charities. um so So you both mentioned being proportionate. David, you've just talked about burdens, and you mentioned earlier about changing reporting regimes for charities that are of a smaller size. So Mark, what's the FRC doing to reduce admin burdens for those you regulate, and do you differentiate by their size?

18:30.81
Mark Babington
Absolutely, we do. So, I mentioned one of the things that goes on is the inspection of audit work. And as I said, you know, a smaller player in the market might be inspected on, say, a six-year rotation.

18:41.34
David Holdsworth
Thank you.

18:46.10
Mark Babington
So they're not being visited every year. We do work with other parties, including with David and his colleagues, for instance, over the development of accounting frameworks that are designed to meet the needs of a particular sector or a particular market.

19:04.51
Mark Babington
So the Charities Commission is one of the organisations that we work with to develop a charity sort, you know, how to meet the needs of that sector and allow it to communicate with its stakeholders.

19:17.33
Mark Babington
Some of the other things are about working with smaller players in the market to say, this is how you can meet your obligations in a more proportionate way that is reflective of the size and complexity of your business.

19:32.85
Mark Babington
So that might only require limited disclosure of information, or it might require you to confirm rather than going into the details of something.

19:43.34
Mark Babington
So we're very careful to make sure that in what we do, we don't add to the burdens that businesses or those we regulate face. One of the other things as well that is perhaps slightly different in our world is that the standards that are used by auditors and accountants are set at the global level, at the international level.

20:04.70
Mark Babington
And what's a real benefit to UK business and UK operators in the market is if we can use the international standards here. Because the work that you do and the reporting that you do can then be used in multiple jurisdictions.

20:21.34
Mark Babington
So you're not actually incurring additional cost. So one of the things we look at very closely is, can we make sure that we align with what's happening at the international level?

20:31.60
Mark Babington
Because that is a way of reducing regulatory burden.

20:35.53
Marcial
That's fantastic. And again, a particular example about the sector that you regulate there, Mark, to help UK businesses deal with regulatory burdens and reduce them. David, you mentioned, as I say, that you've changed reporting requirements for smaller charities.

20:53.85
Marcial
The government is focusing understandably on the business market to reduce admin burdens to improve growth in the economy, but you'll be doing the same there, for the reasons that you set out earlier about and making sure that money invested in charities is it goes to the purposes of the ah of the charity. So you want to say a little bit more about how you're trying to reduce admin burdens on the charities that you regulate?

21:19.29
David Holdsworth
Yeah, I think it's all about proportionality, and it's all about risk as we've discussed, and it's important to keep that under continuous review. But I think we need to remember that most regulation comes about because of a failure, because something went wrong.

21:34.58
David Holdsworth
And what we can't forget is why that regulation is important. I think what we need to do from time to time is take a step back because all regulation evolves over a period of time.

21:47.03
David Holdsworth
Sometimes, what you need to do is a bit, as we say to charities, remember your charitable purpose. Does everything you do further that charitable purpose? We need to go back to basics every now and then and look at whether the regulation we're doing is still meeting its objective, which is public trust and confidence.

22:04.79
David Holdsworth
And we know, for example, from our research that we do every year, that what matters to the public is knowing that the money they donate gets to the end cause and gets to the beneficiary. And that is a key driver in their trust and their willingness to give.

22:19.99
David Holdsworth
So making sure that our regulation is meeting that transparency, is meeting those public expectations, is what matters because that's what drives public trust and confidence.

22:30.88
David Holdsworth
That's what enables charities to raise funds. It's what enables them to deliver their charitable purpose and make our communities and society better. So we have a very close relationship, as Mark says, with other regulators.

22:44.16
David Holdsworth
We look at how we can work together. Mark gave an example of the SOAP and the regulations that we work closely on there, and how we make sure that we reduce that burden.

22:56.37
David Holdsworth
We're also doing the same with Companies House. We're exploring how you can file once. There are 26,000 charitable companies who have to file with Companies House, and they also have to file with us.

23:07.08
David Holdsworth
Well, let's move to a point where you only file once with the government. You don't have to dual file. So we're exploring that at the moment with Companies House and using technology to benefit that.

23:18.04
David Holdsworth
And we've also introduced changes to legislation. So the Charities Act 2022 enabled and eased certain regulations.

23:26.47
David Holdsworth
And a new example was the Act, which introduced a new statutory power for trusts and unincorporated organisations to make certain changes to their governing document for the first time without having to get formal approval from the regulator, from the Commission.

23:41.63
David Holdsworth
So we are looking at it, but it is important to remember that regulation is there for the public interest, and the balance must be right.

23:50.25
David Holdsworth
Otherwise, as we've seen in the past, things can go horribly wrong, and the cost when things go wrong can often outweigh the burden of regulation if you don't get it right.

23:59.26
Marcial
Absolutely right. Before we carry on, I think we'd better just explain what a SOARP is because ah both of you have mentioned it now, and some people won't know. Mark, maybe I can ask you to just say what a SOARP is and why it's important for regulatory purposes.

24:13.24
Mark Babington
Indeed. So a SOAP is a statement of recommended practice. So it's a particular way of reporting that's tailored to the needs of the sector. So like obviously with a charity, it will want to be able to demonstrate how it's um used the funds that it's raised.

24:32.86
Mark Babington
And, you know, having something that's targeted and proportionate and allows them to do that is a really good communications tool, not only for their accountability, but also to show, you know, if you give money to this particular charity, this is where it's going.

24:48.26
Mark Babington
This is what it's doing.

24:50.03
Marcial
Fantastic. Well, that's a good example of a tool that we all use. And we all use acronyms to describe these tools to help us to assess and regulate the sectors that we're responsible for. So I'm going to summarise where we've got to, because we obviously talked about the importance of risk, understanding where the risk is, and the different dimensions of that, and reducing burdens. But you've also both talked about proportionality.

25:18.23
Marcial
In the context of regulating larger and smaller entities and the judgment that you apply as regulators to assess how to regulate in different contexts and different organisations of different sizes, bearing in mind public confidence.

25:21.92
Mark Babington
That the employment has regulated to assess and to recommend different contacts in the school.

25:34.01
Marcial
I think that's come through from both of you very strongly. Mark, do you think that's a fair summary of the issues that we've discussed? And is there anything else that you'd like, just particularly to pick on as an important thing for those listening to this podcast who also regulate entities of different sizes?

25:52.70
Mark Babington
um I suppose the key thing that's come out of our discussion today, Marcial, is, well, firstly, I agree with you, you know, in terms of the challenge that we face in regulating businesses of different sizes or entities of different sizes.

26:06.55
Mark Babington
But I think the one thing that we've shown through our discussion today is the importance of regulators working together. Because, you know, we've talked about having things that are proportionate and reduce burdens.

26:19.45
Mark Babington
And actually, you know, we can act in a way that we think is going to reduce the burden, but it might increase the burden for David's regulated community and vice versa.

26:32.06
Mark Babington
So what it does show is the importance of regulatory coordination. And to make sure that what we're doing not only works for the issue that we are regulating with respect to, but it works holistically for the sector of the market or the market as a whole that we're involved in.

26:51.46
Marcial
That's fantastic. And as a charity trustee, you know, three decades or so in different organisations, David, the suggestion that charities at Charity Commission and Companies House are going to work together on a single filing, that's a fantastic idea, and I absolutely applaud that initiative. So, David, back to you for the final comment. We've had a fascinating conversation about all kinds of areas that I know others will be interested in, but, from your perspective,

27:20.76
Marcial
What do you think other regulators who are listening to this should think about when they're considering how to regulate large and small entities fairly and consistently?

27:30.42
David Holdsworth
Well, firstly, I absolutely agree with Mark that regulatory coordination is vital. And I think if we're honest as regulators, we've not been great at that in the past because, you know, the Acts of Parliament, which we all work to, quite rightly, focus on individual sectors. And whereas, so we're all law-driven regulators, but actually...

27:50.04
David Holdsworth
Working together, looking across overlaps and boundaries, is a really important thing for us to do as regulators. From my perspective, I think one of the important things is really understanding the sector you regulate, understanding what you're asking of them and the burden that places on them, and also perhaps some unintended consequences. So one of the important things we've learned is before we introduce any changes to our annual reporting system, to thresholds, really ensure you engage with the sector, and you understand what you're trying to do will have the intended outcome. You know, regulators often work; we all work with the best of intent. We've all got good intent. We want to make things better for the public, for the sectors we regulate.

28:35.26
David Holdsworth
But sometimes we can have unintended consequences. So one of the really important things, I think, is engaging with the sector before you introduce, adapt or change your regulation. Stability, certainty, and consistency can have a massive difference to a sector.

28:51.90
Marcial
Fantastic. Well, absolutely agree with that final point that you've just made, David, because a good, stable regulatory environment is in itself a stimulus for growth. And as companies and anybody else can come to the UK and feel that they've got a degree of certainty about the regulatory environment and invest and create jobs, and because they know that they're not going to have ah some somebody undercut them or the rules change overnight. So, it's a fantastic conversation that we've had. And it's remarkable, as you've both noted, how many parallels there are between the world of regulating audit and the world of regulating charities. And I'm very grateful to you both. And I'm sure that other people will find the conversation very interesting. Thank you very much again. David Holdsworth from the Charity Commission ah for England and Wales, and Mark Badington from the Financial Reporting Council. Thanks also to our sound engineer, Neil Bowerman of Bowerman Audio Production. And I hope those of you listening to this have found the discussion as interesting as I have. Do let your colleagues know about it and share the link.

30:01.24
Marcial
And tune in to future podcasts where we'll talk about other issues of relevance to regulators here in the UK and indeed internationally. and there's material and events on the Institute of Regulation's website, ioregulation.org.

30:15.53
Marcial
So that's all from this podcast. Thanks from me, Marciel Bou. Good luck with your own regulatory challenges, and do stay in touch to help UK regulation become the best it can. Thanks very much. Goodbye.