The changes to the Audit Regulations will take effect from 1 October 2024. There will be a transitional period included in the Regulations to allow firms until 1 April 2025 to comply with the changes relating to voting rights and majority control.

Qualified persons are:

• individuals who hold an appropriate (audit) qualification;
• certain third country auditors; and
• audit-registered firms.

We are amending the definition of ‘voting rights’, adding a new definition for a ‘majority’ and aligning the guidance under regulations 2.03b and 2.03c to these new definitions.

The Audit Regulations need to be aligned with the requirements in the FRC’s Eligibility Criteria and the Companies Act 2006 (the Act). At present, the requirements in the Audit Regulations are looser than the Eligibility Criteria and the Act, and having taken external advice, we need to update the Audit Regulations. 

No. The Audit Regulations’ current explanations of ‘majority’ and ‘voting rights’ are looser than the Eligibility Criteria and the Act and as such the regulations need to be tightened.

A simple majority is more than 50%. 

A super-majority is approval by more than a simple majority (for example, 75% approval, 90% approval etc.).

Decisions on all matters that direct the overall policy of the firm or alter its constitution. This applies to decisions made by holders of voting rights (under regulation 2.03b) and where such decisions are made by a management board of the firm* (under regulation 2.03c).

*Defined in the Audit Regulations as “The committee, board or other body which administers or manages the firm.”

This is likely to need a careful assessment by the firm, as explained in the Steps to be taken section. In broad terms, directing the policy of a firm means directing how managerial, financial and administrative mechanisms are to be arranged to reach explicit goals. While we can provide help to assist a firm’s assessment, the ultimate decision rests with the firm. It may be necessary for firms to take external legal advice on whether a certain decision does direct its overall policy.

These provisions only apply to matters that direct the overall policy of the firm or alter its constitution. You may need to take advice on whether a particular matter falls within the scope of this revised definition of ’voting rights’.

The deadline is 1 April 2025 but we recommend you start work now to make sure you have sufficient time to make any changes.

No. Firms will need to draft their own changes to governance documents. We are happy to help review and assess any proposed alterations that the firm prepares. 

The firm will be ineligible for audit registration and will not be able to issue any audit reports. The firm’s audit registration will not be able to continue if the matter cannot be resolved by the date when the changes to the Audit Regulations come into effect.

However, a firm may be able to apply for a 90-day dispensation under the provisions in Audit Regulations 2.17-2.20, provided the application for dispensation is made with 10 business days of the breach occurring, and the firm can demonstrate it is taking all necessary steps to resolve the matter. Any dispensations will be considered on a case-by-case basis but in all cases cannot exceed 90 days starting from the date of the breach as stipulated by the Act.

We can accept dispensation applications submitted before the breach, ie, if your firm is aware that the necessary changes to governance documents will not be completed by 1 April 2025. But please note, the dispensation is always subject to a maximum, non-extendable period of 90 days from the date of the breach.

These matters will typically affect the firm’s constitution (eg, change of company name, amending the Articles of Association, winding up of the firm, reduction in share capital etc.). As such, firms that are limited companies will need to ensure they have sufficient qualified persons to approve any decisions that require a special resolution to be passed.

A limited company firm may be able to include provisions in its Articles of Association to deprive a certain class/type of shareholders of the right to vote in certain circumstances. We would strongly advise limited company firms to obtain legal advice on whether changes are needed to their Articles of Association to ensure qualified persons hold a majority of voting rights.

If the investor/shareholder whose approval is needed for the ‘reserved matters’ is not a qualified person (as defined in the Act) then the firm is likely to be in breach of the updated regulations, unless the firm has another mechanism that gives qualified persons the ability to vote on all matters that alter its constitution or direct its overall policy.

Firms with ‘reserved matters’ may need to take advice on what changes are needed to their governance arrangements to ensure the updated requirements of regulations 2.03b and 2.03c will be met from 1 April 2025.

Yes.