King's speech heralds sweeping changes for UK corporate finance
The government’s legislative agenda, outlined in the recent King’s Speech on July 17, signals a sea change in corporate governance and financial regulation that will reverberate through British boardrooms.
At the heart of the proposed reforms is the Draft Audit Reform and Corporate Governance Bill. This legislation aims to address long-standing concerns about audit quality and corporate failures by establishing the Audit, Reporting and Governance Authority (ARGA) to replace the Financial Reporting Council. ARGA will wield expanded powers to investigate and sanction directors, potentially increasing personal liability for CFOs.
The bill also extends Public Interest Entity status to large private companies, subjecting them to more rigorous audit requirements. Importantly, it will remove unnecessary rules on smaller Public Interest Entities, making life easier for important smaller businesses by cutting disproportionate requirements.
Fiscal policy is set for an overhaul with the Budget Responsibility Bill, which mandates independent assessment of significant tax and spending changes by the Office for Budget Responsibility. This ‘fiscal lock’ is designed to prevent large-scale unfunded commitments that are not subject to an OBR fiscal assessment, reinforcing market credibility and public trust.
The implications of this bill for corporate finance are far-reaching. CFOs will need to navigate a more predictable, but potentially less flexible, fiscal environment. The requirement for OBR assessment could lead to slower implementation of tax changes, necessitating more agile financial planning. Companies may need to develop more sophisticated economic modeling capabilities to anticipate the outcomes of these assessments and their impact on business operations.
Moreover, this increased fiscal transparency could lead to more stable economic conditions, potentially reducing uncertainty in financial markets. This stability might benefit long-term corporate planning and investment decisions. However, it may also limit the government’s ability to respond rapidly to economic shocks, which CFOs should factor into their risk management strategies.
The bill also underscores the growing importance of economic literacy in the C-suite. CFOs may find themselves increasingly called upon to interpret OBR assessments and explain their implications to boards and shareholders. This could elevate the strategic role of the CFO within organisations, particularly in sectors heavily influenced by fiscal policy.
Furthermore, the emphasis on preventing unfunded commitments could lead to a more conservative fiscal environment. CFOs might need to reassess their companies’ reliance on government incentives or subsidies, particularly in sectors like renewable energy, infrastructure, or research and development.
The ‘fiscal lock’ could also impact public-private partnerships and government contracts. CFOs in sectors that frequently engage with the public sector may need to adjust their strategies to account for potentially longer lead times in fiscal decision-making.
The establishment of the National Wealth Fund, with its £8.3bn capitalisation, signals the government’s intent to catalyse investment in clean energy and infrastructure. The fund will directly invest in priority sectors set out in the manifesto in every corner of the country, aiming to generate £3 of private sector investment for every £1 it invests.
This ambitious initiative presents significant opportunities and challenges for corporate finance leaders. The fund’s focus on clean energy and infrastructure projects signals a shift towards sustainable finance, which CFOs will need to factor into their long-term strategies.
The fund will develop, own and operate assets, investing in partnership with the private sector. This structure opens up potential for public-private partnerships, which could create complex financial arrangements that CFOs will need to navigate. These might include new forms of risk assessment, valuation methods for emerging technologies, and specialised tax considerations for clean energy projects.
With the fund aiming to unlock billions in private sector investment, CFOs should be prepared for a potential surge in investment opportunities, particularly in renewable energy, sustainable infrastructure, and related technologies. This could necessitate a re-evaluation of corporate investment strategies, with a greater emphasis on ESG (Environmental, Social, and Governance) factors.
The fund’s nationwide focus, with investments planned “in every corner of the country”, suggests that CFOs may need to familiarise themselves with regional economic development strategies and local investment landscapes. This could be particularly relevant for companies with operations across multiple UK regions.
Furthermore, the fund’s establishment under the Great British Energy company, headquartered in Scotland, underscores the government’s commitment to the clean energy transition. CFOs in energy-intensive sectors should be prepared for potential shifts in energy pricing and availability, which could impact operational costs and supply chain strategies.
The fund’s aim to leverage private investment may lead to innovative financing structures. CFOs might find opportunities to advise on deal structuring and financial modelling in these emerging sectors. This could require developing new expertise within finance teams, particularly in areas such as green bonds, carbon pricing, and sustainability-linked financing.
For CFOs in the renewable energy and infrastructure sectors, the fund represents a significant opportunity for growth and expansion. However, it also means preparing for increased competition and potentially more complex bidding processes for major projects.
Digital transformation is another key theme, with the Digital Information and Smart Data Bill set to reshape data management practices. The bill will enable new innovative uses of data to be safely developed and deployed, potentially changing how CFOs handle and utilize client data. It includes provisions for Digital Verification Services, which could save businesses around £600 million per year.
The Employment Rights Bill introduces new protections for workers, including banning exploitative zero-hour contracts and ending ‘Fire and Rehire’ practices. This may require CFOs to reassess employment costs and structures, particularly in industries reliant on flexible labour.
Energy strategy is also in focus, with the Great British Energy Bill establishing a publicly owned clean power company. This new entity will develop, own and operate assets, investing in partnership with the private sector. It aims to take a stake for the British people in projects and supply chains which accelerate technologies of the future.
As these reforms take shape, CFOs will need to adapt quickly. “The role of the CFO is evolving from financial steward to strategic partner in navigating this new landscape,” observes the chief executive of a leading business lobby group.
Priorities for finance chiefs in the coming months should include:
While the proposed legislation presents challenges, it also offers opportunities for businesses to differentiate themselves through enhanced governance and strategic alignment with national priorities. As one FTSE 100 CFO puts it, “Those who embrace these changes proactively will be best positioned to thrive in the new regulatory environment.”
As the legislative process unfolds, finance leaders would do well to stay closely attuned to developments. The ability to turn potential hurdles into competitive advantages may well define the next generation of successful CFOs.