The watchdog will invite challenger firms into a “scalebox” initiative, providing them with tailored plans and mentoring to improve their audit quality for listed companies and financial institutions, known as public interest entities (PIEs). In return, participating firms will be exempt from FRC inspections and face fewer regulatory hurdles when taking on new PIE audits.

FRC chief executive Richard Moriarty said the regulator would offer “a more forbearing formal regulatory oversight”, but stressed that “accountability for improvement will, however, rest firmly with the audit firms themselves and a condition of remaining in the programme is that we see progress over time”.

The move addresses long-standing concerns over the lack of competition in the audit market. In 2023, the Big Four – Deloitte, EY, KPMG, and PwC – audited 98% of the FTSE 100. This dominance has created fears over conflicts of interest, famously highlighted when HSBC struggled to attract bids for its audit in 2021 due to the Big Four’s lucrative consulting contracts, Financial Times reports.

However, a significant barrier for challenger firms has been meeting the FRC’s stringent quality standards. The regulator’s latest review found that 65% of PIE audits by firms outside the top 12 required “significant improvements”. This quality gap, brought into sharp focus by corporate collapses such as Carillion, has led some firms to reduce their PIE work and has seen even successful challengers like BDO criticised.

The FRC hopes this new supportive approach can cultivate a more competitive and resilient market.