Implementing audit committee requirements under the revised Statutory Audit Directive

Policy Statement 16/16 | Consultation Paper 34/15

Published on 18 May 2016

Implementing audit committee requirements under the revised Statutory Audit Directive – PS16/16

This Prudential Regulation Authority (PRA) policy statement (PS) provides feedback to responses to Consultation Paper 34/15 ‘Implementing audit committee requirements under the revised Statutory Audit Directive’ (CP34/15). It also sets out the final rules in Appendix 1, implementing the audit committee requirements of article 39 of the Statutory Audit Directive as amended by Directive 2014/56/EU for PRA-regulated firms.

This policy statement is relevant to CRD credit institutions, UK Solvency II insurance and reinsurance firms, the Society of Lloyd’s and managing agents and PRA-designated investment firms.

The PRA has made the following changes to the proposals set out in CP34/15 in light of the consultation responses:

The smallest firms are invited to apply for a waiver or modification of the rules, having regard to the Directive minimum requirements. Refer to Proportionality in Chapter 2 of the PS.

The PRA has introduced transitional arrangements for a period of two years. Refer to Transitional measures in Chapter 2 of the PS.

The PRA has amended the independence of membership requirements for significant subsidiaries of parent undertakings in the European Economic Area (EEA) and outside it also (non-EEA). The requirement in the final rules is for a majority of, rather than all, the members of the subsidiary audit committee to be independent, including the chairman, provided that the audit committee of the subsidiary’s parent is comprised fully of independent non-executive directors (independent NEDs). Refer to Independence of membership in Chapter 3 of the PS.

The PRA has taken the opportunity in this PS to offer clarification as to the intent of the policy in certain areas without a resultant change to the rules. These include the PRA’s approach to independence, clarification of the PRA’s expectations regarding competence, aspects of audit committee functions and how the audit committee requirements will operate alongside the Senior Managers Regime (SMR) and Senior Insurance Managers Regime (SIMR).

The PRA will take forward the proposed requirements, grouped into four distinct themes, in line with CP34/15: i) scope; ii) structure; iii) membership; and iv) functions.

In light of this publication an update to Supervisory Statement 21/15 ‘Internal governance’ was published on 18 May 2016.

Application date

Subject to the provisions during transition, the policy applies to financial years commencing on or after 17 June 2016. Considering this application date, a firm with a financial year beginning on 1 July would be expected, where relevant, to have its audit committee in place and constituted in accordance with the PRA’s rules by around October of that financial year – the point at which it is expected that the external auditors may be meeting with the audit committee as part of their audit planning cycle for that financial year. 

PDFPolicy Statement 16/16

Appendix 1

PRA RULEBOOK: CRR FIRMS AND SOLVENCY II FIRMS: AUDIT COMMITTEE INSTRUMENT 2016

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Published on 18 September 2015

Implementing audit committee requirements under the revised Statutory Audit Directive – CP34/15

This consultation sets out the Prudential Regulation Authority’s (PRA) proposed rules to implement the audit committee requirements of article 39 of the Statutory Audit Directive as amended by Directive 2014/56/EU (Amending Directive). 

The consultation is relevant to banks, building societies and UK Solvency II insurance and reinsurance firms (for the purposes of this CP, ‘Solvency II insurers’). It is proposed to apply the requirements of article 39 to the Lloyd’s market by applying the requirements to the Society of Lloyd’s and managing agents. The PRA also proposes to extend the scope of the requirements to UK designated investment firms.

The proposed requirements will apply to financial years commencing on or after 17 June 2016.

Summary of proposals

Article 39’s provisions can be grouped into four distinct themes: scope, structure, membership and functions. The PRA’s proposals are summarised below.

Scope

  • Audit committees will generally be required for: CRD credit institutions; Solvency II insurers, the Society of Lloyd's and managing agents; and UK designated investment firms
  • Subsidiaries of EEA parents that have an audit committee in accordance with article 39 do not need to have an audit committee, unless those subsidiaries are significant. If the non-executive directors (NEDs) of the significant subsidiary are the same as those of the parent, then the significant subsidiary does not need to have an audit committee.

Structure

  • The audit committee must be a sub-committee of the board.

Membership

  • The audit committee of a significant firm should consist entirely of independent non-executive directors (independent NEDs). For other firms (lower impact firms) audit committees must consist entirely of NEDs provided that a majority, and the chairman, are independent NEDs.

Functions

  • The audit committee must carry out the responsibilities prescribed by article 39. In addition, the audit committee of a lower impact firm is allowed to be combined with, and carry out the functions of, the risk committee.

Responses

This consultation closed on 18 December 2015.

PDFConsultation Paper 34/15

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