PS2/21 | CP11/20 Solvency II: The PRA’s expectations for the work of external auditors on the matching adjustment

Policy Statement 2/21 | Consultation Paper 11/20

Published on 18 March 2021

Solvency II: The PRA’s expectations for the work of external auditors on the matching adjustment - PS2/21

Overview

This Prudential Regulation Authority (PRA) Policy Statement (PS) provides feedback to responses to Consultation Paper (CP) 11/20 ‘Solvency II: The PRA’s expectations for the work of external auditors on the matching adjustment’. It also contains the PRA’s final policy in the form of an updated Supervisory Statement (SS) 11/16 ‘Solvency II: External audit of, and responsibilities of the governing body in relation to, the public disclosure requirement’ (Appendix).

This PS is relevant to UK Solvency II firms (including mutuals) that have approval to make use of the matching adjustment (MA). It is especially relevant to those firms that are subject to an audit requirement in respect of their Solvency and Financial Condition Report (SFCR). This PS is also relevant for the auditors of such organisations and the users of these SFCRs.

Summary of responses

The PRA received eight responses to the CP. Respondents generally welcomed the enhanced transparency that these proposals provide to regulated firms, their auditors, and to wider stakeholders in relation to auditors’ work over the matching adjustment. However, respondents also made a number of recommendations, observations, and requests for clarification, which are set out in more detail in Chapter 2 of the PS.

Implementation

The changes to SS11/16 will be effective from Thursday 1 July 2021, and the updated version will replace the existing version at that date. The new expectations set out in the updated SS will come into effect for audits in respect of accounting periods ending on or after Thursday 1 July 2021.

Where an external audit for the year ending December 2020 has been prepared in a way that is not consistent with the clarifications in the revised SS, the PRA considers it proportionate for that SFCR audit report to be produced based on existing audit procedures. In practice, that means that both the clarifications and new expectations in the updated SS11/16 are effective for SFCR audits in respect of periods ending on or after Thursday 1 July 2021. The PRA expects firms and auditors to make arrangements to ensure the external audit is produced on the basis of the clarifications and new expectations set out in the revised SS for periods ending on or after that date.

The policy set out in this PS have been designed in the context of the UK having left the European Union and the transition period having come to an end. Unless otherwise stated, any references to EU or EU derived legislation refer to the version of that legislation which forms part of retained EU law. The PRA will keep the policy under review to assess whether any changes would be required due to changes in the UK regulatory framework.

Policy Statement 2/21

Appendix


Published on 30 July 2020

Solvency II: The PRA’s expectations for the work of external auditors on the matching adjustment - CP11/20

Update 15 December 2020: The PRA announces a delay to the proposed effective date set out in paragraph 1.12 of Consultation Paper (CP) 11/20 ‘Solvency II: The PRA’s expectations for the work of external auditors on the matching adjustment’. As such, the PRA confirms that any finalised approach will therefore not be effective for audits of the Solvency and Financial Condition Reports (SFCRs) with a Thursday 31 December 2020 reporting date.

Following the recent closure of the comment period for CP11/20, the delay to the proposed effective date takes into account feedback from respondents, including in relation to the impact of Covid. The communication of a delay at this time is designed to provide clarity and certainty for auditors and firms in relation to the audits of December year-end SFCRs.

The proposals in CP11/20 include clarifications and enhanced transparency relating to the PRA’s expectations in respect of auditors’ work on the matching adjustment (MA). The CP also proposes several new expectations that relate to the communication by auditors on the subject of the MA. The CP, published on Thursday 30 July 2020, had proposed (paragraph 1.12) that the draft changes to Supervisory Statement (SS) 11/16 ‘Solvency II: External audit of, and responsibilities of the governing body in relation to, the public disclosure requirement’ would be effective for SFCR audits carried out in respect of periods ending on or after Thursday 31 December 2020.

Next steps: The consultation has now closed. The PRA is continuing to consider the feedback it has received from respondents to the consultation prior to finalising its policy.

Overview

This consultation paper (CP) sets out the Prudential Regulation Authority’s (PRA) proposed expectations and guidance relating to auditors’ work on the matching adjustment (MA). The PRA also proposes several new expectations that relate to the communication by auditors on the subject of the MA.

The proposals in this CP would result in changes to Supervisory Statement (SS) 11/16 ‘Solvency II: external audit of, and responsibilities of the governing body in relation to, the public disclosure requirement’ (Appendix 1).

This CP is relevant to UK Solvency II firms (including mutuals) that have approval to make use of the MA, especially those that are subject to an audit requirement in respect of their Solvency and Financial Condition Report (SFCR). The CP is also relevant for the auditors of such organisations and the users of these SFCRs. 

The purpose of these proposals is to clarify the current requirements for auditors in relation to the MA and increase transparency on the respective roles of auditors and the PRA. The proposals would set out the PRA’s expectations on the way that auditors should consider the MA as part of their audit work. The proposals would also clarify the scope of the PRA’s approval of the MA. 

Implementation

The PRA proposes that the draft changes to SS11/16 would take effect from Thursday 31 December 2020.

Response and next steps

This consultation closes on Friday 30 October 2020. The PRA invites feedback on the proposals set out in this consultation. Please address any comments or enquiries to CP11_20@bankofengland.co.uk.

Consultation Paper 11/20

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