PRA implements audit committee requirements under Statutory Audit Directive

The Prudential Regulation Authority (PRA) has published policy statement PS16/16.  This  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.

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.

The PRA statement and related information are available here.

Lavanya Rathnam

Lavanya Rathnam is an experienced technology, finance, and compliance writer. She combines her keen understanding of regulatory frameworks and industry best practices with exemplary writing skills to communicate complex concepts of Governance, Risk, and Compliance (GRC) in clear and accessible language. Lavanya specializes in creating informative and engaging content that educates and empowers readers to make informed decisions. She also works with different companies in the Web 3.0, blockchain, fintech, and EV industries to assess their products’ compliance with evolving regulations and standards.

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