FCA consults on audit committee changes
James Barbour, Director, Technical Policy, provides an update on the Financial Conduct Authority's (FCA) consultation into the implementation of the EU audit legislation.
The FCA has published its proposed changes to its rules affecting audit committees, which are necessitated by the UK Government's implementation of the 2014 EU audit legislation.
These are included as part of its regular quarterly consultation exercise and can be viewed at part 8 of the consultation paper published on 4 September.
The FCA requires to amend its existing rules on audit committees, contained in its Disclosure Rule and Transparency Rule (DTR) Sourcebook. This is to reflect the revised provisions contained in the EU Audit legislation in relation to Public Interest Entities (PIEs) with transferable securities admitted to trading on a regulated market.
Likewise, the Prudential Regulation Authority (PRA) will also update its Rulebook, to reflect requirements in the EU Audit Legislation on audit committees for credit institutions and insurance undertakings in the near future. Credit institutions and insurance undertakings with transferable securities admitted to trading on a regulated market will be subject to requirements for audit committees both under DTR and under the PRA's rules.
The Financial Reporting Council (FRC) will also be consulting later in the year on possible changes to the UK Corporate Governance Code, and to its associated Guidance on Audit Committees, which may be necessary following the implementation of the EU audit legislation. This may require further amendments to the FCA's rules to reflect changes which are made to the Code.
The FCA's proposed changes
Under its current proposals, the FCA proposes to amend DTR 7.1.1R and introduce a new rule, DTR 7.1.1AR. The effect of this would be to:
- Extend the independence requirement from at least one member to a majority of the members of the audit committee.
- Include in new DTR 7.1.1AR the requirement that at least one member of the relevant audit committee must have competence in accounting and/or auditing (previously this requirement was contained in DTR 7.1.1R).
- Require the members of the audit committee as a whole to have competence relevant to the sector in which the issuer is operating.
Additionally, the FCA is proposing to:
- Insert a new rule, DTR 7.1.2AR, to require that the audit committee chair of the relevant body is independent and must be appointed by the members of the audit committee or by the administrative or supervisory body of the issuer.
- To amend DTR 7.1.3R, which sets out the responsibilities of the audit committee, to reflect the amended scope of responsibilities.
- To delete DTR 7.1.4R which requires a proposal to appoint a statutory auditor to be based on a recommendation by the audit committee. This requirement is now included in the list of responsibilities of the audit committee by the EU Audit Legislation (and so should now be reflected in the revised DTR 7.1.3R).
- To take advantage of a revised option to provide an exemption for alternative investment funds (AIFs), as well as for undertakings for collective investment in transferable securities (UCITS) that are PIEs, from having an audit committee.
The EU reforms
The EU audit legislation must be implemented in the UK by 17 June 2016. The FCA anticipates that its proposed new rules will come into effect in June 2016 for financial reporting periods beginning on or after 17 June 2016.
The EU reforms introduce new audit committee requirements applying to all PIEs as defined in the EU Audit legislation, i.e. to undertakings with securities admitted to trading on a regulated market, as well as to other banks, building societies and insurers.
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