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

01 July 2016
Phil Smith

This policy statement provides feedback to the Prudential Regulation Authority (PRA) consultation paper (CP34/15) ‘Implementing audit committee requirements under the revised Statutory Audit Directive.

Based on feedback, the PRA has made changes to some of its proposals outlined in CP34/15, the first of which is particularly relevant to smaller insurers who do currently adhere to the new requirements. The changes are as follows:

  • The smallest firms are able to apply for a waiver or modification of the rules, having regard to the Directive minimum requirements.
  • Transitional arrangements will apply for a period of two years.
  • The PRA has amended the independence of membership requirements for significant subsidiaries of parent undertakings in the EEA and non-EEA. A majority, rather than all of the subsidiary audit committee must be independent (including the chairman) provided that the audit committee of the subsidiary’s parent is comprised fully of independent non-executive directors.

The PRA has confirmed the difference between the terms ‘significant’ and ‘lower impact’ firms used within CP34/15. The term significant refers to PRAs two highest potential impact categories. Lower impact firms represent those as not significant, as referred to in the PRA rules.

The proposed requirements in PS16/16 post feedback to CP34/15 are:

  • Audit committees will be required for CRD credit institutions; Solvency II insurers, the Society of Lloyd’s and managing agents and PRA-designated investment firms.Subsidiaries of EEA parents, where the parent has an audit committee in accordance with article 39 of the Directive, 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 the EEA parent, then no audit committee is required.
  • The audit committee must be a sub-committee of the board.
  • The audit committee for a significant firm (stand-alone or parent) should consist entirely of independent NEDs. For the remaining firms, the audit committee must consist entirely of NEDs provided that a majority, including the chairman, are independent NEDs.
  • The audit committee must carry out responsibilities prescribed by article 39 of the Directive.
  • The audit committee of a lower impact firm is allowed to be combined with, and carry out the functions of, the risk committee.

Although the PRA considered its approach in CP34/15 to provide effective governance it understood the concerns of smaller firms particularly regarding costs outweighing potential benefits. In response the PRA will allow smaller firms to apply for a waiver or modification of the rules. This may mean that firms with no current audit committee (where the board are performing an equivalent