Is your audit committee PRA compliant? New PRA rules out this month require designated "significant" insurers to fill their audit committees solely with independent non-executive directors.
Transitional provisions will allow insurers two years to recruit new independent non-executive directors, but the pool of available talent is considered by some in the industry to be limited.
On 18 May 2016, the PRA published policy statement PS16/16 setting out final rules for PRA regulated firms implementing the audit committee requirements under the revised Statutory Audit Directive (Directive 2006/43/EC).
The Statutory Audit Directive was amended to address weaknesses in the European audit regime highlighted following the 2008 financial crisis. Member states are no longer permitted to exempt non-listed public interest entities, such as directive insurers, from the Statutory Audit Directive's audit committee requirements.
The PRA's audit committee rules will apply to PRA regulated firms including Solvency II (re)insurers, the Society of Lloyd’s and managing agents.
The rules will require such firms to establish an audit committee as a sub-committee of the board complying with the following requirements, amongst others:
- it must be composed only of non-executive directors;
- a majority of the members, including the chairman, must be independent of the firm. For significant firms (e.g. PRA designated Category 1 and 2 (re)insurers), all members of the audit committee of the firm or its EEA parent must be independent; and
- the members of the committee as a whole must meet competency requirements (in respect of the relevant sector and in accounting and/ or audit).
Once established, a firm's audit committee must perform its functions in accordance with the PRA's new rules and the Statutory Audit Regulation (EU Regulation 537/2014), which has direct effect in Member States.
To avoid duplication, an exemption to the application of the PRA's audit committee rules applies where a firm is a subsidiary of an EEA parent who complies at group level with the Statutory Audit Directive. This exemption is modified in the case of significant firms, potentially removing them from its scope.
The PRA's rules will apply in respect of financial years beginning on or after 17 June 2016, in time for external auditors to meet with a firm's audit committee as part of their audit planning cycle for that financial year. However, the rules are subject to a transitional period of two years during which a variety of transitional provisions will apply, depending on the significance of the firm and its current audit committee provisions.
The PRA has invited the smallest firms to apply for a waiver or modification of its rules, which, if granted, would mean that they need not have an audit committee - provided that they have a board performing equivalent functions to an audit committee.
PS16/16 also sets out 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 Insurance Managers Regime (SIMR).
PRA authorised firms should already be thinking about how the new rules will affect the structure and composition of their audit committees and whether they will need to recruit new members. The PRA's competency and fitness and propriety requirements and any PRA approvals for members caught by the Senior Insurance Managers Regime will need to be taken into account.