Auditors and actuaries are used to being overseen by the Financial Reporting Council (FRC). In a 2015 Consultation Paper, the PRA signalled that it intends to extend its disciplinary powers over the auditors and actuaries of all PRA authorised firms.
There are two significant changes proposed:
- in relation to the largest domestic banks and building societies that pose most risk to financial stability (ie those with total assets over £50bn), the PRA will require their external auditors to provide written reports to the PRA as part of the statutory audit cycle. These reports will be in addition to the existing communications between the PRA, auditors and audit committees. The PRA will review whether to extend these rules to insurers following the implementation of Solvency II
- the PRA plans to bring into force its powers to apply disciplinary measures to an auditor or actuary that has failed to comply with a duty imposed by rules of the PRA (including the proposed new requirement relating to the new written audit reports) or failed to comply with a duty under FSMA to communicate information to the PRA.
Coming in the wake of a series of failures of UK financial institutions, these changes are intended both to improve the level of communication between the regulator and auditors, but also to incentivise them to improve the quality of audits of financial institutions, which has been criticised by the FRC. In this context, the PRA contends that the new disciplinary regime will be “proportionate and responsive”.
However, the PRA then went on to note that a financial penalty can act as a direct punishment as well as an incentive to other members of the relevant professions to effect behavioural changes. Such language echoes the justifications given for the increasingly harsh penalties imposed by the FCA under the banner of “credible deterrence”. This may suggest that the penalties imposed by the PRA for misconduct will be substantial. Further, the PRA has suggested that in some cases, the starting point for a financial penalty may be a percentage of the firm’s total revenue or its revenue in respect of one or more areas of its business (or, for individuals, the pre tax profit of a sole trader or the relevant employment income). This is certainly an area for auditors and actuaries involved in financial institutions to keep a careful eye on in 2016.