Draft Statutory Auditors and Third Country Auditors Regulations 2016

Peter Dowd Excerpts

Monday 13th June 2016 General Committees

[Anna Soubry]

My officials helpfully warned me about this issue, so I am very grateful to them. Mazars has written to several MPs about a member state option on a practice called joint audit. It is relevant to France, but not to the UK. The CMA considered whether joint audit would improve competition in the audit market and, as I described, chose not to incentivise it. We have taken the same approach and have not taken up that option. I know that Mazars has concerns because it has its origins in France and feels that joint audit has helped it secure its larger share of the market there, but that is about all I can say at this stage. We are aware of those concerns but, on balance, we think that what we have done is right, which is why I am so keen that we should all agree that these regulations are the right way forward. Nevertheless, we will, as always, keep a firm eye on all these matters. If there is ever a need to make changes, I hope we will do so.

[Peter Dowd (Bootle) (Lab)]

On that subject, notwithstanding the fact that it might have some self-interest, Mazars suggested that smaller auditors might be at a competitive disadvantage, but also that challenger businesses would be less likely, thereby reducing consumer choice, and that the regulations would be less likely to encourage competition in the market. Will the Minister comment on that?

[Anna Soubry]

As I said, we are aware of Mazars’s concerns and have looked at them. The important thing about the directive and the fact that the regulations will, hopefully, now come into force is that there really has been extensive consultation, which is highly commendable. We have listened to all parties. All the stakeholders that are involved in this part of the financial sector have been consulted and had their say. On that basis we are content with the regulations as they are. Nevertheless, we will keep a firm eye on them. We will always keep things under consideration.

The regulations contain changes that are likely to have a deregulatory effect, including some to make cross- border provision of audit services more straightforward. That is encouraging, and it is a very good example of how the EU is increasingly moving in the direction of wanting to deregulate and becoming much more aware that it must not be a burden on our businesses. As well as having the potential to increase competition in the UK, the requirement must be reflected in similar provisions in other member states and should open up opportunities to UK firms.

The Government believe that a non-statutory approach to the implementation of EU legislation should be adopted wherever possible. The implementation of ethical and technical requirements in the directive for auditors will be covered by revised FRC standards. The approach reflects that taken to implementing the 2006 audit directive, as the requirements in that directive were implemented in the UK as requirements on the content of FRC standards.

Many requirements of the EU regulation will apply as part of the standards, including a blacklist of services that auditors will not be able to provide alongside the audit to avoid overfamiliarity between the management and auditors of PIEs. It also includes additional requirements on the content of the audit report of PIEs that supplement further harmonisation in the directive. That is not expected significantly to increase the length of audit reports but is likely to increase their value to users.

The Financial Conduct Authority has amended its rules to reflect changes to the framework in the directive on audit committees. The directive requires rules on audit committees to be applied to unlisted banks, building societies and unlisted insurers for the first time. The EU regulation and FRC standards then put in place further measures for corporate governance of PIEs in the form of an additional report by the auditor to the audit committee.

Finally, the regulations will strengthen standards for the audit of PIEs and make audit reporting more informative. They should also improve confidence in the independence of auditors and avoid excessive concentration in the audit market. They open up opportunities for smaller audit firms. On that basis, I commend the regulations to the Committee.