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  • John Watson

Audit thresholds and Financial Services - How has the position arisen?


Further to my previous post, I thought I would explain how the position has arisen and set out my proposals for addressing the issue.


How has the position arisen?


There has been an understandable desire by government over the last couple of decades to ease the bureaucratic and regulatory burden on all but the largest firms. One way they have sought to do this is by excluding “small and medium” firms from an audit requirement. However, the thresholds used to classify firms as small or medium are based on employee numbers, turnover and company assets. These measurements of size may be appropriate for some sectors, but they are not appropriate in financial services, because they ignore the amount of client assets a firm is advising on or providing and/or administering a pension wrapper. Simply this means that individual firms providing such services to client assets that can even exceed £1Bn may not require an audit.


What is the answer?


I am recommending that:


· Financial Services firms are automatically required to have an audit when customer Assets under Advice or Administration (AuA) are above a set threshold, e.g. £0.75Bn. There may be an additional need for a half yearly review where AuA sits above a higher threshold, say £2Bn.


· At the very least these firms must be subject to a limited assurance review by a Chartered Accountant and ideally a qualified auditor on specific matters to be defined, e.g. going concern, complaints provisioning, capital resources.


· There should be a new stipulation for all regulated firms subject to capital adequacy requirements to have their capital adequacy calculations audited at least once a year. If necessary, this could take the form of a review of specific aspects of the calculation, i.e. with the CA or audit firm being able to caveat what they are not reviewing.


· For the protection of the investments of the public, there must be greater collaboration between the FCA and the Chartered Accountancy institutes to ensure that there is third-party assurance as to the current and future regulatory capital position of companies and to ensure FCA rules around the financial wellbeing of regulated companies are being followed.


I have written to the Chairs of the FCA, the FSCS and the Treasury Select Committee, as well as the CEO of one of the largest retirement solutions providers in the UK. Next time I will share the feedback from these individuals as well as the next steps we are taking to expose and address this issue.