Schedule 13 - Auditors and actuaries

Financial Services Bill – in a Public Bill Committee at 2:00 pm on 15th March 2012.

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Question proposed, That this schedule be the thirteenth schedule to the Bill.

Photo of Chris Leslie Chris Leslie Shadow Minister (Treasury)

This is a relatively uncontroversial part of the Bill, but I have a couple of questions for the Minister, particularly about the disqualification of auditors and actuaries in certain circumstances. Obviously, they can be disqualified, fines can be imposed on them, they can be publicly censured and so on. It is important that there should be adequate powers for disciplinary measures in this particular schedule.

However, my understanding is that the Financial Reporting Council, via the Accountancy and Actuarial Discipline Board—I mention that body just in case you were not aware of it, Mr Leigh—and its accountancy scheme and actuarial scheme, already has the powers to make sanctions, including reprimands, suspensions, expulsions, exclusions, fines, licence withdrawals and so forth.

The point has been made in correspondence with me that there are concerns that auditors and actuaries potentially face double jeopardy, as they could face the possibility of being fined or censured twice: once by the provisions under the FRC arrangements; and once under the provisions of the Prudential Regulation Authority’s or Financial Conduct Authority’s disciplinary arrangements. The Institute and Faculty of Actuaries has raised its concerns about that dual regulation. It is worried, and believes that simple reference to its own disciplinary scheme or to the AADB scheme might be a more proportionate and appropriate response.

I am not sure what the Minister’s logic is for the changes that he is making in the Bill. Is it his intention that there should be this double sanction capability for potentially the same alleged failing? If that is the case, can he explain what is being done to co-ordinate the imposition of sanctions between the relevant regulatory authorities—in particular, the new regulators and the FRC? I am sure that he will understand the point that I am making.

Photo of Mark Hoban Mark Hoban The Financial Secretary to the Treasury

Indeed I do. As I am a member of the Institute of Chartered Accountants in England and Wales, I am aware of these disciplinary structures, although I hasten to add that they have never been applied to me.

The issue here is that the FCA will make rules that impose duties that go significantly beyond the normal duties of actuaries and auditors, and it is those additional rules that will need to be enforced. In particular, the FCA will make rules requiring auditors to prepare client asset reports, giving the auditor’s opinion on the compliance with the FCA’s client asset regime.

This is a very specialised area. It is an area where the FCA will need to be sure that it can take disciplinary action when rules have been breached. The accounting and actuarial professional bodies approach matters from a general perspective of professional competence, and the FRC will take disciplinary cases only where a strict public interest test is satisfied. So it is important that the FCA has the necessary powers to enforce the rules that it makes without having to rely on the other bodies.

Given that the rules will go beyond the normal duties imposed on professionals, particularly auditors, it is right to have the right regime in place. It is also right to have a suite of proportionate sanctions in place; it is not in place under the existing regime. So I think that we have struck the right balance that will ensure that these very important rules, which help to safeguard clients’ assets and money, are enforceable when they are breached by accountants.

Photo of Chris Leslie Chris Leslie Shadow Minister (Treasury)

I am sure that the Minister’s logic has some sense to it, but I am anxious that we should not find two organisations simultaneously using disciplinary powers and arrangements, not least because sometimes one will have to stop while the other tries to make its findings.

The Minister says that the existing AADB has a public interest threshold test of some sort or other before its proceedings are triggered. Presumably that is something that would also exist for the new regulators that he is creating. Does he envisage that there are particular categories of failure that will fall within the new disciplinary arrangements and that will not fall within the AADB scheme?

Is there a schema whereby it is possible to draw together the arrangements, so that certain categories of offence fall within one set of arrangements and other categories fall within the other? The Minister will understand why I am anxious about the same misdemeanour or failing being explored by two different bodies simultaneously.

Photo of Mark Hoban Mark Hoban The Financial Secretary to the Treasury

In a sense, this is not anything new, because the existing Act—the Financial Services and Markets Act 2000—actually gives sanctions for the FSA to use when auditors breach the client money rules. The existing sanctions, which operate within the same framework, are limited to disqualification of a whole firm. The schedule introduces a wider range of sanctions that are more proportionate and more likely to stick. The sanctions are more likely to be used and be a deterrent.

In a sense, the overlap—if overlap is the right word—between the existing professional bodies and the AADB already exists. There is nothing novel in that. Importantly, where auditors breach the FCA’s tight money rules, a new proportionate sanction will be in place to penalise that breach, which is what we want.

Photo of Chris Leslie Chris Leslie Shadow Minister (Treasury)

I apologise for labouring the point, but is this not a classic example of where some sort of memorandum of understanding might be necessary? The Minister is creating all these new regulators, but surely some sort of memorandum of understanding might be necessary so that, in circumstances in which their jurisdictions do not apply or where there is overlap, organisations can work together on understanding and co-ordination. I worry that he is not making any effort to ensure that the matter is properly co-ordinated.

Photo of Mark Hoban Mark Hoban The Financial Secretary to the Treasury

I do not feel that it is incumbent on me to mediate on every single point at which one regulator rubs up against somebody else, otherwise I would spend all my time doing that. By and large, these arrangements are already in place. As I said, the difference is in the range of sanctions available to the FCA. The FCA and FRC already work together closely, which we discussed many sittings ago. I do not think the provisions are particularly novel, and there is no need for the Bill to include an MOU, or anything like that. In schedule 13 we are trying to introduce a wider range of sanctions to address rule breaches.

Photo of Mark Durkan Mark Durkan Shadow SDLP Spokesperson (International Development), Shadow SDLP Spokesperson (Work and Pensions), Shadow SDLP Spokesperson (Foreign and Commonwealth Affairs), Shadow SDLP Spokesperson (Home Affairs), Shadow SDLP Spokesperson (Justice), Shadow SDLP Spokesperson (Treasury)

I told the Committee last week that I have belatedly given up amendments for Lent, but Members might see that I have tabled some starred amendments, which qualify as alcohol-free. I will not directly address those amendments, some of which reflect issues raised by my hon. Friend the Member for Nottingham East.

The Minister has addressed why the schedule does not specifically refer to the work of the Financial Reporting Council or recognised supervisory bodies and the class of sanctions they may apply, as opposed to those provided for by the schedule. He may want to reflect on whether the schedule should at least acknowledge or refer to the potential interface between the measures available to the FCA and PRA and the work of the FRC and recognised supervisory bodies. Saying that the interface might emerge outside the Bill leaves many people with the fear that they potentially face double jeopardy or serious confusion on which regime they fall under. Later in the Bill’s passage, the Minister may want to reflect on whether amendments should be made to allow the FCA and PRA either to refer to the recognised supervisory bodies or the Financial Reporting Council, or, in some cases, to take reference from them by providing for that recognised interface. That would ensure that there is neither double jeopardy and double penalties nor misunderstandings and gaps between the two. Something in the purview of one body could be fully complemented by the purview of another body, and there could be circumstances in which there ends up being a gap. Due reference would be helpful.

There is a danger not only of double jeopardy but that the existing arrangements for professionals are somehow sidestepped, on the one hand, or usurped, on the other hand, by these provisions. We as Parliament, when we are introducing this mandate—this hit—have the right to say that we want the provision to be more balanced and more precise.

Another dimension I would like the Minister to address—later in the Bill’s proceedings, if not now, due to time constraints—is the potential cost of the penalties that the schedule provides for. The powers relating to penalties mean that, at some point, a penalty framework will have to be produced. There are no terms of reference for the boundaries of that framework, and some people will be concerned about over-burdensome arrangements, as well as the burdensome amounts that could be charged. It is important to reflect on the measure and proportionality of penalties. We as legislators cannot just provide for them, in an open-ended way, without having regard to their measure and proportionality in practice, and particularly the impact that they could have on the key professionals affected.

At some point, I would like to hear more from the Minister on the terms of reference for the penalty framework. The hon. Member for Nottingham East referred to work currently being undertaken at the Financial Reporting Council, which is undergoing a restructuring.

Photo of Mark Hoban Mark Hoban The Financial Secretary to the Treasury 2:15 pm, 15th March 2012

The reality is that the FRC tends not to take on the specialised cases of breaches of client asset rules, because it lacks the resources to do so. It tends to fall back to the FCA, or currently, the FSA. First, the issue of double jeopardy goes against the principle of proportionality in section 3B and secondly, we need to recognise that the FRC tends not to handle such cases.

Photo of Mark Durkan Mark Durkan Shadow SDLP Spokesperson (International Development), Shadow SDLP Spokesperson (Work and Pensions), Shadow SDLP Spokesperson (Foreign and Commonwealth Affairs), Shadow SDLP Spokesperson (Home Affairs), Shadow SDLP Spokesperson (Justice), Shadow SDLP Spokesperson (Treasury)

I take the Minister’s point and he is obviously pleased with it, because he seems to be doing a facial lap of honour. He has said that the FRC “tends  not to”, but where such references are made, if the FRC will hand those matters over or leave them to the regulator, that can be sensibly provided for in the schedule, rather than saying “We know” or “We presume” it will happen just because it tends to. The fact is that under the schedule, the PRA and the FCA have a specific menu of actions that they can perform in the event of such cases. None of those involve reference to or from either regulatory supervisory bodies or the FRC, but that menu could be extended to include reference to or from those bodies.

The FRC is undergoing restructuring, and its disciplinary powers may be extended, which is part of the review’s scope. Should that happen, the Minister’s assurance about what tends to happen may not obtain as clearly, or it may be qualified in some other way. In that case, he might be better indicating that subject to the ongoing review of the FRC, he will keep the matter under consideration and that he is prepared to fine-tune the schedule later in the Bill’s proceedings, if that would improve the proposals.

Photo of Chris Leslie Chris Leslie Shadow Minister (Treasury)

I agree with my hon. Friend the Member for Foyle that some concerns need to be addressed. I understand that the Minister is aware of where he thinks the line between the FRC and the FCA is drawn, but some issues remain, and I do not think it is outrageous to ask him to at least encourage those organisations, as he has done with other parts of the Bill, to try to co-ordinate matters offline—outside legislation, informally—in a memorandum of understanding or whatever agreement they want to have. It is a pity that the Minister is not able to encourage them to do so, because it is not a massively difficult thing to ask. However, I hear what the Minister has said and I will not vote against schedule 13. It is broadly uncontroversial, but that was my principal concern.

Question put and agreed to.

Schedule 13 accordingly ordered to stand part of the Bill.