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Statutory Auditors, Third Country Auditors and International Accounts Standards (Amendment) (EU Exit) Regulations 2019

Volume 799: debated on Thursday 26 September 2019

Motion to Approve

Moved by

That the draft Regulations laid before the House on 15 July be approved.

Relevant document: 59th Report from the Secondary Legislation Scrutiny Committee

It is like I have never been away. Noble Lords will be aware that regulations were laid before Parliament earlier in the year to address deficiencies arising in the fields of accounting and audit from the withdrawal of the United Kingdom from the European Union. They did not implement new policy but granted new powers and responsibilities to the Secretary of State and the Financial Reporting Council. Further regulating adjustments are now required.

The EU accounting and audit directive, together with the EU’s international financial reporting standards regulation—to the extent that they are not repealed—will form part of the retained EU law under the European Union (Withdrawal) Act. The accounting and audit directives set out the requirements on the accounts and audit of most incorporated businesses, as well as a framework of standards. The directives also set out the responsibilities of the competent authorities.

The EU’s international financial reporting standards regulation sets standards for accounting by parent companies of groups. The audit regulation sets additional requirements on the statutory audit of those businesses defined as public interest entities. These are banks, building societies, insurers and issuers of shares or debt securities on regulated markets.

Our aim is to ensure that the framework for accounting and audit regulation works effectively following the UK’s withdrawal from the EU. The statutory instrument under discussion takes some further steps to help facilitate this. With regard to the audit directive, this instrument will ensure that equivalence or adequacy status decisions will be granted by negative resolution regulations. It makes sure that, irrespective of whether a withdrawal agreement is reached, the Secretary of State can make regulations after our exit from the EU to set out the framework for future assessment of equivalence and adequacy by the UK regulator. It will also enable us to grant equivalence and adequacy status to some third countries that have had applications under consideration in the EU during the period since March this year.

This instrument also completes the process of extending powers to the UK’s competent authority, the Financial Reporting Council. It extends the FRC’s ability to regulate third-country auditors to include EEA and Gibraltarian auditors. It also puts beyond doubt that those EEA auditors who have already registered in the UK as statutory auditors will retain that status after exit. The instrument makes an important change to the audit exemption framework. In common with the exemptions in the accounting framework for subsidiaries, the subsidiaries audit exemption will not be available unless the subsidiary has a UK parent. Finally, on audit, the instrument corrects an error in the previous audit statutory instrument affecting the frequency of audit inspections required for auditors of public interest entities.

On accounting standards, the instrument revokes some EU regulations relating to the adoption or amendment of IFRS within the EU. Without revocation, these regulations would be brought into domestic law by the European Union (Withdrawal) Act. However, the International Accounting Standards and European Public Limited-Liability Company (Amendment etc.) (EU Exit) Regulations 2019 have already made provision for what will be the international accounting standards for the UK at exit day. These revocations remove any duplication and potential confusion. The revocations here also reflect changes in EU adopted international accounting standards issued or identified since the earlier accounting statutory instruments were made.

What will the impacts be? The Government have carried out a de minimis impact assessment of this instrument as the overall costs to business are anticipated to be small. This confirmed that the additional impact on business of the changes in this instrument is a cost of approximately £930,000 per year. Only limited sectors are affected by each of the changes. This limited impact is counterbalanced by the beneficial effect of the changes in the first audit EU exit statutory instrument, which was assessed as saving businesses approximately £2.96 million per year.

In conclusion, these amendments aim to provide continuity for businesses operating in the audit sector wherever possible and to ensure that UK companies will continue to benefit from global trade and investment. If the UK leaves the EU without an agreement, the measures contained in these regulations will be critical in ensuring that the audit regulatory framework in the UK works effectively. I commend these draft regulations to the House.

Is the Minister able to indicate a little more why it was a de minimis consultation? There has been briefing, but companies that operate on a cross-border basis have to register with the country in the EEA that they will be doing business with. This means that, effectively, there will now be British businesses doing duplicate processes after exit—a UK one and an EU one. These points of principle on the additional burdens on British businesses having to operate in two entities were raised repeatedly during the passage of the Trade Bill. It is even more complex for those in Scotland, where the Minister and I both live, which is under the ICAS registration process. What information does the Minister have about how many British businesses will have to have these dual processes? Why was there no consultation on the regulatory impact on those businesses, which will be a cost to the British economy?

The impact assessment was conducted on a de minimis basis and it established that the cost is £0.93 million—£930,000. I am happy to write further to the noble Lord on this matter to set out exactly how this figure was reached and who is affected by it and will place a copy in the Library.

I thank the Minister for his introduction to this statutory instrument. Before I come to the substance of the policy in these regulations, I highlight the comments made by the House of Lords Secondary Legislation Scrutiny Committee, which said:

“However, the range and magnitude of the changes are significant: the Regulations make changes to 15 items of legislation and include a sub-delegation of powers to UK regulators and extend a ministerial power of direction”.

The committee is right. Despite the utterances in the Explanatory Memorandum that this instrument exists only to continue the framework of the regulatory oversight and professional recognition of statutory auditors and third-country auditors in the UK, concerns have been raised, as we have just heard, that the regulations extend beyond this. The challenges financial services organisations will face in adapting to these changes are numerous, and were also noted by the SLSC. Can the Minister confirm whether any recent support has been offered to such firms to assist them in adapting to the changes?

In the light of such wide-ranging challenges resulting from these regulations, I draw the House’s attention to the fact that one of the core reasons why the other place divided on this instrument was the absence of a full impact assessment. Although I have no intention of similarly dividing this House, I place on record my disappointment that the Government have chosen not to publish an assessment in the period between these regulations being debated in the Commons and today. Parliament needs to be given the full information on the impact that these regulations will have on the financial sector; without such an assessment, that is not the case.

Moving on, I should like to ask the Minister a number of technical questions about the substance of these regulations. I will speak slowly. First, on Regulation 4, which deals with the loss of the EEA subsidiary exemption, can he confirm the timescale for the issues here to take effect? The legislation does not give a specific timeframe for the implementation of this provision, so I can assume only that further regulations may well be necessary. Secondly, in relation to Regulation 6, which focuses on the EEA qualification for auditors and which the Minister touched on, can he guarantee to the House that EEA-qualified auditors recognised up to December 2020 will retain their eligibility? If I missed that in his introductory remarks, my apologies.

To conclude, the way in which this instrument has been progressed, with little assessment and consultation, is deeply disappointing. It is mentioned in the Explanatory Memorandum for the SI, under paragraph 10 on “Consultation outcome”, that there has been no consultation on this instrument, which is deeply worrying. There also seems to be a thread of ambiguity through the regulations, which I hope the Minister can cast aside with assurances today. On this side of the House, we have agreed that the Government should make preparation through secondary legislation to ensure continuity after exit, but I hope the Minister can confirm that future regulations aimed at doing this will take a different approach.

My Lords, I was not planning to intervene, having not read these papers in great detail, but until my noble friend spoke I was not aware that the Government had not carried out an economic assessment of the impact of these changes. On the face of it, this seems rather worrying.

As the Minister will know, there has been considerable controversy over the role of auditors and accountants in the past five years. The competition authorities in Europe have sought to break up the monopoly of the big five, although I am sure they would not put it as crudely as that. In the UK, the Competition Commission has also pursued these questions. There are also big ethical questions about the combination of roles between accounting and audit, which has resulted in some major scandals about the role of auditors.

Are we content that nothing in what we are doing in any way limits the ability of the authorities to pursue the cause of greater competition and greater separation of powers and duties? One of my really big worries about Brexit is that we may be creating a situation in which a close relationship between an industry and a UK ministry results in arrangements that are not in the interests of consumers or shareholders and that work against the public interest.

My Lords, this is quite an exciting issue when you get into it—more so than I anticipated. I will attempt to tackle each of the questions raised in turn. After that, perhaps I may make some general points.

In reference to the points made by the noble Lord, Lord McNicol, the first thing to note is that the passage he quoted refers to the 58th report of that committee and not the 59th. In that report, the committee described the SI as being of interest, but the reports are quite different in the way they tackle the elements themselves. On the noble Lord’s specific points about the EEA auditors losing their exemption and to what timescale, that will happen at the point at which the changes come into force on exit day. Regulations 4 and 7 amend the Statutory Auditors and Third Country Auditors (Amendment) (EU Exit) Regulations 2019, which will also come into force on exit day. He asked whether the EEA qualification of auditors will be recognised up to December 2020 and the answer is yes, it will.

I hope noble Lords will bear with me because I am trying to make sure that I give all the answers that they expect. On the question asked by the noble Lord, Lord Liddle, about the implications of this, the impact assessment that was undertaken was able to show that the impact was modest. But the question he asked echoes the points made by the noble Lord, Lord Purvis of Tweed, so if the noble Lord, Lord Purvis, will allow, I will copy him into the answer that I will lodge in the Library. Noble Lords should have all the information that I have. I have no problem with that.

As to the wider philosophical questions of potential conflicts of interest and so forth, I am probably less equipped to answer those specifically. However, the Government will always maintain the highest levels of integrity, as noble Lords would expect. I have no reason to suspect any reason why I should be discomfited by what I am putting forward today, whether there are ethical or indeed wider accountancy considerations. It is not the intention of the Government in any way to create further ambiguity in this, but rather to ensure continuity as we move this matter forward. However, I will take away the issue about consultation, which is useful. I will reflect on that. I would not wish there to be an issue where noble Lords were uneasy because of the absence of information. I want noble Lords to have as much information as I have. I will reflect on that and make sure that in future I am able to bring noble Lords information that might help them.

It would not be the first time that Ministers at the Dispatch Box during consideration of statutory instruments or Brexit-related legislation have said that they will reflect on the lack of consultation. To set my mind at rest on this aspect, what consultation was carried out on this measure with the Institute of Chartered Accountants of Scotland? What consultation was there with the Scottish Government? As the Minister will well know, the implications of this measure affect all parts of the United Kingdom, including those that have distinct history and presents, not just England.

I am happy to write to the noble Lord, Lord Purvis of Tweed, answering each of those questions—if he will permit. Again, I will ensure that the answer is laid in the Library as appropriate.

I use the term “reflect” because it is the only term I can use in this instance. It is not just my own views that might reflect on the wider questions. My view right now is that I do not wish to stand before the House when these questions are raised when the answer is not adequate for noble Lords’ consideration. I wish all noble Lords to be able to see that we have taken every possible measure to assess the correctness of the approach and I want noble Lords to have comfort and confidence that that has been done adequately. I will give a guarantee that I will do that very thing. On that basis, I wish to move forward with the instrument.

Motion agreed.