Building Societies Act 1986 (Accounts, Audit and EEA State Amendments) Order 2008

17:05:00

Lord Davies of Oldham
rose to move, That the Grand Committee do report to the House that it has considered the Building Societies Act 1986 (Accounts, Audit and EEA State Amendments) Order 2008.

The noble Lord said: I bring forward this order with a certain degree of trembling apprehension. If we could extend the last order to quite a significant debate, this order deals both with issues related to building societies and European directives. I see that my noble friend is already present for the next business, but I can only say to him that it may be a little delayed if every opportunity to extend the implications of this order is taken up. However, it may be that we stick fairly close to the terms of the order, which is quite limited in its objectives. It will form part of the UK’s implementation of two EC directives, namely directives 2006/43 on the statutory audit directive and 2006/46 on amending the EC accounting directives.

The overall objectives of these directives are to help to improve the credibility of financial statements provided by businesses in the EU, establish some basic sets of principles for the conduct of statutory audits and to engender good corporate governance practice. Before I move on to the substantive issues included in the order, it may be useful for me to explain the background to the directives. They have their genesis in the European Commission’s broader programme of company law reform aimed at enhancing the credibility of financial statements and annual accounts published by European businesses and, more significantly, in the need for accurate, reliable information in the aftermath of certain corporate financial scandals in the EU such as Parmalat. The directives focus on the linked objectives of increasing confidence in corporate governance frameworks, improving investor confidence through increased transparency and requiring better information from businesses. The measures contained in them are consistent with Government policy and contribute to several of the aims that this Government believe are important to UK industry such as stability, market confidence, better information and improved access to capital.

I must stress the obvious in that UK legislation is already in place for a significant proportion of the areas covered by the directives. However there are some areas where specific provision needs to be made in the legislative framework for UK entities. The Department for Business Enterprise and Regulatory Reform has made specific statutory instruments to give full effect to the requirements of these directives in so far as they relate to companies. The Treasury has been working closely with BERR to implement the directives’ provisions for mutual societies for which it has policy responsibility; namely, for building societies and friendly societies. This order relates only to building societies.

I must explain that in relation to these directives a total of four orders have been laid by the Treasury, two for friendly societies and two for building societies. Three of the orders are by the negative resolution procedure. However, this order related to building societies is required to be dealt with under the affirmative resolution procedure, which is why we are considering it today. The power allows the Treasury to modify the Building Societies Act 1986 to reflect changes in company law.

The order makes appropriate amendments to the 1986 Act concerning disclosures relating to off-balance sheet arrangements, disclosure of auditor remuneration, certain safeguards for auditor independence and security, and procedures for the removal and resignation of auditors. Many of these changes simply bring building societies legislation into line with companies legislation. In addition, the order makes an amendment to the definition of EEA state in the 1986 Act.

I shall explain briefly which changes the order will make and what they are intended to achieve. the order includes a requirement for building societies to give certain information on off-balance sheet arrangements in the notes to their annual accounts. At present, they are not required by law to give this information. The Committee will agree that this is a helpful addition to building society legislation. It will increase transparency and the information provided to members, as well as to other interested parties, will help them to take more informed decisions.

The order updates the current requirements on the disclosure of auditor remuneration. Under these changes, building societies will have to specify separately in the notes to the accounts the fees paid to the statutory auditor for several categories of services, such as tax and internal audit services, in addition to the fees for the statutory audit. This will show at a glance what other services the auditor has performed for the client and will alert interested stakeholders to any possible conflicts of interest.

It is clear that auditor independence, and indeed the security of the audit, is paramount to the provision of reliable information. The order includes safeguards for auditor independence and security. Accordingly, it requires the auditor’s report to be signed by the senior statutory auditor in his own name, but provides exemptions to the requirement on security grounds. It amends the rules on the removal and resignation of auditors, requiring the building society and the auditor to notify the audit authority of any removal or resignation and to give reasons. It also gives building society members and the Financial Services Authority a right to apply to court for an order under which an auditor was dismissed on improper grounds. These changes implement various requirements of the audit directive, and whenever possible bring building society law into line with company law.

Finally, the order will amend the definition of a European economic area state in the Building Societies Act 1986. The current definition excludes Bulgaria and Romania, which became Community member states on 1 January 2007. The new definition includes all Community members.

I am sure the Committee will agree that the proposed changes are necessary and proportionate. They will help further to enhance confidence in the financial statements and annual reports published by building societies and to engender good corporate governance standards. They will help to protect the rights and the independence of auditors and ensure that they are not unduly coerced into giving favourable, or indeed misleading, accounts. I commend the proposals to the Committee, and I beg to move.

Moved, That the Grand Committee do report to the House that it has considered the Building Societies Act 1986 (Accounts, Audit and EEA State Amendments) Order 2008. 17th report from the Joint Committee on Statutory Instruments.—(Lord Davies of Oldham.)

Baroness Noakes
The Minister will be relieved to hear that I shall not detain the Committee for long on this order, which is pretty unremarkable. He explained that the order largely follows the Companies Act in its audit and accounting requirements. He did not have the joy of the passage of the Companies Act 2006, as some of us did, but I make it clear that I shall not re-run any of the arguments that I lost during the passage of that Act.

Building society accounting legislation does not always exactly mirror company legislation; we found that when we debated an order last year. Will the Minister therefore confirm that the order does nothing to building society accounts and audit arrangements that is not also found in the arrangements for companies? I had a quick look, and so far as I can see they are pretty much the same, but can the Minister answer for the detail? In addition, will he say whether there will be any further building-society catching-up, if I can put it that way, with Companies Act legislation? It would be helpful to know whether we should expect any more.

Lord Newby
The Minister said that there were four bits of secondary legislation relating to building societies in this area, three of which were going through under the negative resolution arrangements while this one is under the affirmative procedure. It is not immediately obvious why this needed an affirmative resolution because it does not appear to have any major issues of principle within it and has no significant cost involvement. I was amused to see in the impact assessment that the cost of these provisions was estimated in the range of £14,080 to £44,600. Spread over the whole raft of building societies that will have to implement the legislation, that is as near to zero as makes no difference. Here we have a modest set of provisions that bring building societies, as the Minister says, into line with banks and other companies at a modest cost, so I am happy to support them.

Lord Davies of Oldham
I am grateful to both noble Lords. The reason that this is modest is that what the directive seeks to deal with across Europe, British law already largely covers. We therefore have to make more modest adjustments.

The noble Baroness asked whether there is any difference between the requirements so far as building societies and companies are concerned. There is a technicality in that respect, which I will spell out as accurately as I can. The audit directive requires member states to ensure that auditors shall not be dismissed on improper grounds. For companies, that requirement is implemented by an amendment to provisions of company law on petitions brought by company members. There is no equivalent of these provisions for building societies, so the order creates a new right for members or the Financial Services  Authority to apply to the High Court where an auditor has been dismissed on improper grounds. That is the only differential.

I do not think I have anything else to add on the question of catching up on legislation in this matter. As I say, we are reflecting directives that have definite implications for member states. I end on the fact that I am grateful for the succinctness of the comments on this matter. I say to the noble Baroness that, as much as she missed me on the Companies Act, that was nothing to my loss when we did the Banking (Special Provisions) Act and she was unfortunately detained when we most needed her.

On Question, Motion agreed to.