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SUP 3.1 Application

SUP 3.1.1 R RP

This chapter applies to:

  1. (1)

    every firm within a category listed in column (1) of the table in SUP 3.1.2 R; and

  2. (2)

    the external auditor of such a firm (if appointed under SUP 3.3 or appointed under or as a result of a statutory provision other than in the Act);

in accordance with column (2) or (3) of that table, except as described in the remainder of this section.2

SUP 3.1.1A G RP

9For the avoidance of doubt, this chapter does not apply to the following firms if they do not hold client money or client assets and do not appoint an auditor under or as a result of a statutory provision other than in the Act:

  1. (1)

    authorised professional firms;

  2. (2)

    energy market participants, including oil market participants to whom IPRU(INV) 3 does not apply;

  3. (3)

    exempt insurance intermediaries;

  4. (4)

    insurance intermediaries not subject to SUP 3.1.2 R(10);

  5. (5)

    investment management firms;

  6. (6)

    mortgage administrators;

  7. (7)

    mortgage intermediaries;

  8. (8)

    mortgage lenders;

  9. (9)

    personal investment firms, including small personal investment firms;

  10. (10)

    securities and futures firms; and

  11. (11)

    service companies.

SUP 3.1.2 R RP

Applicable sections (see SUP 3.1.1 R)

(1) Category of firm

(2) Sections applicable to the firm

(3) Sections applicable to its auditor

(1)

Authorised professional firm which is required by IPRU(INV) 2.1.2R to comply with chapters 3, 5,10 or 13 of IPRU(INV) and which has an auditor appointed under or as a result of a statutory provision other than in the Act9 (Note 1)

SUP 3.1 - SUP 3.7

SUP 3.1 , SUP 3.2, SUP 3.8 - SUP 3.10

(2)

Authorised professional firm not within (1) to which either or both of CASS 2 (Client assets) and CASS 4 (Client money and mandates: designated investment business) applies , unless the firm is regulated by The Law Society (England and Wales), The Law Society of Scotland or The Law Society of Northern Ireland (Note 2)

SUP 3.1 - SUP 3.7

SUP 3.1 , SUP 3.2, SUP 3.8, SUP 3.10

(3)

Authorised professional firm not within (1) or (2) which has an auditor appointed under or as a result of a statutory provision other than in the Act

SUP 3.1 , SUP 3.2, SUP 3.7

SUP 3.1 , SUP 3.2, SUP 3.8

(4)

Bank or building society which in either case carries on designated investment business (Note 2A)

SUP 3.1 -SUP 3.7

SUP 3.1 , SUP 3.2, SUP 3.8, SUP 3.10

(5)

Bank or building society which in either case does not carry on designated investment business (Note 2A)

SUP 3.1 - SUP 3.7

SUP 3.1 , SUP 3.2, SUP 3.8

(5A)

Credit union

SUP 3.1 - SUP 3.7

SUP 3.1 , SUP 3.2, SUP 3.8

(5B)

ELMI

SUP 3.1 - SUP 3.7

SUP 3.1 , SUP 3.2, SUP 3.8

(6)

Insurer, the Society of Lloyd's, underwriting agent or members' adviser (Note 5)7

SUP 3.1 - SUP 3.7

SUP 3.1 , SUP 3.2, SUP 3.8

(7)

Investment management firm, personal investment firm (other than a small personal investment firm), or securities and futures firm (Note 3) which, in each case, has an auditor appointed under or as a result of a statutory provision other than in the Act9

9

SUP 3.1 - SUP 3.7

SUP 3.1 , SUP 3.2, SUP 3.8 - SUP 3.10

9 (7A)

Investment management firm, personal investment firm (other than a small personal investment firm), or securities and futures firm not within (7) to which either or both of CASS 2 (Client assets) and CASS 4 (Client money and mandates: designated investment business) applies

SUP 3.1 - SUP 3.7

SUP 3.1 , SUP 3.2, SUP 3.8, SUP 3.10

9 (7B)

UCITS management company

SUP 3.1 - SUP 3.7

SUP 3.1 , SUP 3.2, SUP 3.8 - SUP 3.10

(8)

Small personal investment firm or service company which, in either case, has an auditor appointed under or as a result of a statutory provision other than in the Act

SUP 3.1 , SUP 3.2, SUP 3.7

SUP 3.1 , SUP 3.2, SUP 3.8

(9) 8

Mortgage lender 8 which has an auditor appointed under or as a result of a statutory provision other than in the Act9

SUP 3.1 - SUP 3.78

SUP 3.1 , SUP 3.2, SUP 3.88

(10) 8

Insurance intermediary (other than an exempt insurance intermediary) to which CASS 5 (Client money and mandates) (except for CASS 5.2 (Holding money as agent)) applies (see Note 4)8

SUP 3.1 - SUP 3.78

SUP 3.1 , SUP 3.2, SUP 3.8, SUP 3.108

(11) 8

Exempt insurance intermediary and insurance intermediary not subject to SUP 3.1.2 R(10) which has an auditor appointed under or as a result of a statutory provision other than in the Act

SUP 3.1 , SUP 3.2, SUP 3.78

SUP 3.1 , SUP 3.2, SUP 3.88

(12) 8

Mortgage intermediary or mortgage administrator which has an auditor appointed under or as a result of a statutory provision other than in the Act.

SUP 3.1 , SUP 3.2, SUP 3.78

SUP 3.1 , SUP 3.2, SUP 3.88

Note 1 = This chapter applies to an authorised professional firm in row (1) (and its auditor) as if the firm were of the relevant type in the right-hand column of IPRU(INV) 2.1.4R.

Note 2 = In row (2):

(a) CASS 2 (Client assets) is treated as applying only if (i) the firm safeguarding and administering investments in connection with managing investments (other than when acting as trustee) or (ii) it safeguarding and administering investments in relation to bonded investments;

(b) CASS 4 (Client money and mandates: designated investment business) is treated as applying only if the firm receives or holds client money other than under an arrangement where commission is rebated to the client;

but, if CASS 2 or CASS 4 is treated as applying, then SUP 3.10 (Duties of auditors: notification and report on client assets) applies to the whole of the business within the scope of CASS 2 or CASS 4.

Note 2A = For this purpose, designated investment business does not include either or both:

(a) dealing which falls within the exclusion in article 15 of the Regulated Activities Order (Absence of holding out etc) (or agreeing to do so); and

(b) dealing in investments as principal (or agreeing to do so):

(i) by a firm whose permission to deal in investments as principal is subject to a limitation to the effect that the firm, in carrying on this regulated activity, is limited to entering into transactions in a manner which, if the firm was an unauthorised person, would come within article 16 of the Regulated Activities Order (Dealing in contractually based investments); and

(ii) in a manner which comes within that limitation;

having regard to article 4(4) of the Regulated Activities Order (Specified activities: general: core investment services by investment firms).

Note 3 = This note applies in relation to an oil market participant to which IPRU(INV) 3 does not apply and in relation to an energy market participant to which IPRU(INV) 3 does not apply. In SUP 3:

(a) only SUP 3.1, SUP 3.2 and SUP 3.7 are applicable to such a firm; and

(b) only SUP 3.1, SUP 3.2 and SUP 3.8 are applicable to its auditor;

and, in each case, only if it has an auditor appointed under or as a result of a statutory provision other than in the Act.

Note 4 = The client money audit requirement in SUP 3.1.2 R(10) therefore applies to all insurance intermediaries except:8

• those which do not hold client money or other client assets in relation to insurance mediation activities; or 8

• those which only hold up to, but not exceeding, £30,000 of client money under a statutory trust arising under CASS 5.3.8

Insurance intermediaries which, in relation to insurance mediation activities, hold no more than that amount of client money only on a statutory trust are exempt insurance intermediaries.8

Note (5) = In row (6):7

(a) 7

SUP 3.1 - SUP 3.7 applies to a managing agent in respect of its own business and in respect of the insurance business of each syndicate which it manages; and7

(b) 7

SUP 3.1 , SUP 3.2 and SUP 3.8 apply to the auditors of a managing agent and the auditors of the insurance business of each syndicate which the managing agent manages.1234567
SUP 3.1.2A G RP

8If a firm falls within more than one row in column (1) of the table in SUP 3.1.2 R, SUP 3.1.1 R requires the firm and its external auditor to comply with all the sections referred to in column (2) or (3). For example, a bank which carries on designated investment business which is also a mortgage lender, falls in rows (4) and (9). Therefore, the bank must comply with SUP 3.1 to SUP 3.7, and its external auditor must comply with SUP 3.1, SUP 3.2, SUP 3.8 and SUP 3.10.

Incoming firms

SUP 3.1.3 R RP

This chapter does not applyto an incoming EEA firm without atop-up permission or an auditor of such a firm.

SUP 3.1.4 G RP

The application of SUP 3.10 to the auditor of an incoming EEA firm with a top-up permission is qualified in SUP 3.10.3 R.

SUP 3.1.5 R RP

This chapter does not apply to an incoming Treaty firm, which:

  1. (1)

    does not have a top-up permission; and

  2. (2)

    is not required to comply with the client asset rules.

SUP 3.1.6 G RP

The application of SUP 3.7 and SUP 3.9 to an incoming Treaty firm or an auditor of such a firm is further qualified in SUP 3.7.1 G and SUP 3.9.2 R.

Auditors of lead regulated firms

SUP 3.1.7 G RP

The application of SUP 3.9 and SUP 3.10 to the auditor of a lead regulated firm is qualified in SUP 3.9.2 R and SUP 3.10.3 R.

Authorised professional firms

SUP 3.1.8 G

This chapter applies to an authorised professional firm as set out in rows (1) to (3) of SUP 3.1.2 R:

  1. (1)

    a firm in row (1) is treated in the same way as its equivalent in row (7);

  2. (2)

    large parts of this chapter apply to a firm in row (2) and its auditor; the report on client assets under SUP 3.10 (Duties of auditors: notification and report on client assets) must cover compliance for the whole of the business within the scope of whichever ofCASS 2 and CASS 4 is treated as applying; but there is no requirement for the auditor to prepare a report to the FSA on the firm'sfinancial statements;

  3. (3)

    this chapter has limited application to a firm in row (3) and its auditor.3

Material elsewhere in the Handbook

SUP 3.1.9 G RP

A firm which is a bank, building society, friendly society or other insurer, investment management firm, personal investment firm,securities and futures firm,7 the Society of Lloyd's or a Lloyd's managing agent in respect of each syndicate managed by it7, should see the InterimPrudential sourcebooksfor further provisions on auditors as set out in SUP 3.1.10 G. For the categorisations employed in SUP 3.1.2 R and SUP 3.1.10 G see SUP App 1.

7

7Lloyd's

7Enabling provision and application

SUP 3.1.11 G

7The insurance market direction in this chapter is given under section 316(1) of the Act (Direction by Authority) and applies to members.

7Purpose

SUP 3.1.12 G

7The insurance market direction in this chapter is intended to enable the rules in SUP 3 and SUP 4 to be applied to a managing agent in respect of the insurance business of each syndicate which it manages.

7Insurance market direction on rules concerning auditors and actuaries

SUP 3.1.13 D
  1. (1)

    7With effect from 1 January 2005, Part XXII of the Act (Auditors and Actuaries) applies to the carrying on of insurance business by members as modified by paragraph (3).

  2. (2)

    For the purposes of (1) "insurance business" means the regulated activities of effecting or carrying out contracts of insurance written at Lloyd's.

  3. (3)

    Regulations made by the Treasury under section 342(5) and section 343(5) of Part XXII of the Act apply only to actuaries appointed by a managing agent in respect of the insurance business of a syndicate, in relation to the long-term insurance business of that syndicate.

  4. (4)

    In Part XXII of the Act (Auditors and Actuaries) as applied by this insurance market direction:

    1. (a)

      a reference to an auditor of an authorised person is to be read as including an auditor appointed by a managing agent in respect of the insurance business of a syndicate; and

    2. (b)

      a reference to an actuary acting for an authorised person is to be read as including an actuary appointed by a managing agent in respect of the insurance business of a syndicate.

SUP 3.1.14 G

7Part XXII (Auditors and Actuaries) is a core provision mentioned in section 317(1) of the Act (The core provisions).

SUP 3.1.15 G

7 Section 317(2) of the Act (The core provisions) provides that references in an applied core provision to an authorised person are to be read as references to a person in the class to which the insurance market direction applies. The effect of this, and of the insurance market direction set out at SUP 3.1.13 D, is that Part XXII of the Act (Auditors and Actuaries), applies also to auditors and actuaries who are appointed to report on the underwriting business of members. Part XXII is modified in its application to members by paragraph (3) of SUP 3.1.13 D with the effect that the regulations made under sections 342(5) and 343(5) of the Act relating to communications by actuaries will only apply where the actuary is appointed to evaluate the long-term insurance business of the syndicate. The regulations made under sections 342(5) and 343(5) in relation to communications by auditors will apply in relation to both general insurance business and long-term insurance business.

SUP 3.1.16 G

7 SUP 3.3 sets out rules the effect of which is to require a managing agent to appoint an auditor in respect of its own business and the insurance business of each syndicate which it manages.

SUP 3.1.17 G

7References in SUP 3, as applied by SUP 3.1.2 R, to a firm include, where appropriate:

  1. (1)

    a managing agent; and

  2. (2)

    one or more members carrying on insurance business at Lloyd's through a syndicate,

and references to an actuary of a firm should be read accordingly.

SUP 3.1.18 G

7 SUP 4.6 sets out rules the effect of which is to require a managing agent to appoint an actuary in respect of the insurance business of each syndicate which it manages.

SUP 3.2 Purpose

Purpose: general

SUP 3.2.1 G RP

This chapter sets out rules and guidance on the role auditors play in the FSA's monitoring of firms' compliance with the requirements and standards under the regulatory system. In determining whether a firm satisfies the threshold conditions, the FSA has regard to whether the firm has appointed auditors with sufficient experience in the areas of business to be conducted by the firm (COND 2.5.7 G (11)). Auditors act as a source of information for the FSA in its supervision. They report, where required, on the financial resources of the firm, the accuracy of its reports to the FSA and its compliance with particular rules, such as the Client asset rules.

SUP 3.2.2 G RP

The Act, together with other legislation such as the Companies Acts 1985 and 1989, the Building Societies Act 1986 and the Friendly Societies Act 1992, provides the statutory framework for firms' and auditors' obligations.

SUP 3.2.3 G

The requirements in SUP 3.9 represent an interim approach to the use of auditors, based mainly on the requirements which previous regulators applied to firms.

SUP 3.2.4 G

[deleted]6

1 2 3

Insurance intermediaries and their auditors

SUP 3.2.5 G RP

4It is the responsibility of an insurance intermediary's senior management to determine, on a continuing basis, whether the insurance intermediary is an exempt insurance intermediary and to appoint an auditor if management determines the firm is no longer exempt. SUP 3.7 (amplified by SUP 15) sets out what a firm should consider when deciding whether it should notify the FSA of matters raised by its auditor.

6

Rights and duties of auditors5

SUP 3.2.6 G RP

4The rights and duties of auditors are set out in SUP 3.8 (Rights and duties of all auditors) and SUP 3.10 (Duties of auditors: notification and report on client assets). SUP 3.8.10 G includes the auditor's statutory duty to report certain matters to the FSA imposed by regulations made by the Treasury under sections 342(5) and 343(5) of the Act (information given by auditor or actuary to the FSA). An auditor should bear these rights and duties in mind when carrying out client asset report work, including whether anything should be notified to the FSA immediately.

SUP 3.3 Appointment of auditors

Purpose

SUP 3.3.1 G RP

This section requires a firm to appoint an auditor and supply the FSA with information about its auditor. The FSA requires such information to ensure that the firm has an auditor.

Appointment by firms

SUP 3.3.2 R RP

A firm to which this section applies (see SUP 3.1) must:

  1. (1)

    appoint an auditor;

  2. (2)

    notify the FSA, without delay, on the form in SUP 15 Ann 2R (Standing data form), in accordance with the instructions on the form, when it is aware that a vacancy in the office of auditor will arise or has arisen, giving the reason for the vacancy;2

  3. (3)

    appoint an auditor to fill any vacancy in the office of auditor which has arisen;

  4. (4)

    ensure that the replacement auditor can take up office at the time the vacancy arises or as soon as reasonably practicable after that; and

  5. (5)

    notify the FSA of the appointment of an auditor, on the form in SUP 15 Ann 2R (Standing data form), in accordance with the instructions on the form, advising the FSA of the name and business address of the auditor appointed and the date from which the appointment has effect.2

SUP 3.3.3 G
  1. (1)

    SUP 3.3.2 R applies to every firm to which this section applies. That includes a firm which is under an obligation to appoint an auditor under an enactment other than the Act, such as the Companies Act 1985. Such a firm is expected to wish to have a single auditor who is appointed to fulfil both obligations. SUP 3.3.2 R is made under section 138 of the Act (General rule-making power), in relation to such firms, and under section 340(1) (Appointment) in relation to other firms.

  2. (2)

    Building societies and friendly societies are reminded that they are subject to the provisions of Schedule 11 to the Building Societies Act 1986 and Schedule 14 to the Friendly Societies Act 1992 relating to auditors, in addition to the provisions in this chapter. In relation to SUP 3.3.2 R (2), such firms may give the FSA a single notification of a vacancy in the office of auditor provided that the notification complies with the requirements of the relevant Act and SUP 3.3.2 R (2).

1
SUP 3.3.4 D

[deleted]1

1
1
SUP 3.3.5 R

[deleted]1

SUP 3.3.6 G

[deleted]1

1

Appointment by the FSA

SUP 3.3.7 R RP
  1. (1)

    Paragraph (2) applies to a firm which is not under an obligation to appoint an auditor imposed by an enactment other than the Act.

  2. (2)

    If a firm fails to appoint an auditor within 28 days of a vacancy arising, the FSA may appoint an auditor for it on the following terms:

    1. (a)

      the auditor to be remunerated by the firm on the basis agreed between the auditor and firm or, in the absence of agreement, on a reasonable basis; and

    2. (b)

      the auditor to hold office until he resigns or the firm appoints another auditor.

SUP 3.3.8 G

In addition, in the case of a building society or friendly society, Schedule 11 of the Building Societies Act 1986 and Schedule 14 of the Friendly Societies Act 1992 allow the FSA to appoint an auditor if this is not done at the society's annual general meeting.

SUP 3.3.9 G RP

SUP 3.3.7 R allows but does not require the FSA to appoint an auditor if the firm has failed to do so within the 28 day period. When it considers whether to use this power, the FSA will take into account the likely delay until the firm can make an appointment and the urgency of any pending duties of the appointed auditor.

SUP 3.3.10 R RP

A firm must comply with and is bound by the terms on which an auditor has been appointed by the FSA, whether under SUP 3.3.7 R, the Building Societies Act 1986 or the Friendly Societies Act 1992.

SUP 3.4 Auditors' qualifications

Purpose

SUP 3.4.1 G RP

The FSA is concerned to ensure that the auditor of a firm has the necessary skill and experience to audit the business of the firm to which he has been appointed. This section sets out the FSA's rules and guidance aimed at achieving this.

Qualifications

SUP 3.4.2 R RP

Before a firm, to which SUP 3.3.2 R applies, appoints an auditor, it must take reasonable steps to ensure that the auditor has the required skill, resources and experience to perform his functions under the regulatory system and that the auditor:

  1. (1)

    is eligible for appointment as an auditor under Part II of the Companies Act 1989 or Part III of the Companies (Northern Ireland) Order 1990 (Eligibility for appointment) respectively; or

  2. (2)

    if appointed under an obligation in another enactment, is eligible for appointment as an auditor under that enactment; or

  3. (3)

    in the case of an overseas firm, is eligible for appointment as an auditor under any applicable equivalent laws of that country or territory.

SUP 3.4.3 G

Enactments within SUP 3.4.2 R (2) include the Building Societies Act 1986 and the Friendly Societies Act 1992.

SUP 3.4.4 G RP

An auditor which a firm proposes to appoint should have skills, resources and experience commensurate with the nature, scale and complexity of the firm's business and the requirements and standards under the regulatory system to which it is subject. A firm should have regard to whether its proposed auditor has expertise in the relevant requirements and standards (which may involve access to UK expertise) and possesses or has access to appropriate specialist skill, for example actuarial expertise in carrying out audits of insurance companies or friendly societies where appropriate. The firm should seek confirmation of this from the auditor concerned as appropriate.

Disqualified auditors

SUP 3.4.5 R RP

A firm must not appoint as auditor a person who is disqualified by the FSA under section 345 of the Act (Disqualification) from acting as an auditor either for that firm or for a relevant class of firm.

SUP 3.4.6 G RP

If it appears to the FSA that an auditor of a firm has failed to comply with a duty imposed on him under the Act, it may disqualify him under section 345 of the Act. For more detail about what happens when the disqualification of an auditor is being considered or put into effect, see ENF 17. A list of persons who are disqualified by the FSA under section 345 of the Act may be found on the FSA website (www.fsa.gov.uk).

Requests for information on qualifications by the FSA

SUP 3.4.7 R RP

A firm must take reasonable steps to ensure that an auditor, which it is planning to appoint or has appointed, provides information to the FSA about the auditor's qualifications, skills, experience and independence in accordance with the reasonable requests of the FSA.

SUP 3.4.8 G RP

To enable it to assess the ability of an auditor to audit a firm, the FSA may seek information about the auditor's relevant experience and skill. The FSA will normally seek information by letter from an auditor who has not previously audited any firm. The firm should instruct the auditor to reply fully to the letter (and should not appoint an auditor who does not reply to the FSA). The FSA may also seek further information on a continuing basis from the auditor of a firm (see also the auditor's duty to cooperate under SUP 3.8.2 R).

SUP 3.5 Auditors' independence

Purpose

SUP 3.5.1 G RP

If an auditor is to carry out his duties properly, he needs to be independent of the firm he is auditing, so that he is not subject to conflicts of interest. Many firms are also subject to requirements under the Companies Act 1989, the Building Societies Act 1986 or the Friendly Societies Act 1992 on auditor's independence.

Independence

SUP 3.5.2 R RP

A firm must take reasonable steps to ensure that the auditor which it appoints is independent of the firm.

SUP 3.5.3 R RP

If a firm becomes aware at any time that its auditor is not independent of the firm, it must take reasonable steps to ensure that it has an auditor independent of the firm. The firm must notify the FSA if independence is not achieved within a reasonable time.

SUP 3.5.4 G RP

The FSA will regard an auditor as independent if his appointment or retention does not breach the ethical guidance in current issue from the auditor's recognised supervisory body on the appointment of an auditor in circumstances which could give rise to conflicts of interest.

SUP 3.5.5 G

Firms are reminded that the Building Societies Act 1986 and Friendly Societies Act 1992 provide that an auditor who is ineligible under section 27 of the Companies Act 1989 for appointment as auditor of a company (which is a subsidiary undertaking of a building society or a subsidiary of a friendly society) is ineligible for appointment as auditor to the building society or friendly society concerned.

SUP 3.6 Firms' cooperation with their auditors

SUP 3.6.1 R RP

A firm must cooperate with its auditor in the discharge of his duties under this chapter.

Auditor's access to accounting records

SUP 3.6.2 G RP

In complying with SUP 3.6.1 R, a firm should give a right of access at all times to the firm's accounting and other records, in whatever form they are held, and documents relating to its business. A firm should allow its auditor to copy documents or other material on the premises of the firm and to remove copies or hold them elsewhere, or give him such copies on request.

SUP 3.6.3 G RP

Section 341 of the Act (Access to books etc.) provides that an auditor of a firm appointed under SUP 3.3.2 R:

  1. (1)

    has a right of access at all times to the firm's books, accounts and vouchers; and

  2. (2)

    is entitled to require from the firm's officers such information and explanations as he reasonably considers necessary for the performance of his duties as auditor.

SUP 3.6.4 G RP

Section 389A of the Companies Act 1985, section 79 of the Building Societies Act 1986 and section 75 of the Friendly Societies Act 1992 give similar rights to auditors of companies, building societies and friendly societies respectively.

SUP 3.6.5 G RP

Section 413 (Protected items), under which no person may be required under the Act to produce, disclose or permit the inspection of protected items, is relevant to SUP 3.6.1 R and SUP 3.6.3 G.

Access and cooperation: appointed representatives, material outsourcing, employees

SUP 3.6.6 G RP

In complying with SUP 3.6.1 R, a firm should take reasonable steps to ensure that each of its appointed representatives gives the firm's auditor the same rights of access to the books, accounts and vouchers of the appointed representative and entitlement to information and explanations from the appointed representative's officers as are given in respect of the firm by section 341 of the Act (see also SUP 12.5.5 R (3)).

SUP 3.6.7 G RP

In complying with SUP 3.6.1 R, a firm should take reasonable steps to ensure that each of its suppliers under a material outsourcing arrangement gives the firm's auditor the same rights of access to the books, accounts and vouchers of the firm held by the supplier, and entitlement to information and explanations from the supplier's officers as are given in respect of the firm by section 341 of the Act.

SUP 3.6.8 G RP

In complying with SUP 3.6.1 R, a firm should take reasonable steps to ensure that all its employees cooperate with its auditor in the discharge of his duties under this chapter.

Provision of false or misleading information to auditors

SUP 3.6.9 G RP

Firms and their officers, managers and controllers are reminded that, under section 346 of the Act (Provision of false or misleading information to auditor or actuary), knowingly or recklessly giving false information to an auditor appointed under SUP 3.3.2 R constitutes an offence in certain circumstances, which could render them liable to prosecution. This applies even when an auditor is also appointed under an obligation in another enactment.

SUP 3.7 Notification of matters raised by auditor

Application

SUP 3.7.1 G RP

SUP 3.7 does not apply to an incoming Treaty firm which does not have a top-up permission.

Notification

SUP 3.7.2 G RP

A firm should consider whether it should notify the FSA under Principle 11 if:

  1. (1)

    the firm expects or knows its auditor will qualify his report on the audited annual financial statements or add an explanatory paragraph; or

  2. (2)

    the firm receives a written communication from its auditor commenting on internal controls (see also SUP 15.3).

SUP 3.7.3 G

[deleted]1

1

SUP 3.8 Rights and duties of auditors

Purpose

SUP 3.8.1 G RP

The auditor of a firm has various rights and duties to obtain information from the firm and both to enable and to require him to pass information to the FSA in specified circumstances. This section imposes or gives guidance on those rights and duties.

Cooperation with the FSA

SUP 3.8.2 R RP

An auditor of a firm must cooperate with the FSA in the discharge of its functions under the Act.

SUP 3.8.3 G RP

The FSA may ask the auditor to attend meetings and to supply it with information about the firm. In complying with SUP 3.8.2 R, the auditor should attend such meetings as the FSA requests and supply it with any information the FSA may reasonably request about the firm to enable the FSA to discharge its functions under the Act.

SUP 3.8.4 R RP

An auditor of a firm must give any skilled person appointed by the firm all assistance that person reasonably requires (see SUP 5 and section 166(5) of the Act (Reports by skilled persons)).

Auditor's independence

SUP 3.8.5 R RP

An auditor of a firm must be independent of the firm in performing his duties in respect of that firm.

SUP 3.8.6 R RP

An auditor of a firm must take reasonable steps to satisfy himself that he is free from any conflict of interest in respect of that firm from which bias may reasonably be inferred. He must take appropriate action where this is not the case.

SUP 3.8.7 G RP

SUP 3.5.4 G explains that an auditor whose appointment does not breach the ethical guidance in current issue from the auditor's recognised supervisory body will be regarded as independent by the FSA.

Auditors' rights to information

SUP 3.8.8 G RP

SUP 3.6.1 R requires a firm to cooperate with its auditor. SUP 3.6.3 G refers to the rights to information which an auditor is granted by the Act. SUP 3.6.4 G refers to similar rights granted by the Companies Act 1985, the Building Societies Act 1986 and the Friendly Societies Act 1992.

Communication between the FSA, the firm and the auditor

SUP 3.8.9 G RP

Within the legal constraints that apply, the FSA may pass on to an auditor any information which it considers relevant to his function. An auditor is bound by the confidentiality provisions set out in Part XXIII of the Act (Public record, disclosure of information and cooperation) in respect of confidential information he receives from the FSA. An auditor may not pass on such confidential information without lawful authority, for example if an exception applies under the Financial Services and Markets Act 2000 (Disclosure of Confidential Information) Regulations 2001 (SI 2001/2188) or with the consent of the person from whom that information was received and (if different) to whom the information relates.

Auditors' statutory duty to report

SUP 3.8.10 G RP

Auditors are subject to regulations made by the Treasury under sections 342(5) and 343(5) of the Act (Information given by auditor or actuary to the FSA). These regulations oblige auditors to report certain matters to the FSA. Sections 342(3) and 343(3) of the Act provide that an auditor does not contravene any duty by giving information or expressing an opinion to the FSA, if he is acting in good faith and he reasonably believes that the information or opinion is relevant to any functions of the FSA. These provisions continue to have effect after the end of the auditor's term of appointment. In relation to Lloyd's, an effect of the insurance market direction set out at SUP 3.1.13 D is that sections 342(5) and 343(5) of the Act (Information given by an auditor or actuary to the Authority) apply also to auditors appointed to report on the insurance business of members.1

Termination of term of office, disqualification

SUP 3.8.11 R RP

An auditor must notify the FSA without delay if he:

  1. (1)

    is removed from office by a firm; or

  2. (2)

    resigns before his term of office expires; or

  3. (3)

    is not re-appointed by a firm.

SUP 3.8.12 R RP

If an auditor ceases to be, or is formally notified that he will cease to be, the auditor of a firm, he must notify the FSA without delay:

  1. (1)

    of any matter connected with his so ceasing which he thinks ought to be drawn to the FSA's attention; or

  2. (2)

    that there is no such matter.

SUP 3.8.13 R

[deleted]1

SUP 3.8.14 G

[deleted]1

1

SUP 3.9 Duties of auditors: reports on certain investment business firms

Purpose

SUP 3.9.1 G

The types of firm which an auditor is required to report on in this section generally have businesses and assets of a nature which lend themselves well to the use of standardised reports by auditors as a supervisory tool. To assist its supervision, the FSA therefore requires an auditor's report on these firms' financial statements and regulatory reporting in the format in SUP 3.9.5 R as a means of obtaining information about the firm's financial position, and the quality of its regulatory reporting.

Application

SUP 3.9.2 R

In addition to those excluded under SUP 3.1, SUP 3.9 does not apply to the auditor of:

  1. (1)

    a lead regulated firm; or

  2. (2)

    an incoming Treaty firm, which does not have a top-up permission.

SUP 3.9.3 R

Where this section requires the auditor of a firm to report on a firm's compliance with rules, this section applies to the auditor only to the extent that the firm is required to comply with the relevant rules.

The auditor's report: content

SUP 3.9.4 R

An auditor of a firm must:

  1. (1)

    submit a report addressed to the FSA, signed in his capacity as auditor, which states the matters set out in SUP 3.9.5 R;

  2. (2)

    in preparing a report to the FSA under (1), carry out such investigations as are reasonably necessary in order to form an opinion as to the matters required to be stated in the report; and

  3. (3)

    submit a letter to the firm annually commenting on the firm's internal controls or stating that he has no such comments, whichever is appropriate; such a letter need only cover matters which have come to the auditor's attention while undertaking the work to produce the reports required by (1) or SUP 3.10.4 R.

SUP 3.9.5 R

Auditor's report

1

whether the auditor has:

(1)

audited the firm's annual financial statements in accordance with International Standards on Auditing (UK and Ireland) issued by the Auditing Practices Board;

(2)

carried out such other procedures as he considered necessary, having regard to the relevant Auditing Practices Board's Practice Note; and

(3)

obtained all the information and explanations which to the best of his knowledge and belief are necessary for the purposes of his report to the FSA; and

whether in the auditor's opinion:

(4)

except in the case of an OPS firm, the audited annual financial statements of the firm give a true and fair view:

(a)

in the case of the profit and loss account, of the firm's profit or loss for the period to which that account relates; and

(b)

in the case of the annual balance sheet, of the state of the affairs of the firm at the accounting reference date at which that balance sheet was prepared;

(5)

in the case of an OPS firm, the audited annual financial statements give a true and fair view of the state of affairs:

(a)

in the case of the statements of the firm, of the firm at theaccounting reference date of the firm; and

(b)

in the case of any OPS collective investment scheme in relation to which the firm carries on OPS activities, of the OPS collective investment scheme at the accounting reference date of the scheme;

(6)

Except in the case of a small personal investment firm, 2the relevant financial reporting statement has been properly prepared in accordance with theFSA's rules, the relevant financial reporting statement being, in the case of:

(a)

an investment management firm: the annual financial return (see SUP 16.7.36 R); or

(b)

a personal investment firm: (except a small personal investment firm): sections A, B & D of the RMAR as at the firm'saccounting reference date (see SUP 16.7.77 R) (see Note)2; or

2

(c)

a securities and futures firm: the annual reporting statement (SUP 16.7.25 R or SUP 16.7.27 R);

(d)

a UCITS management company: the annual financial return (see SUP 16.7.68 R);

(7)

the balance sheet and the profit and loss account of the relevant financial reporting statement in (6) are in agreement with the firm's accounting records ;

2

(8)

in the case of:

(a)

a personal investment firm; or

(b)

a securities and futures firm;

the balance sheet of the relevant financial reporting statement in (6) has been properly reconciled to , respectively, 2 the RMAR submitted under SUP 16.7.77 R , or 2 quarterly reporting statement or monthly reporting statement prepared , in respect of 2 the same accounting reference date;

2

(9)

in the case of a securities and futures firm, the balance sheet of the annual reporting statement has been properly reconciled to the balance sheet of the audited annual financial statements;

(10)

the firm (not being a corporate finance advisory firm or an OPS firm) has calculated its expenditure requirement in accordance with the relevant rules for the forthcoming year, the relevant rules being, in the case of:

(a)

an investment management firm: IPRU(INV) 5.2.3R (4), IPRU(INV) 5.2.4R;

(b)

a category A personal investment firm (see SUP 3.9.6 R): IPRU(INV) 13.2R and IPRU(INV) 13.5R;

(c)

a category B personal investment firm (see SUP 3.9.6 R, IPRU(INV) 13.9R and IPRU(INV) 13.12R);

(d)

a securities and futures firm which is not an ISD investment firm: IPRU(INV)3-70R, IPRU(INV)3-71R and IPRU(INV)3-73R;

(e)

a securities and futures firm which is an ISD investment firm: IPRU(INV)10-71R, IPRU(INV)10-72R and IPRU(INV)10-73R;

(f)

a UCITS management company: IPRU(INV)7.2.3R andIPRU(INV)7.2.4R;

(11)

the firm's statement of financial resources, and the firm's statement of financial resources requirement, have been properly prepared in accordance with the rules;

(12)

the firm's financial resources at the accounting reference date are sufficient to meet the firm's financial resources requirement;

(13)

the firm has kept proper accounting records in accordance with the rules throughout its financial year, the relevant rules being, in the case of:

(a)

an investment management firm: IPRU(INV)5.3.1R;

(b)

a personal investment firm: IPRU(INV)13.1.11-13.1.16R

(c)

a securities and futures firm which is not an ISD investment firm: IPRU(INV)3-10R;

(d)

a securities and futures firm which is an ISD investment firm IPRU(INV) 10-10R; (except IPRU(INV) 10-10R(3)(m)-(n))

(e)

a UCITS management company: IPRU(INV)7.4.1R;

(14)

if the firm prepares a consolidated supervision return 1 at its accounting reference date, that it has been prepared in accordance with the rules.

1

Note: The data submitted in section B (Profit & Loss) will be cumulative over the financial year.2
SUP 3.9.6 R

In SUP 3.9.5 R(10)(b) and (c), a "Category A personal investment firm" is a personal investment firm which is an ISD investment firm and a "Category B personal investment firm" is a personal investment firm other than a category A personal investment firm.

The auditor's report: timing of submission

SUP 3.9.7 R

An auditor of a firm must submit a report under SUP 3.9.4 R (1) after each accounting reference date of the firm and so as to be received by the FSA within:

  1. (1)

    in the case of an auditor of a securities and futures firm, three months of the firm's accounting reference date;

  2. (2)

    in the case of an auditor of a personal investment firm, a UCITS management company or an investment management firm, four months of the firm'saccounting reference date.

SUP 3.9.8 R

If an auditor is unable to report to the FSA within the timetable set out in SUP 3.9.7 R, the auditor must notify the FSA and advise the FSA of the reasons why it has been unable to meet the requirements of SUP 3.9.7 R.

The auditor's report: requirements not met or inability to form opinion

SUP 3.9.9 R
  1. (1)

    If the report under SUP 3.9.4 R (1) states that one or more of the applicable requirements described in SUP 3.9.5 R(4) to (14) have not been met, the auditor must specify in the report those requirements and the respects in which they have not been met.

  2. (2)

    If an auditor is unable to form an opinion as to whether one or more of the applicable requirements described in SUP 3.9.5 R(4) to (14) have been met, the auditor must specify in the report under SUP 3.9.4 R (1) those requirements and the reasons why the auditor has been unable to form an opinion.

Method of submission of reports

SUP 3.9.10 R

An auditor of a firm must submit a report under SUP 3.9.2 R (1) in accordance with the rules in SUP 16.3.6 R to SUP 16.3.13 R as if those rules applied directly to the auditor.

Service of Notice Regulations

SUP 3.9.11 G

The Financial Services and Markets Act 2000 (Service of Notices) Regulations 2001 (SI 2001/1420) contains provisions relating to the service of documents on the FSA. They do not apply to reports required under SUP 3.9 because of the specific provisions in SUP 3.9.10 R.

SUP 3.10 Duties of auditors: notification and report on client assets

Application

SUP 3.10.1 R

Where this section requires an auditor of a firm to report on a firm's compliance with rules, this section applies to the auditor only to the extent that the firm is required to comply with the relevant rules.

SUP 3.10.2 R RP

An auditor of an authorised professional firm need not report under this section in relation to that firm's compliance with the client money rules (CASS 4), if that firm is regulated by:

  1. (1)

    the Law Society (England and Wales);

  2. (2)

    the Law Society of Scotland;

  3. (3)

    the Law Society of Northern Ireland.

SUP 3.10.3 R RP

SUP 3.10.5 R (3) does not apply to an auditor of a lead regulated firm or an incoming EEA firm.

Client assets report: content

SUP 3.10.4 R RP

An auditor of a firm must submit a report addressed to the FSA, signed in his capacity as auditor, which:

  1. (1)
      5

    states the matters set out in SUP 3.10.5 R; or

  2. (2)

    if the firm claims not to hold client money or custody assets, states whether anything has come to the auditor's attention that causes him to believe that the firm held client money or custody assets during the period covered by the report.

SUP 3.10.5 R RP

Client assets report

111

Whether in the auditor's opinion

(1)

the firm has maintained systems adequate to enable it to comply with the rules in CASS 2 to CASS 4 (inclusive) and CASS 5.1 to CASS 5.8 (except CASS 5.2)1 throughout the period since the last date as at which a report was made;

(2)

the firm was in compliance with the rules in CASS 2 to CASS 4 (inclusive) and CASS 5 (except CASS 5.2),1 at the date as at which the report has been made;

(3)

in the case of an investment management firm, personal investment firm, a UCITS management companyorsecurities and futures firm, when a subsidiary of the firm is a nominee company in whose name custody assets of the firm are registered that nominee company has maintained throughout the year systems for the custody, identification and control of custody assets which:

(a)

are adequate; and

(b)

include reconciliations at appropriate intervals between the records maintained (whether by the firm or the nominee company) and statements or confirmations from custodians or from the person who maintains the record of legal entitlement; and

(4)

if there has been a secondary pooling event during the period, the firm has 1complied with the rulesCASS 4.4, and CASS 5.6 (Client money distribution)1 in relation to that pooling event.

Client assets report: period covered

SUP 3.10.6 R RP

The period covered by a report under SUP 3.10.4 R must end not more than 53 weeks after the period covered by the previous report on such matters, or, if none, after the firm is authorised or becomes a firm to which SUP 3.10 applies.

Client assets report: timing of submission

SUP 3.10.7 R RP

An auditor must deliver a report under SUP 3.10.4 R to the FSA so as to be received within four months of theend of each period covered, unless it is the auditor of a firm falling within category (10) of SUP 3.1.2 R.1

SUP 3.10.8 R RP

If an auditor is unable to report to the FSA within the timetable set out in SUP 3.10.7 R, the auditor must notify the FSA and advise the FSA of the reasons why it has been unable to meet the requirements of SUP 3.10.7 R.

SUP 3.10.8A R RP

1The auditor of a firm falling within category (10) of SUP 3.1.2 R must deliver a report under SUP 3.10.4 R:

  1. (1)

    to the firm so as to be received within four months of the end of each period covered; and

  2. (2)

    to the FSA upon request within six years of the end of the period covered.

SUP 3.10.8B G RP

1The rights and duties of auditors are set out in SUP 3.8 (Rights and duties of all auditors) and SUP 3.10 (Duties of auditors: notification and report on client assets). SUP 3.8.10 G also refers to the auditor's statutory duty to report certain matters to the FSA imposed by regulations made by the Treasury under sections 342(5) and 343(5) of the Act (information given by auditor or actuary to the FSA). An auditor should bear these rights and duties in mind when carrying out client asset report work, including whether anything should be notified to the FSA immediately.

SUP 3.10.8C G RP

1It is the responsibility of an insurance intermediary's senior management to determine, on a continuing basis, whether the firm is an exempt insurance intermediary for the purposes of this requirement and to appoint an auditor if management determines the firm is no longer exempt. SUP 3.7 (amplified by SUP 15) sets out what a firm should consider when deciding whether it should notify the FSA of matters raised by its auditor.

Client assets report: requirements not met or inability to form opinion

SUP 3.10.9 R RP

If the report under SUP 3.10.4 R states that one or more of the applicable requirements described in SUP 3.10.5 R have not been met, the auditor must specify in the report those requirements and the respects in which they have not been met.

SUP 3.10.10 R RP

If an auditor is unable to form an opinion as to whether one or more of the applicable requirements described in SUP 3.10.5 R have been met, the auditor must specify in the report under SUP 3.10.4 R those requirements and the reasons why the auditor has been unable to form an opinion.

SUP 3.10.11 G

An auditor may at the firm's request include the matters required under this section in a separate report to that required under section SUP 3.9.

Method of submission of reports

SUP 3.10.12 R RP

An auditor of a firm must submit a report under SUP 3.10.4 R in accordance with the rules in SUP 16.3.6 R to SUP 16.3.13 R as if those rules applied directly to the auditor.

Service of Notice Regulations

SUP 3.10.13 G RP

The Financial Services and Markets Act 2000 (Service of Notices) Regulations 2001 (SI 2001/1420) contain provisions relating to the service of documents on the FSA. They do not apply to reports required by SUP 3.10 because of the specific provisions in SUP 3.10.12 R.