We now turn to the proposal to put in the Bill new requirements on regulators to meet the auditors of banks. This issue has been subject to extensive debate. The Government have been clear throughout that the regulators should carry the full responsibility for managing an effective relationship with the auditors of banks they supervise, and be held to account for how well they deliver it.
The reasons for this are strong. Before the crisis, regulators neglected their engagement with auditors while the auditors themselves signed off on the accounts of banks which we now know were, in some cases, in dire straits. The Government took action. There is now a requirement in the Financial Services and Markets Act for the PRA to lay its code of practice on auditor engagement before Parliament, meaning that the regulators will be held accountable for how well they deliver on the requirement to engage with the auditors of banks.
However, it has become clear how strongly the PCBS valued the opportunity to go further and specify the number of meetings in statute, to ensure auditors’ insights are used. For those reasons the PCBS is clear that, over time, this dialogue between auditors and regulators must not be allowed to lapse. The proposed amendment therefore includes two provisions to ensure that this crucial dialogue is preserved.
First, the regulators must disclose in their annual report the number of meetings they have held with the auditors. This allows Parliament to hold the regulators to account for the frequency of meetings. Secondly, the regulators must meet at least once per year with the auditors of firms that the PRA, the leading prudential regulator, considers to be important to the stability of the United Kingdom economy. This is a minimum requirement. The Government believe that it is right to place the duty on the regulator to determine how many more meetings are required with the auditors of firms of particular types, consistent with its risk-based, judgment-led approach. This allows the regulators to focus their resources where the risks are highest.
Some noble Lords may argue that the minimum requirement should be higher. The Government do not agree. The Government have said that the regulators must meet with any firm that may be important to the financial system at least once per year, but within this group, there will be firms of major and firms of minor significance.
For firms of major significance, once may be too little; for firms of minor significance, once may be sufficient. For example, under the PRA’s current code, for banks that could have the most significant impact on financial stability, the PRA code mandates at least three meetings a year. For other firms whose failure could still materially impact the UK financial system, the PRA code mandates at least one bilateral a year. The FCA meets at least twice per year with the auditors of the most significant banks and at least once per year with those in the next largest category.
The Government believe that it is right that Parliament does not seek to specify this level of detail in legislation. To do so would risk misaligning the PRA’s resources with the risks the financial system faces. The Government therefore believe that this amendment arrives at a suitable compromise between the desire to specify in the Bill a minimum number of meetings, to prevent meetings between auditors and regulators from lapsing entirely, and an approach that requires regulators to take responsibility for pursuing proportionate and high-quality engagement, and enhanced mechanisms for accountability. I commend these amendments to the House.