Published: 2nd July 2010

Discussion Paper 10/3 “Enhancing the auditor’s contribution to prudential regulation” has been issued by the FSA.

Firms that hold client money and assets may find 3.43 onwards of interest. As mentioned in previous Regulatory Roundups, and indeed on page 3 of this Regulatory Roundup, the FSA has had concerns over firms’ handling of client assets.

As you will know, SUP 3 concerns auditors with SUP 3.10 setting out the duties of an auditor of a firm regarding client money and assets. The FSA places some reliance on these independent assurances so is concerned that there is a lack of understanding of the FSA Handbook among some auditors.

Examples cited include audit reports quoting the wrong FSA Firm Reference Number, or even referring to another firm; not understanding the SUP 3.10 obligations; and referring to the wrong chapters of the Handbook.

The FSA intend to consult by the end of September 2010 on proposals to enhance the auditors’ reporting on client assets. The Discussion Paper also reveals that the FSA is considering making more effective use of section 166 Skilled Persons Reports.

Given the number of firms the FSA regulates, and the move to more intensive supervision, it may be that the FSA should be thinking in terms of commissioning more s166 Reports (88 were commissioned in 2009/10). Currently s166 Reports involve a contractual relationship between the firm and the skilled person which the FSA feel may give rise to a conflict of interest.

The FSA is considering whether it is desirable for FSMA to be amended to allow it to commission the equivalent of a s166 directly, with the report being addressed to the FSA but paid for by the firm.

Other areas under consideration are the possibility of regulatory returns being subject to audit or some other form of regulatory review (the FSA001 is one of the forms that appear to cause problems) and, in chapter 7, whether auditors should have a role in relation to Pillar 3 disclosure.

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