FCA looks to auditors to disclose going concern compliance risks

In our June podcast, “The REIT Stuff” we commented on the FCA’s finalised guidance “FG20/1 Assessing adequate financial resources” and, in particular, that the FCA appeared to have missed, or simply avoided to bring to firms’ attention, the role of the external auditors in ensuring capital adequacy compliance. Now, in an open letter to senior partners and directors of audit firms, the FCA has sought to clarify expectations.

Making the polluter pay

Underlying the FCA’s recent capital adequacy message is the drain on the Financial Services Compensation Scheme  (FSCS) caused by failed companies. As Charles Randell, Chair of the FCA says, it is seeking to improve capital adequacy standards “to ensure that the polluting firms in the financial sector pay, not those who have behaved well”. Largely consistent with the FCA’s consultation we posted on last year, “Money for Something“, FG20/1 draws on much of the orthodox “good practice” developed since the introduction of Internal Capital Adequacy Assessments (“ICAAPs”); adequate capital to meet compensation, redress, enforcement fines and litigation, effective risk management and controls, “What if’ scenarios and stress tests, liquidity for “going concern” purposes and wind-down planning.

Policing the polluters

The FCA is now reminding external auditors of their statutory responsibility to report “certain” information to the regulator, relevant to the regulator’s functions, which comes to the auditor’s attention during their work.  The FCA has chosen to highlight that this duty includes going concern considerations. In fact, the legislative responsibility to report matters to the FCA applies where (the auditor) “is acting in good faith and … reasonably believes that the information or opinion is relevant to any functions of (the FCA)”.

Reporting those with potential to pollute?

Which could place auditors with a difficult conflict to manage. It is hard to think that risk assessment and its link to capital adequacy and going-concern would not need to be considered by the external auditor in the context of that statutory responsibility. Information about the firm’s ability to meet FCA’s expectations in that respect, is likely to be relevant to the FCA and discoverable in an audit. Even for simple business models, the extent of non-compliance with FG20/1 could be a reportable matter, going concern risks or not.

All regulated firms will therefore need to demonstrate alignment of their risk and control frameworks with their assessment of capital adequacy.  For advice on how to do this proportionately, contact Jon or Kim at Ellis Wilson.