FEEDBACK STATEMENT ISSUED

Transcription

1 FEEDBACK STATEMENT ISSUED FURTHER TO INDUSTRY RESPONSES TO MFSA CONSULTATION DOCUMENT ON INSURANCE RULES IMPLEMENTING AUDIT COMMITTEE REQUIREMENTS MFSA REF: [05/2016] 18 TH JULY P a g e

2 1. Background On the 31 st May 2016, the MFSA issued a Consultation Document on proposed Insurance Rules issued under the Insurance Business Act (Cap.403) transposing the new requirements set out in Article 39 of Directive 2006/43/EC on statutory audits of annual accounts and consolidated accounts, amending Council Directives 78/660/EEC and 83/349/EEC and repealing Council Directive 84/253/EEC, ( the Statutory Audit Directive ), which has been amended by Directive 2014/56/EU 1 of 16 April The purpose of the Consultation Document was to bring to the attention of authorised undertakings the new requirement found in Article 39 of the Statutory Audit Directive relating to the audit committee and applicable to public-interest entities as defined in Article 2 of the said Directive. Further to the said Consultation Document, the MFSA is issuing the amendments to Chapter 6 on System of Governance, including a new Annex II - Audit Committee, in Part B of the Insurance Rule, together with a Feedback Statement on the comments received in relation to the proposed amendments relating to the audit committee requirements. An outline of the main comments received and the MFSA s position in relation thereto is provided below. 2. Main Comments received on the proposed amendments to Insurance Rules in relation to the Audit Committee requirements and the MFSA s position 2.1 Article 39(1) of the Statutory Audit Directive Structure and Membership of the Audit Committee Industry comment: Clarification was sought as to whether the audit committees that are already in place for authorised insurance and reinsurance undertakings will be effected in terms of the new requirements. Moreover, industry participants pointed out that it would be difficult for captives or niche underwriters, given that they have small board compositions, to meet all the requirements of paragraph 1.2 (transposing Article 39(1) of the Statutory Audit Directive), in particular the requirements to have an audit committee composed entirely of non-executive directors of the Board of Directors which has at least three members and the majority of which shall be independent of the authorised undertaking. MFSA s Position: Any audit committee currently in place is required to take steps to comply with the requirements introduced by Article 39 of the Statutory Audit Directive, as amended by Directive 2014/56/EU. However, in the case of an authorised undertaking falling within the definition of a small and medium-sized enterprise, in order to adopt a proportionate approach in view of the size of boards in small and medium-sized undertakings, the MFSA 1 As a note of general information, the market may wish to note that the provisions of Directive 2014/56/EU have been transposed by means of Act No. XXXVI of 2016, entitled an Act to introduce amendments to the Accountancy Profession Act and to other Laws and to implement Directive 2014/56/EU and certain provisions of Regulation (EU) No.537/2014, which was published in the Government Gazzette of Malta, No. 19,607, on the 12th July

3 considers it opportune to permit that the functions assigned to the audit committee be performed by the Board of Directors as a whole. This is catered for in paragraph 1.5 of Annex II to Chapter 6 on System of Governance, in Part B of the Insurance Rules, which transposes the first sub-paragraph of Article 39(2) of the Statutory Audit Directive Competence in Accounting and/or Auditing Industry Comment: The insurance industry requested clarification or guidance as to what fitness requirements are expected in relation to the competence in accounting and/or auditing required to be possessed by at least one member of the audit committee. MFSA s Position: The Statutory Audit Directive does not specify what competence in accounting and/or auditing entails. The MFSA is of the view that ideally a member is deemed to have the necessary competence in accounting and/or auditing if he/she is in possession of the necessary qualifications or if not, he/she has the knowledge and practical experience acquired during a significant number of years which renders that person competent in accounting and/or auditing, taking into account the nature, scale and complexity of the risks of the business carried on by the undertaking concerned. The Statutory Audit Directive also requires that every audit committee should collectively possess the necessary skills to be able to carry out the required tasks The term independence Industry Comment: Industry repondents requested clarification or guidance as to the meaning of independence in relation to the requirements in paragraphs 1.2 (d) and (e), which requires that a majority of the members of the audit committee and the Chairman of the audit committee are to be independent of the authorised undertaking. MFSA s Position: It is not an easy task to define independence. Neither the Statutory Audit Directive nor the Statutory Audit Regulation give further clarification on what independence of audit committee members means. Following a request by the market, the MFSA has introduced a new paragraph 1.3 in Annex II to Chapter 6 of the Insurance Rules. In assessing the independence of the members or Chairman of the audit committee, as a guidance, reference may be made to the Commission Recommendation of 15 February 2005 on the role of non-executive or supervisory directors of listed companies and on the committees of the (supervisory) board, which contains a list of situations that may be considered to undermine independence and likely to generate a material conflict of interest The appointment of the Chairman of the Audit Committee Industry Comment: A respondent maintained that the Chairman of the audit committee should be appointed by the Board of Directors and not by the audit committee. MFSA s Position: These comments were noted. The MFSA has amended paragraph 1.2(e)(ii) so that the Chairman of the audit committee may be appointed either by the members of the audit committee or by the Board of Directors, as provided for in Article 39(1) of the Statutory Audit Directive. 2

4 2.2 Member State Options or Derogations from the requirements of Article 39(1) of the Statutory Audit Directive Articles 39(2) of the Statutory Audit Directive The application of paragraph 1.2 Industry comment: The insurance industry requested clarification as to whether the requirements set out in paragraph 1.2, which provide for the composition and membership of the audit committee, would still apply in the case where the functions assigned to the audit committee may thus be performed by the Board of Directors as a whole, provided at least that when the chairman of such a body is an executive member, he is not the chairman of the audit committee. If that is the case, in their view it would result in a substantial burden and costs on a number of Boards of Directors of authorised insurance and reinsurance undertakings and captive undertakings in Malta, which would need to employ additional non-executive directors. In addition, the insurance market claimed that Maltese undertakings have limited resources in general and a seriously limited pool of directors is available locally and that therefore an increase in the number of independent directors increases the related governance costs even further and this immediately following the impact of the Solvency II requirements. It was also pointed out that this burden is higher in the case of captives. It was also submitted that should the independence and non-executive membership requirements of the audit committee contained in paragraph 1.2 be applied to the Board of Directors as a whole, in their view an proportionate approach would be more properly achieved by establishing a threshold for the balance sheet size and/or turnover of the re/insurance undertaking which is tailored to the Maltese market and that would mean that any authorised undertakings exceeding the threshold would thus be required to satisfy the independence and non-executive member requirements. It was also noted that if the Member State option contained in Article 39 (5) of the Statutory Audit Directive is adopted, it may provide an exemption from the independence requirements contained in paragraphs 1.2(d) and (e), to the Board as a whole. MFSA s Position: The MFSA has already attempted to adopt a proportionate approach in the draft Insurance Rules attached to the Consultation Document, by applying the derogations permitted under Article 39(2) of the Statutory Audit Directive to public-interest entities which meet the criteria set out in Article 2(1)(f) of Directive 2003/71/EC of the European Parliament and of the Council. In terms of Article 2(1)(f) small and medium-sized enterprises refers to companies, which, according to their last annual or consolidated accounts, meet at least two of the following three criteria: an average number of employees during the financial year of less than 250, a total balance sheet not exceeding EUR and an annual net turnover not exceeding EUR It is our understanding that in the case of an authorised undertaking which meets the criteria of a small and medium-sized enterprise and where the functions of the audit committee are carried on by the Board of Directors as a whole, the requirements found in paragraph 1.2 are deemed not to be applicable. However, in such a case, the MFSA would require that the Board 3

5 of Directors, when it acts as the audit committee, is to include, as a minimum, an independent non-executive director and a non-executive director. Moreover, in this case, one of such nonexecutive directors is to be the Chairman of the Board of Directors when such Board acts as the audit committee Article 39(3)(a) of the Statutory Audit Directive Industry comment: Some industry respondents queried as to whether the derogation provided under paragraph 1.6 (now paragraph 1.7 of Annex II), is applicable also where the parent undertaking of the subsidiary undertaking has its head office in a third country jurisdiction which is Solvency II equivalent. Clarification was also sought as to whether this exemption applies in cases where the authorised undertaking is itself a subsidiary of a Maltese holding company or a subsidiary of a parent undertaking whose head office is in a Member State or EEA State. MFSA s Position: It is our understanding that the audit committee must be an audit committee of a parent undertaking of the authorised undertaking and such parent undertaking complies at group level with the requirements set out in paragraphs 1.1, 1.2 and 1.5, where applicable, in Articles 11(1), 11(2) and 16(5) of the Statutory Audit Regulation. Therefore, the equivalence of a parent undertaking may be assessed in terms of compliance with the said requirements relating to the audit committtee and not on the basis of the Solvency II Directive. Moreover, the exemption contained in Article 39(3)(a) is deemed to be applicable in the scenario where an authorised undertaking is a subsidiary of a Maltese holding company or a subsidiary of a parent undertaking whose head office is in a Member state or EEA State Consistency with Listing Rules Industry comment: A respondent maintained that in its view the audit committee roles and responsibilities as provided in the proposed Insurance Rules need to be consistent with those prescribed in the Listing Rules, since some differences were observed. MFSA s Position: In paragraph 1.7 of the proposed Insurance Rules attached to the Consultation Document, the MFSA had expressly provided that where an authorised undertaking is listed on a regulated market, it shall comply with requirements of the audit committee found in the Listing Rules issued under the Financial Markets Act (Cap. 345). 4

6 3. The Way Forward The MFSA will be approaching authorised undertakings requesting feedback as to what steps such undertakings have taken or propose to take in order to comply with the requirements of the audit committee under the new Article 39 of the Statutory Audit Directive, as transposed in Annex II to Chapter 6 on System of Governance, in Part B of the Insurance Rules. Contacts Any queries or requests for clarifications in respect of the above should be addressed by on ipsu@mfsa.com.mt. Communications Unit 18 th July 2016 Ref: MFSA