Dear Secretary of State,
Definition of Public Interest Entities
In parallel with our formal response to your department’s consultation ‘Restoring Trust in Audit and Corporate Governance’, I want to raise with you directly the specific matter of Public Interest Entities (PIEs) in the context of proportionality.
The UK’s exit from the European Union provides significant opportunity to shape aspects of our domestic legislative and regulatory framework in ways which maintain robust standards whilst removing unnecessary burdens from smaller firms in particular. This has already been characterised in the Prudential Regulation Authority (PRA) Strong and Simple consultation, supported by HM Treasury, and is also a feature of the Independent report from the Taskforce on Innovation, Growth and Regulatory Reform (TIGRR) which recommends a new Proportionality Principle to be put at the heart of all UK Regulation.
The direction of travel in the audit and governance proposals from your department is to expand the definition of Public Interest Entities (PIEs) to cover other types of larger institution. We can see the strength in the case to do this. However, what is missing from the proposals is consideration of whether now is also the time to review the appropriateness of smaller institutions, such as the majority of building societies, remaining PIEs.
As member-owned financial institutions, building societies specialise in retail savings and residential mortgage lending. Smaller building societies have a simple business model and the PIE status imposes a burden that is substantially disproportionate to the potential benefit, contrary to the Financial Conduct Authority’s Principles for Good Regulation.
In practical terms our smaller members are already experiencing significant issues for example:
- Audit costs have already doubled and indications are that they could rise by up to a further 400% under these proposals.
- The pool of auditors prepared to work for smaller PIEs has been contracting and is already far too small, causing difficulty in finding audit firms willing to undertake this work. This will be exacerbated if additional larger firms are designated PIEs without a reduction at the smaller/simpler end of the spectrum. Some mid-tier audit firms are already refusing to accept PIE audit appointments as it does not fit with their risk appetite. This is already leading to ineffective tender processes and risks significant future gaps in provision.
- The audit of smaller deposit-takers is already comprehensive and arduous because of the prudential regulatory environment. PIE status creates additional burdens but adds little real value.
- Credit unions are excluded from PIE status as they are exempt from being considered a Credit Institution under the Capital Requirements Directive (CRD), however, their business is similar and some building societies are smaller than the largest credit unions.
Taken together, we advocate that there is a strong argument for carving out the majority of building societies from PIE status, alongside other smaller financial institutions.
I would ask that you give serious consideration to the arguments made here for greater proportionality and I would, of course, be delighted to discuss this issue further with you or your team.
Chief Executive (BSA)