Feedback on Bank Financial Reporting and Audit consultation
Feedback on Bank Financial Reporting and Audit consultationConsultation feedback
This feedback reports on the responses we received following Consultation No. 13 2020 (CP13). Further enquiries regarding the consultation and this feedback should be directed to:
David Fisher
Senior Adviser, Policy
Jersey Financial Services Commission
PO Box 267
14-18 Castle Street
St Helier
Jersey
JE4 8TP
Telephone: +44 (0) 1534 822106
Email: d.fisher@jerseyfsc.org
Glossary of terms
Defined terms are indicated throughout this document as follows:
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A respondent from the accountancy sector, see 1.5.2 and Appendix A. |
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Orders issued under other Jersey regulatory laws concerning accounting and auditing |
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‘Banking Code: Appointment of auditors’, a draft of which is set out in Appendix D |
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Used to refer to any of the JIB Auditor, OIB Auditor or Branch Auditor |
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The Code of Practice for Deposit-taking Business: Main Body, as set out in Appendix C |
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Banking Code |
The Code of Practice for Deposit-taking Business, comprising five parts, being:
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Banking Business (Jersey) Law 1991 |
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A respondent from the banking sector, see 1.5.1 and Appendix A. |
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‘External audits of banks’, published by the Basel Committee on Banking Supervision in March 2014, available at: https://www.bis.org/press/p140331a.htm |
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Auditor appointed in relation to an OIB’s Jersey business |
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Financial Services Commission (Jersey) Law 1998 |
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Consultation No. 13 2020 on Bank Financial Reporting and Audit, available at: https://www.jerseyfsc.org/industry/consultations/consultation-on-bank-financial-reporting-audit/ |
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Declaration required to be produced by a registered person, in accordance with the New Order, regarding its compliance with laws and regulations |
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‘Banking Code: Declaration of Compliance’, a draft of which is set out in Appendix G |
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‘Banking Code: Financial statements’, a draft of which is set out in Appendix E |
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Financial Services (Fund Services Business (Accounts, Audits and Reports)) (Jersey) Order 2007, available at: https://www.jerseylaw.je/laws/revised/Pages/13.225.95.aspx |
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Accounts Orders issued under the Financial Services (Jersey) Law 1998, i.e. FSB Order, GIMB Order and TCB/IB Order. |
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Financial Services (General Insurance Mediation Business (Accounts, Audits, Reports and Solvency)) (Jersey) Order 2005, available at: https://www.jerseylaw.je/laws/revised/Pages/13.225.06.aspx |
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Banking Business (General Provisions) (Jersey) Order 2002 |
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Accounting standards issued by the International Accounting Standards Board |
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JBA Prudential & Banking Reform Technical Working Group |
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Jersey Finance Limited |
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Jersey Financial Services Commission |
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Jersey Incorporated Bank: a Registered Person incorporated in Jersey |
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Auditor appointed in relation to a JIB’s business |
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The Technical sub-committee of the Jersey Society of Chartered and Certified Accountants |
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Banking Business (Accounts, Auditors and Reports) Order, set out in Appendix B |
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Overseas Incorporated Bank: a Registered Person incorporated overseas |
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Auditor appointed in relation to an OIB’s business |
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‘Banking Code: Prudential reporting’, a draft of which is set out in Appendix F |
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A person registered under the Banking Law |
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An auditor or a person appointed under Article 26(7) of the Banking Law to make a report |
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Financial Services (Trust Company and Investment Business (Accounts, Audits and Reports)) (Jersey) Order 2007, available at: https://www.jerseylaw.je/laws/revised/Pages/13.225.92.aspx |
1 Executive summary
Overview
1.1 This feedback provides a summary of responses received on proposals set out in CP13 and on what we intend to do.
Summary of what was proposed in CP13
1.2 Enacting new legislation – the Banking Business (Accounts, Auditors and Reports) (Jersey) Order (New Order) - that would establish new and varied requirements, with the key aspects being:
1.2.1 The appointment of auditors
1.2.2 Financial statements
1.2.3 Prudential return
1.2.4 Declaration of compliance
1.2.5 Publication of financial statements.
1.3 Removing superseded provisions in the GPO.
1.4 Revising the current Banking Code so that it provides the main body of the Banking Code (Banking Code: Main Body) and issuing four new parts of the Banking Code in separate documents:
1.4.1 Banking Code: Appointment of auditors (AoA Code)
1.4.2 Banking Code: Financial statements (FS Code)
1.4.3 Banking Code: Prudential reporting (PR Code)
1.4.4 Banking Code: Declaration of Compliance (DoC Code).
Feedback received
1.5 The consultation closed on 31 March 2021. Excluding nil responses, we received eleven substantive responses, as follows:
1.5.1.1 JBA Prudential & Banking Reform Technical Working Group (JBARTG)
1.5.1.2 Three JIBs and two OIBs responded directly
1.5.1.3 One bank responded via JFL
1.5.2 Accountancy respondents:
1.5.2.1 The Technical sub-committee of the Jersey Society of Chartered and Certified Accountants (JSCCA)
1.5.2.2 Three individual accountancy firms.
1.6 Sections 2 to 7 of this feedback has a summary of the substantive comments received and our response, as appropriate, to each.
1.7 We are grateful to respondents for taking the time to consider and comment on the proposals. A full list of direct respondents is provided in Appendix A.
Next steps
1.8 We have listened to the feedback received and will work with government to request the New Order is bought in to force alongside associated legislation in Q3 2022. This will provide Registered Persons with substantial additional time (compared to the original timeframe) to address the new and varied requirements. The first stage of this will be the lodging of the Banking Business (Amendment No. 9) (Jersey) Law 201-, which as a primary law amendment requires Privy Council approval.
1.9 We will provide banks with forms and updated Code documents, as final drafts for comment, by the end of March 2022. These will be adjusted to address the feedback received. We will then consider feedback on those drafts by the end of April 2022 and intend to publish final versions by the end of May 2022. These will then come into effect on 30 September 2022.
1.10 At the same time as providing the final drafts, we will also share the final text of the proposed New Order and the other associated legislation.
1.11 We subsequently, but not imminently, intend to carry out work on the New Order and other Accounts Orders to address the matters identified by Accountancy Respondents in Sections 3 and 4.
2 General issues
2.1 Question 1: Are there any particular issues relating to multiple licences held by Registered Persons under the Banking Law that should be further addressed?
2.2 No respondents raised any objections.
2.3 As proposed, we will publish a form to be used if any banks want to request any variances to address overlapping conflicting requirements.
2.4 One banking respondent supported the longer term aim aligning regulations further, though noting that it may have a short term cost. This remains a longer term aim at this time.
3 Appointment of auditors
3.1 Question 2: Are the proposals clear regarding the appointment of auditors? Are there any other matters that you wish to raise in relation to the proposals?
3.2 Banking respondents raised the following concerns for the appointment of JIB Auditors:
3.2.1 One questioned on what grounds we may object and suggested that we could publish a pre-qualified list of auditors. It also suggested that tri-party meetings (for example bank, auditor and JFSC) to discuss the annual financial statements, as is seen in other jurisdictions, might be useful, rather than focussing on the appointment process.
3.2.2 One stated that for larger banking groups, the relevant processes would be primarily operated at a Group or Head Office level and not within the JIB itself and asked whether the cascading of this information met the criteria of a “robust" process for the JIB? It also questioned whether the BCBS Audit paper referred to as good practice should apply to the JIB itself when the appointment is likely performed at a Global level.
3.3 For JIB Auditors, the New Order requires that we are notified, as per the current Banking Law, and provides a specific power to us to object to an appointment. This is not considered to significantly alter our role as we already have to consider these notifications. We will not alter existing practices in this area, for example, by issuing a list of pre-qualified auditors.
3.4 Where an appointment is made at group level, the JIB would need to ensure that the local appointment of its JIB Auditor was appropriate, which might well draw on information cascaded to it. The BCBS Audit paper is considered to set out good practice and hence be relevant to JIBs, but it may well be that in some circumstances not every provision will apply, hence it is guidance only.
3.5 Regarding tri-party meetings, we are aware of this idea and we use this approach where we consider it to be appropriate.
3.6 Accountancy respondents raised the following concerns:
3.6.1 One felt that the definition of ‘registered person’ in the Order was less clear than that defined in CP13.
3.6.2 Whether the requirement to notify us of the appointment of an Auditor applies pre- or post-appointment (or either).
3.7 The concern about the definition of ‘registered person’ in the New Order will be considered as part of the proposed follow up work on the New Order and other Accounts Orders, as set out in 1.10.
3.8 The New Order (Article 2, paragraphs 2 and 5) requires notification to us before appointment of an Auditor.
4 Financial statements
4.1 Question 3: Are the proposals clear regarding the production and submission to the JFSC of financial statements? Are there any other matters that you wish to raise in relation to the proposals?
4.2 Banking respondents raised the following concerns:
4.2.1 The requirement to provide unconsolidated accounts of parent entities to us, because currently these are not always produced and producing them would entail significant extra time and costs.
4.2.2 The requirement that financial statements must be prepared under UK GAAP or IFRS, as opposed to permitting other standards such as US GAAP, accepting that Article 17 of the New Order 'Exemptions and variation' would allow other standards to be adopted. It suggested that any existing variances be grandfathered in.
4.2.3 Whether OIBs have to produce audited financial statements for their Jersey branches or only for the OIB as a whole?
4.3 We have the power to vary requirements, including regarding the provision of consolidated accounts, the use of US GAAP and re audited parental accounts. This will also be made clear in the FS Code document, in a new section on transitional provisions.
4.4 Banks will be contacted and will be allowed to continue existing practices provided they respond with details of all required variances by the end of April 2022, ahead of the delayed date for these proposals coming into force. This will also be made clear in the FS Code document, in a new section on transitional provisions.
4.5 OIBs are required to produce and submit the audited accounts of the entity as a whole – the legal person – not those of its Jersey branch.
4.6 Accountancy respondents raised the following concerns:
4.6.1 A number of provisions are made in relation to OIBs (including the obligation to prepare a Directors Report, requirements on the auditor in relation to auditing and the financial statement filing obligation within four months) which may be more onerous or inconsistent with the law in the home jurisdiction. This would seem difficult to impose and may potentially be difficult to enforce.
4.6.2 Similar concerns to those raised in 4.2.1, for largely similar reasons.
4.6.3 Similar concerns to those raised in 4.2.2 but with particular emphasis on the application to OIBs and the use of other versions of IFRS than specified in the New Order. In addition, it notes that US GAAP has no requirement re true and fair, which is required by the New Order.
4.6.4 Why, unlike other Accounts Orders, there appears to be no requirement under the New Order, to say that reports are produced in accordance with it.
4.7 The requirements in relation to OIBs listed are broadly similar to those currently in place within the Banking Code and no general issue has been raised historically.
4.8 As stated in 4.3 & 4.4, we have the power to vary requirements and intend to make this to address these issues. This could include the use of other versions of IFRS and amending the requirements in relation to true and fair.
4.9 It is not considered that the suggested declaration is necessary, having not required such declarations historically for banks without any issues arising.
4.10 Accountancy respondents also noted that the bodies referenced in the New Order for the issuance of standards are out of date.
4.11 The New Order has been adjusted to reflect the feedback. More generally, it is intended to look at how to most efficiently update the Accounts Orders and the New Order as a single piece of work to both bring them all up to date and future proof them.
5 Prudential return
5.1 Question 4: Are the proposals clear regarding the production and submission to the JFSC of prudential returns? Are there any other matters that you wish to raise in relation to the proposals?
5.2 Regarding quarterly prudential reporting, the only feedback from Banking Respondents was that the date for Q1 reporting appears wrong (30 March in the New Order should have read 31 March). This is agreed and will be addressed in the New Order and the PR Code.
5.3 An Accountancy Respondent suggested that the New Order should make it clear that prudential reporting for OIBs only relates to the Jersey branch. The prudential reporting guidance on this is unchanged and is longstanding and it is not considered that the suggested change would be useful, particularly as part of the prudential reporting required for an OIB relates to the entity as a whole.
5.4 Banking Respondents raised the following concerns and suggestions concerning the requirement for a report from an auditor on the year-end prudential return:
5.4.1 CP 13 does not presently specify the level of comfort that we are seeking to obtain from external auditors. There are clear cost implications associated with this. In particular, for OIBs where potentially minimal external audit work is performed for the overall group engagement, the increased scope could result in significant challenges for OIBs and their external auditors to gain the level of assurance required.
5.4.2 The rationale for this additional requirement, which increases the regulatory burden for JIBs and OIBs with Jersey Branches, particularly when comparing against other jurisdictions (for example Guernsey, Isle of Man and the UK). One asked that evidence be provided regarding the need for this change.
5.4.3 Banks should be given the flexibility to instead use assurance from internal auditors or, more generally, place the code requirements on banks, which would then ensure compliance of the bulleted items noted through their existing internal risk and control framework, noting that banks have existing risk and control frameworks for prudential reporting.
5.4.4 Moving the work to a different quarter, limiting the scope to specific aspects of the return and/or providing JIBs with additional time to complete the work by aligning the deadline with OIBs (four months).
5.4.5 Delaying the start date till year-end 2022.
5.4.6 Whether the banks required instructions to its Auditor must be included within its engagement letter.
5.4.7 Re OIBs, references to the OIB Auditor were identified in the supporting documentation, including in Article 11 of the New Order, whereas CP 13 refers to the Branch Auditor only.
5.5 References to the OIB Auditor will be corrected; it is the solely the responsibility of the Branch Auditor to produce a report on an OIB’s end-year prudential return.
5.6 The requirement in the New Order is close to the current Banking Code requirement for auditors’ reports on the year-end prudential return. We also understand that both the Isle of Man and Guernsey regulators also require reports on prudential returns – though not at year-end in all cases. We therefore intend to leave the New Order provisions as proposed but focus on the PR Code, where the concerns appear to be focussed.
5.7 The proposals are aimed at ensuring that reliance can be placed on audit reports. We have seen issues in this area and we consider that effective Auditor assurance is a more proportionate response than increasing our own work in this area. However, in order to minimise the impact, three measures will be implemented.
5.8 Firstly, the start date has been delayed so that the changes only impact from 30 September 2022 and thereafter. This provides significantly more time (than the original timeframe) to make the required changes.
5.9 Secondly, it will be made clear in the PR Code that (1) it is up to individual banks to determine the nature of the auditor engagement (2) this must be included in the relevant engagement letter and (3) this determination must be conveyed to us as part of the submission. This allows costs to be reduced where warranted but ensures clarity over this matter, enabling us to address any concerns.
5.10 Thirdly, it will be made clear in the PR Code that we have the power to vary the PR Code and New Order requirements, without endorsing any particular alternative arrangements (such as changing the quarter audited or utilising internal audit assurance). A new section on transitional provisions will be added to spell out an indicative timeline for this, being that we will aim to address all requests received prior to 30 June 2022 by 30 September 2022, ahead of the PR Code being live. This does not prevent later requests for variances being considered either later in 2022 or in subsequent years.
5.11 Accountancy Respondents raised the following concerns and suggestions, also on the production of a report from an auditor:
5.11.1 Guidance requested on the nature of the reporting framework to be used for this work. It was suggested that limited assurance as per ISAE 3000 would be an appropriate framework, though it was also noted that this would not in itself be sufficient guidance. For example, it was suggested that a standardised format for reporting would be useful.
5.11.2 The increased scope of reporting means that there is the potential for a significantly increased cost and effort on the part of both the Registered Person and the auditor.
5.12 It will be made clear in the PR Code that it is up to individual banks to determine the level of auditor engagement sought. It is recognised that this may lead to inconsistencies but the process will be transparent and any issues can be addressed with individual banks.
5.13 Notwithstanding this, it is agreed that limited assurance as per ISAE 3000 would be an appropriate framework and this will be set out in guidance in the PR Code (but NOT a code requirement).
6 Declaration of compliance
6.1 Question 5: Are the proposals clear regarding the production and submission to the JFSC of the Declaration of Compliance? Are there any other matters that you wish to raise in relation to the proposals?
6.2 Banking Respondents raised the following concerns and suggestions:
6.2.1 The requirement to explain changes to regulations and procedures to auditors (see DoC Code, section 2.13/3.13) is unclear.
6.2.2 The level of materiality to be considered when providing issues to the relevant auditor is unclear.
6.2.3 Whether a single declaration could be produced where banks also have a requirement to produce a return under the TCB/IB Order;
6.2.4 The rationale for this additional requirement, which increases the regulatory burden for JIBs and OIBs with Jersey branches.
6.3 The start date for these proposals has been delayed until 30 September 2022, which provides additional time to prepare.
6.4 All references to procedures in 2.13/3.13 of the DoC Code are to procedures for the production and sign off of the Declaration of Compliance. These sections will be revised to only require material matters to be identified to auditors (re changes to procedures, changes in the law and issues).
6.5 All banks are required to produce a Declaration of Compliance under the current Banking Code. The New Order is consistent with other Accounts Orders in requiring firms to procure an auditor report on their Declarations of Compliance.
6.6 A single document can be submitted in cases where multiple overlapping requirements for Declarations of Compliance under the New Order and the Accounts Orders apply.
6.7 Accountancy Respondents raised the following concerns and suggestions:
6.7.1 It would be helpful to provide example wording for the auditor’s report on the declaration, similar to what is currently provided for other regulated businesses.
6.7.2 There may be no wider audit work for the Branch Auditor and as such, it is suggested that it may be preferable to establish a minimum level of procedures that an auditor would undertake in addressing these requirements.
6.7.3 Matters could be captured within the auditor’s report of both the declaration and the prudential return, and hence be required to be reported twice (see 8.2.9.2 in CP 13 in particular).
6.7.4 How the requirement differed to those established under the other Accounts Orders.
6.8 Given the small number of firms involved, we consider that prescribing the wording to be used would not be greatly beneficial. Providing an example of good practice will be considered in 2023, following the first set of submissions.
6.9 As for the report on the prudential return, we do not intend to prescribe a specific or minimum standard for the work and instead it will be made clear in the DoC Code that (1) it is up to individual banks to determine the nature of the auditor engagement (2) include this in its engagement letter and (3) convey this to us as part of the submission.
6.10 Where issues are identified concerning the prudential return, the non-compliance aspect should be addressed within the report on the Declaration of Compliance but duplication can be reduced by cross referring to the report on the prudential return. This will be made clear in a Note to the DoC Code.
6.11 The legal requirement is similar to that set out in other Accounts Orders. The principal difference is that the DoC Code is prescriptive regarding how banks should comply with it, whereas under the Accounts Orders there is no such prescription, instead only a Guidance Note has been issued.
7 Publication of Financial Statements
7.1 Question 6: Are the proposals clear regarding the publication of financial statements? Are there any other matters that you wish to raise in relation to the proposals?
7.2 Banking Respondents raised the following concerns and suggestions:
7.2.1 Is the requirement to keep a copy of the most recent audited financial statements at each of its offices in Jersey a reference to a physical copy and must a copy be available at all offices?
7.2.2 Would a link to a group website (on which the statements can be found) be sufficient, or even just the fact that they were available on a group website?
7.2.3 This change may require IT development to enable links to the Bank's and its Parent's audited financial statements. In a similar vein, is there a period of time to enable IT to update linkage of documents post sign off and obtain Group sign off in relation to Parent financial statements?
7.2.4 Confirmation was requested regarding whether the requirement would, depending on timing, require publication of statements produced prior to the New Order coming into force.
7.3 The delay of the enactment of the New Order to September 2022 provides significant additional time to make changes.
7.4 The New Order will require a physical copy to be kept at each office in Jersey and made available for inspection by any person, in line with the existing law (Article 32 of the Banking Law).
7.5 It is considered that a link to a group website would be a suitable means of making a document available.
7.6 The requirement for publication relates to statements produced in accordance with the New Order only. We have the power to vary requirements and any firm that expects there to be an issue regarding this requirement should contact us so that a variation can be granted.
7.7 We expect banks to be able to manage the publication of the relevant documents physically and via relevant websites so that there is not a significant delay (more than one week) between the publication date and the date that they are published on websites.
7.8 Accountancy Respondents raised the following concerns and suggestions:
7.8.1 What accounts must be available for an OIB.
7.8.2 Where summarised accounts are prepared, we believe it is appropriate for these to be reported upon by the bank’s auditor.
7.9 The financial statements of the OIB (as a whole, the legal person) must be published, as well as the financial statements of its ultimate parent (which might be the same company but this is not typically the case).
7.10 We consider the existing requirements in the Banking Code (paragraph 7.16) regarding the use of summarized accounts to be sufficient.
8 Other requirements
8.1 Question 7: Are there any matters that you wish to raise regarding the provisions of the New Order described in Section 10?
8.2 All comments received from Banking Respondents and Accountancy Respondents related to matters addressed in Sections 2 to 7 and have been included and addressed within the relevant section.
Appendices
Banking Respondents
- JBARTG
- Barclays Bank plc, Jersey Branch
- SG Kleinwort Hambros Bank (CI) Limited
- Standard Bank Jersey Limited
- Standard Chartered Bank, Jersey Branch
- The Royal Bank of Scotland International
Accountancy Respondents
- JSCCA
- Deloitte
- KPMG
- PricewaterhouseCoopers CI LLP
Appendices B to J
Nine documents were published alongside CP13:
- Draft New Order
- Draft Banking Code
- Draft Banking Code: Appointment of auditors
- Draft Banking Code: Financial statements
- Draft Banking Code: Prudential reporting
- Draft Banking Code: Declaration of Compliance
- Amendment 7 to the Banking Law
- Draft Changes to the Banking Business (General Provisions) (Jersey) Order 2002
- Draft Changes to the Banking Law (Amendment 9)