Written evidence from H M Treasury
PAC HEARINGS ON 2 AND 8 FEBRUARY 2011
At the PAC hearings on the "Asset Protection
Scheme (APS)" and "Maintaining Financial Stability of
UK Banks" on 2 and 8 February respectively, I committed to
provide you with further information on:
— HM
Treasury's engagement with the audit profession since the financial
crisis;
— the
application of section 122 of the Lisbon Treaty and the UK's financial
obligations to the Eurozone;
— information
on how many taxpayers in the 50% tax rate work in financial services;
and
— any
enforcement action taken by the authorities against Royal Bank
of Scotland (RBS) employee.
AUDIT
Turning first to engagement with the auditing profession;
whilst the banking crisis was not primarily a matter of a particular
audit that went wrong, as the Treasury Select Committee concluded,
it did bring to light deficiencies in the audit framework.
Alongside the Department for Business, Innovation
and Skills (BIS), who take the lead in Government on the implementation
of standards relating to accountancy and audit, the Treasury has
been working closely with the Bank of England, the Financial Reporting
Council (FRC) and the Financial Services Authority (FSA) to improve
the audit framework. The particular focus has been on:
— better
reporting by audit committees;
— more
disclosures around the "going concern" judgement;
— investigating
the scope for assurance on narrative reporting;
— enhancing
auditor scepticism; and
— improved
processes and standards for supervisor and auditor dialogue.
Some examples of ongoing work in this area may be
helpful. They include:
— FRC-Ied
work on encouraging sufficient professional scepticism into auditors'
work. The FRC's Audit Inspection Unit, in their 2009-10 Annual
Reporti led to the UK Auditing Practices Board publishing a Discussion
Paper in August 2010: "Auditor scepticism: raising the bar",ii
— the
Bank of England and the FSA have been working together to introduce
changes to the British Bankers Association Code. Credit institutions
will meet regularly with the FSA to discuss relevant disclosure
points and related matters for each reporting methodology. There
is also a proposal for greater disclosure of changes in accounting
methodology, and, for some financial instruments, greater disclosure
around: accounting judgements relating to market conditions; complex
fair values and complex products; and risks arising from off balance
sheet arrangements; and
— work
to follow up the ongoing House of Lords Economic Affairs Committee's
inquiry into audit, to promote dialogue between auditors and prudential
supervisors, which was provided for in the 19B7 Banking Act, but
weakened in the Financial Services and Markets Act 2000. BIS and
Treasury officials have been working with the FSA and FRC on this,
and feedback on their joint consultation "Enhancing the
auditor's contribution to prudential regulation",iii
is expected soon.
The Treasury, along with BIS, has also been working
with the European institutions and internationally. For example:
— in
the UK's response to the European Commission's Green Paper on
Corporate Governance in Financial Institutions, we highlighted
the potential benefit of measures to improve the frequency and
quality of reporting by auditors, and of the need for greater
contact between external auditors and national supervisory
authorities;
— the
UK's response to the European Commission's Green Paper on Audit
sets out the Government's view that audit has an important role
to play within the broader corporate governance and regulation
regime, and highlights the importance of delivering improvements
through: enhancing audit quality through improving auditor scepticism;
enhancing the content of the report of the audit committee in
relation to listed companies; and through exposing the expectation
gap in audit; and
— support
for the work of the International Accounting Standards Board (IASB).
which has taken significant steps to improve financial instrument
accounting, through a portmanteau standard known as IFRS 9—Financial
Instruments. The first phase of these changes was published in
November 2009 and addresses the appropriate accounting treatment
for, for example, off balance sheet transactions.
ASSISTANCE UNDER
THE LISBON
TREATY
At the Maintaining Financial Stability hearing, the
Committee raised some questions about the UK's financial obligations
towards the Eurozone, and whether and how Article 122 of the Lisbon
Treaty applies to this.
The European Financial Stabilisation Mechanism (EFSM)
was established b EcoFin Council on 9 May 2010. EcoFin Council
agreed that up to €60 billion would be available from the
EFSM. The EFSM had been established under Article 122(2) of the
Lisbon Treaty, which foresees the possibility of granting Union
financial assistance to a Member State in difficulties or seriously
threatened with "severe difficulties [...] or exceptional
occurrences beyond its control", EcoFin Council decided,
given the circumstances at that time, that these criteria now
applied.
The EFSM is financed by the European Commission raising
funds on capital markets, guaranteed by the EU Budget. There is
no direct impact on the EU Budget from any such borrowing by the
Commission. Only in the unlikely event that a beneficiary Member
State defaults on loan repayments the EU Budget would be affected.
In those circumstances, Member States would be liable
for a share based on their contribution to the EU Budget at that
time. Contributions to the EU Budget vary over time, mainly driven
by the Member States' share in national income. As an illustrative
example, based on contributions to the 2010 EU Budget the UK's
share is approximately 14%. Therefore the contingent liability
to the UK from the EFSM loan to Ireland would be around 0.15 billion.
The December European Council agreed that a permanent
mechanism to safeguard the financial stability of the euro area
as a whole (European Stability Mechanism (ESM) will be established
by "the Member States of the euro area" from 2013. The
UK will not be part of the ESM, which will replace both the EFSM
and the EFSF.
The December European Council also agreed that "as
[the ESMJ is designed to safeguard the financial stability of
the euro area as a whole [...JArticle 122(2) TFEU will no longer
be needed for such purposes".
50% RATE TAXPAYERS
Turning next to the Committee's questions on the
proportion of taxpayers within the 50% tax rate band who work
in financial services firms; there are estimated to be 275,000
taxpayers in this band in 2010-11, and of these, around 63,000
are classified as working in the financial intermediation sector.
The definition of financial intermediation used here includes
those working in banks, insurance and pension funding (excluding
compulsory social security contributions), and in activities auxiliary
to the financial intermediation sector.iv
FSA ENFORCEMENT
Finally, at the Asset Protection Scheme hearing,
the Committee asked about any enforcement action taken against
individuals in RBS as a result of the bank's failure.
The FSA carried out an enforcement investigation
into Johnny Cameron, former Executive Director of RBS and former
Chairman of Global Markets. The FSA did not find any incidences
of regulatory breaches against Cameron and he did not make any
admissions. However, on the basis of information available, the
FSA believes that Cameron would not meet its current standards
for approval for a "significant influence function".
Following the investigation, Cameron agreed that he would not:
— perform
any significant influence function in relation to any regulated
activity; or
— undertake
any further full time employment in the financial services industry.
More broadly, the Government has welcomed the proposal
by the FSA to produce a publishable report on the events that
led to the failure of RBS.
The FSA is aiming to deliver a publishable report
to the Government and the Treasury Select Committee by the end
of March.
In order to publish such a report, the FSA considers
that it would need permission from RBS and perhaps other individuals,
to use confidential information provided by them in the course
of the supervisory investigations now concluded, as well as those
to whom the information relates. The FSA is conducting the discussions
with RBS and, where necessary, other individuals, to secure the
necessary permissions.
February 2011
REFERENCES
i Audit Inspection
Unit Annual Report 2009-10 (21 July 2010) Financial Reporting
Council http://www.frc.org.uk/pob/audit/reports.cfm
ii Auditing Practices
Board: Auditor Scepticism: raising the bar (August 2010) financial
Reporting Council http://www.frc.org.uk/apb/publications/pub2343.html
iii FSA DP10/3:
Enhancing the auditor's contribution to prudential regulation
(June 2010) http://www.fsa.gov.uk/pubs/discussion/dp10_03.pdf
iv This is based
on information from the 2007-08 Survey of personal incomes (SPI),
uprated to 2010-11 using economic determinants from the office
for budget Responsibilities autumn forecast. Information on Industry
classifications is based on 2007-08 (SPI) data, and projections
take no account of sectoral variations in trends
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