§ Lords amendment: No. 178, after clause 93, to insert
Appointment of auditors
.—(1) The Secretary of State may make rules requiring a person who is authorised to carry on investment business by virtue of section 24 or 30 above and who, apart from the rules, is not required by or under any enactment to appoint an auditor to appoint as an auditor a person satisfying such conditions as to qualifications and otherwise as may be specified in or imposed under the rules.
(2) Rules under this section may make provision—
(3) An auditor appointed under the rules shall in accordance with the rules examine and report on the
accounts of the authorised person in question and shall for that purpose have such duties and powers as are specified in the rules.
§ Read a Second time.
§ Mr. Tim Smith
I beg to move, as an amendment to the Lords amendment, in line 6, leave out from "above" to second "to" in line 8.
§ Mr. Speaker
It will be convenient also to take Lords amendments Nos. 179 to 182, 187, 210, 333 and 381.
§ Mr. Smith
This group of amendments deals with the provision for auditors now in the Bill. I welcome the provisions which I think strengthen and reinforce the Bill. I have only one concern, which is that amendment No. 178, which introduces the new clause about auditors, is limited to the appointment of auditors by the designated agency to investment businesses which are not otherwise audited, that is, unincorporated, businesses.
One aspect of the McDonald Wheeler case which has been given insufficient attention is the position of the auditors to that company. They published a clean audit report for the 1984 accounts and shared the building in Canterbury with McDonald Wheeler. That gives some idea of their relationship with the company. No doubt they are being investigated along with the company, but it may be sensible to extend the clause so that the Securities and Investments Board could take a more general interest in who was appointed auditors.
We might reach the point where, rather as in the case of Lloyd's, it would be appropriate to have a panel of auditors who were approved as having the necessary experience and qualifications to audit authorised investment businesses particularly as it would be something of an extended audit, not a Companies Act audit. They will have to report as accountants on whether the business has complied with the conduct of business rules, or at least some of them. That will require some special expertise and experience. Therefore, it might be sensible to extend the clause in the way that my amendment proposes and I hope that my hon. and learned Friend will consider doing that.
§ Mr. Cash
I am slightly worried about the provisions of subsection (5) of the new clause introduced by Lords amendment No. 180, which appears to say that auditors would effectively have the right to determine who is or is nota fit and proper personin many circumstances. It is somewhat incongruous—to complete a point I made in Committee—that qualified auditors should have that kind of control over the members of SROs. The competence of an auditor, as defined for statutory purposes, is related to his qualifications under the Companies Act 1985, and that does not necessarily give him any right to determine a person's competence to give investment advice. My hon. and learned Friend the Minister is aware of my reservations, and I should be glad to hear his comments on that.
§ Mr. Howard
The broad content of these provisions has already been given to the House in a written answer to my hon. Friend the Member for Suffolk, South (Mr. Yeo) on 9 June. They are intended to provide a framework within which a constructive relationship between auditors and supervisors can develop, without undermining the auditor's relationship with his client or transferring 571 responsibility for regulation from the supervisor to the auditor. But the supervisor can do his job more effectively if communications with the auditor are facilitated so that the supervisor can benefit from the knowledge of an investment business which the auditor, in the course of his work, will develop.
Lords amendment No. 178 provides that rules may be made requiring those businesses authorised directly by the Secretary of State or under the clause 30 arrangement in the Bill to appoint an auditor. The intention is to ensure that all such investment businesses, however they are constituted, can be required to appoint an auditor who will be able to enter into that constructive relationship with a supervisor to which I have referred. Those rules will not apply to those investment businesses already required to appoint auditors under other statutes, such as the Companies Act. So this provision will apply to investment businesses which are not companies.
The new clause also sets out what the rules concerning the appointment of such auditors may contain. Their scope parallels those provisions concerning the appointment of auditors in the Companies Act. It is not intended that an entirely new set of provisions concerning the appointment and role of auditors should be created. There are some adaptations to those requirements for overseas businesses which are contained in the fourth new clause.
The power contained in the second new clause enables the Secretary of State to require a second examination of information supplied by a business on which an auditor has reported; it is intended to enable work of an apparently sub-standard nature to be checked by another person. That goes a long way towards meeting the point made by my hon. Friend the Member for Beaconsfield (Mr. Smith). This is not intended to reflect on the high standard of professionalism set by the major accountancy bodies in the United Kingdom. But the Bill does not enable the Secretary of State or agency to dictate who shall be an auditor of an investment business and there should be some route open to the regulator to take a second opinion if he has any suspicion about the data given to him.
The clause introduced by Lords amendment No. 180 concerns communication made by the auditor to the Secretary of State or, if appropriate, to an SRO or RPB. Information may be given at the request of the appropriate supervisor, in response to a question put by him or, occasionally, at the auditor's initiative. Usually such reports will be made with the knowledge of the business concerned—but on rare occasions it may be appropriate for the business not to be informed, for example, if senior management fraud is suspected.
The clause provides that the auditor in making such a report in good faith will not contravene any duty to which he may be subject. So the auditor will not be liable for any loss suffered as a result of his report. This provision is intended to remove any inhibition which an auditor might otherwise consider kept him from discussing matters with a supervisor.
It is intended that the circumstances in which an auditor should be expected to give information to a supervisor — especially on his own initiative — will be defined carefully. This will ensure that the individual auditor knows where he stands and will not feel obliged to volunteer much irrelevant information to the supervisor to safeguard his position. It is expected that these circumstances will be set out in professional guidance 572 agreed between the supervisor and the professional bodies. I know that both sides are approaching the task of agreeing this guidance positively. Contravention of the terms of such guidance would be subject to whatever disciplinary proceedings the relevant professional body decided to impose.
In the event that some professional bodies do not want to or cannot agree on the terms of guidance, it will be possible for the Secretary of State to make rules, subject to affirmative resolution, specifying the circumstances in which auditors should communicate with a supervisor. If an auditor fails to make reports in accordance with these rules, he may be disqualified from auditing authorised businesses as laid down in the new clause introduced by Lords amendment No. 182. But I emphasise that this sanction applies when the auditor is subject to rules made by the Secretary of State and not when satisfactory guidance is given.
The Bill also makes provision for the auditors of insurance companies to report to the Secretary of State matters relevant to his function under the Insurance Companies Act 1981, in a manner parallel to that being introduced for matters covered by this Bill. The Government intend that there should be a broadly similar approach to the role of auditors across the financial sector.
The provisions which I have outlined will create the right relationship between auditor and supervisor and will contribute to the effectiveness of the regulatory system.
On the point raised by my hon. Friend the Member for Stafford (Mr. Cash), the auditor can give information to a supervisor if it is relevant to whether a person subject to supervision by that supervisor is fit and proper, but it will be for the supervisor to decide whether the person is fit and proper on the basis, among other factors, of the information supplied by the auditor.
§ Mr. Gould
I welcome what the Government have achieved with these new provisions. In broad terms, they have struck a sensible balance and have gone a long way towards resolving what has clearly been a difficult problem, not least for the professional bodies and for the accountants and auditors involved.
The first thing which the new clause embodied in amendment No. 180 does is to remove or set aside the duty of confidentiality. Clearly that is the first step that is required to remove what would otherwise be an obstacle to the auditor making any report to the supervisor if he considered that something was wrong.
I hope that the Minister can answer a question on subsection (2). That subsection, having removed the duty of confidentiality, goes some way towards putting in place a duty to report, but it does so by virtue of two separate provisions covering two separate circumstances: one where the recognised professional body lays down the rules and gives guidance to its members, and the other where the professional body does not do so and the Secretary of State has a reserve power.
What bothers me is that, in the first part of that subsection, the language is not that of duty. Where the rules are laid down, they are described as rules of guidance which specify circumstances in which matters are to be communicated. Later in the subsection, where the rules are imposed by the Secretary of State, the language of duty is used. That is a crucial question. Perhaps the Minister can assure me that the two parts are equivalent in this respect, but, if not, there is a problem. It is always a problem for 573 auditors, unless they are told that they must—in every circumstance—choose between the duty which they owe to their client and the duty which they owe to the supervisory authority. Unless that is made clear, not just in the rather exceptional circumstances where the Secretary of State imposes the rules, but in the more usual circumstances where the guidance is provided by the professional body, we may run into problems.
Will the Minister comment on that, or at least assure me that it is intended, and that the language secures the intention, that a duty should be imposed by those guidance rules issued by the professional bodies?
§ Mr. Howard
The answer to the point raised by the hon. Member for Dagenham (Mr. Gould) is to be found in subsection (2) of the new clause which gives the Secretary of State power to intervene if any auditor or class of auditor to whom subsection (1) applies is not subject to satisfactory rules made or guidance issued by a professional body.
It being Ten o'clock, the debate stood adjourned.