Response to consultation on Guidelines on communication between competent authorities supervising credit institutions and statutory auditors
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LCH.Clearnet understands that, in certain jurisdictions, there are professional secrecy restrictions that prevent auditors from disclosing certain information about a credit institution with competent authorities (for example, the French Commercial Code, ‘Loi de sécurité financière” and “Code de déontologie de la profession de commissaire aux comptes” in France).
LCH.Clearnet believes that guidelines should set out more precisely the types of information that can be shared by auditors and whether the professional secrecy standards that currently apply in some jurisdictions will continue to apply once the guidelines are implemented. We would encourage the EBA to seek input from auditors on the professional secrecy restrictions that they are subject to in each relevant jurisdiction.
LCH.Clearnet suggests that the guidelines should set out additional requirements on competent authorities and auditors to, as appropriate:
(i) report any relevant issue that arises in the discussions between competent authorities and auditors to the affected credit institution as soon as possible; and
(ii) keep the affected credit institution up-to-date in relation to on-going discussions between them on such issue.
LCH.Clearnet believes that the above requirements would promote the effective communication between the relevant competent authority and the auditors because:
(i) the credit institution will be given the earliest opportunity to respond to the particular issue (including by providing additional information which may assist the competent authorities and the auditors with their discussions); and
(ii) the competent authority may take into account the affected credit institution’s response under (i) above in order to assess whether a trilateral meeting would be useful (paragraph 41 of the Consultation).
B. Form of communication
In the event that the guidelines are amended in the manner suggested above, it would be useful to include recommendations on the form of communication to be used by the relevant competent authority and the auditors in their communications with the affected credit institution.
LCH.Clearnet believes that the approach outlined in principle 4 of the guidelines (paragraphs 35 and 36 of the Consultation) would be equally appropriate for this purpose. Further, LCH.Clearnet suggests that a written form of communication should be used where the competent authority and the auditors would like the affected credit institution to act in response to the communication. This will ensure that a record is made of any actions agreed upon to resolve an issue.
C. Trilateral meetings
Paragraph 40 of the Consultation provides that competent authorities are responsible for assessing the usefulness of organising trilateral meetings. In making such assessment, the competent authority is required to consider whether:
(i) any clarifications from the management body, senior management body or audit committee of the credit institution are necessary in relation to the particular issue to be discussed between competent authorities and auditors (sub-paragraph a. of paragraph 41 of the Consultation);
(ii) coordination of actions across the competent authority, auditor and credit institution are necessary (sub-paragraph b. of paragraph 41 of the Consultation).
LCH.Clearnet agrees that the considerations set out above are appropriate because it is often the credit institution itself that is best placed to explain the context behind, and reasons for, a particular issue. Further, in circumstances where actions are necessary to resolve an issue, the affected credit institution will always need to be involved.
In addition, LCH.Clearnet encourages the EBA to include in the guidelines a right for the credit institution itself to request a trilateral meeting. Where a credit institution makes such a request, that request should be taken into account by the competent authority when assessing whether a trilateral meeting would be useful in the circumstances (i.e. it should be added as a condition c. in paragraph 41 of the Consultation).
D. Involvement of other relevant authorities
LCH.Clearnet agrees that to ensure effective communication between competent authorities and auditors, it may be appropriate for the competent authority to invite other relevant authorities to its meetings with the auditors or to inform them of the outcomes of any discussions with the auditors (paragraph 42 of the Consultation).
However, LCH.Clearnet suggests that the guidelines be amended to require that where the competent authority decides to take such action, it must give prior notice to the affected credit institution. Further, in the event that the competent authority decides to invite other relevant authorities to a particular meeting, it should also invite the affected credit institution.
LCH.Clearnet supports the proposal in principle 6 of the guidelines that communications between competent authorities and auditors should be as frequent as necessary to ensure timely sharing of relevant information. In particular, LCH.Clearnet believes that it is important for communications to be able to take place at all stages of the supervisory or audit process (paragraph 46 of the Consultation) to ensure that potential issues are fully addressed.
The guidelines provide that when in-depth communication is applied, a bilateral meeting should be held at least on an annual basis (paragraph 48 of the Consultation). For the reasons set out in our response to question 7 above, LCH.Clearnet believes that the guidelines should also recommend trilateral meetings in such circumstances, as appropriate.
LCH.Clearnet encourages the EBA to amend the guidelines to principle 7 to impose requirements on competent authorities and auditors similar to those set out in our response to question 7 above, namely:
(i) reports of potential issues arising out of the collective discussions between the competent authority and auditors should be made to the affected credit institution as soon as possible;
(ii) competent authorities and auditors should keep the affected credit institution up to date in relation to on-going discussions between them on any issues reported under (i); and
(iii) the affected credit institution should be given an opportunity to respond to any potential issues.
B. Involvement of other relevant authorities
LCH.Clearnet agrees that to ensure effective communication between competent authorities and auditors, it may be appropriate for the competent authority to invite other relevant authorities to the collective meetings with competent authorities and auditors or to inform them of the outcomes of discussions (paragraph 52 of the Consultation). However, as mentioned in our response to question 8 above, LCH.Clearnet believes that the relevant credit institution should be given prior notice of such action and the opportunity to attend any relevant meeting.
LCH.Clearnet is a leading multi-asset class and multi-national clearing house, serving major international exchanges and platforms as well as a range of OTC markets. It clears a broad range of asset classes including securities, exchange-traded derivatives, commodities, energy, freight, foreign exchange derivatives, interest rate swaps, credit default swaps and euro and sterling denominated bonds and repos. LCH.Clearnet works closely with market participants and exchanges to continually identify and develop innovative clearing services for new asset classes. LCH.Clearnet is majority owned by the London Stock Exchange Group, a diversified international exchange group that sits at the heart of the world’s financial community.
LCH.Clearnet welcomes the opportunity to respond to the Consultation. Our interest in this issue is a result of the regulatory arrangements for LCH.Clearnet SA, which is incorporated in France and authorised as a central counterparty (CCP) under EMIR . LCH.Clearnet SA is also currently regulated as a credit institution in France. Although LCH.Clearnet SA does not engage in typical banking activities, as a CCP it is required to hold the status of a credit institution under French law.
Please note that our response provides comments only on the proposed provisions of the Consultation that impact directly on LCH.Clearnet SA, in its capacity as a regulated credit institution in France.
KEY POINTS OF LCH.CLEARNET RESPONSE
(i) LCH.Clearnet supports the EBA’s efforts to promote effective communications between competent authorities and auditors and to further converge the existing practices of Member States regarding such communications.
(ii) In order to ensure that communications between auditors and competent authorities are effective, competent authorities and auditors should not conduct such communications without input from the affected credit institution. Affected credit institutions should be made aware of potential issues arising out of communications between competent authorities and auditors, and, where appropriate, be given the opportunity to respond.
(iii) LCH.Clearnet believes that the affected credit institution should be informed of any potential issue at an early stage so that a fully coordinated response to the issue can quickly and effectively be implemented.
We hope that the our response assists the EBA in the development of the guidelines on this topic. Should you have any questions on this response or wish to discuss it in detail, please do not hesitate to contact Natalie Caldwell at Natalie.Caldwell@lchclearnet.com or Corentine Poilvet-Clediere at Corentine.Poilvet-Clediere@lchclearnet.com.
1. Is the scope of application of the guidelines appropriate and sufficiently clear?
N/A2. As currently foreseen, the application date will be in the last quarter of 2016. Is the date of application of the guidelines appropriate?
N/A3. Is the general framework of the communication between competent authorities and auditors appropriate and sufficiently clear? Please indicate any additional elements to be included.
A. Professional secrecyLCH.Clearnet understands that, in certain jurisdictions, there are professional secrecy restrictions that prevent auditors from disclosing certain information about a credit institution with competent authorities (for example, the French Commercial Code, ‘Loi de sécurité financière” and “Code de déontologie de la profession de commissaire aux comptes” in France).
LCH.Clearnet believes that guidelines should set out more precisely the types of information that can be shared by auditors and whether the professional secrecy standards that currently apply in some jurisdictions will continue to apply once the guidelines are implemented. We would encourage the EBA to seek input from auditors on the professional secrecy restrictions that they are subject to in each relevant jurisdiction.
4. Please provide any comments you may have on the appropriateness of the proposed proportionality approach.
N/A5. Are the guidelines on the scope of information to be shared during the communication appropriate and sufficiently clear? Are the issues on which information may be shared in Annex I appropriate and sufficiently clear? Please indicate any additional issues to be included.
N/A6. Are the guidelines on the form of communication appropriate and sufficiently clear? Please indicate whether any particular form of communication should be used and under which circumstances it should be used.
N/A7. Are the guidelines on the participants in the communication between competent authorities and auditors appropriate and sufficiently clear? Are there any other participants that should be considered participating? Under which circumstances should other participants be considered?
A. Communications with affected credit institutionsLCH.Clearnet suggests that the guidelines should set out additional requirements on competent authorities and auditors to, as appropriate:
(i) report any relevant issue that arises in the discussions between competent authorities and auditors to the affected credit institution as soon as possible; and
(ii) keep the affected credit institution up-to-date in relation to on-going discussions between them on such issue.
LCH.Clearnet believes that the above requirements would promote the effective communication between the relevant competent authority and the auditors because:
(i) the credit institution will be given the earliest opportunity to respond to the particular issue (including by providing additional information which may assist the competent authorities and the auditors with their discussions); and
(ii) the competent authority may take into account the affected credit institution’s response under (i) above in order to assess whether a trilateral meeting would be useful (paragraph 41 of the Consultation).
B. Form of communication
In the event that the guidelines are amended in the manner suggested above, it would be useful to include recommendations on the form of communication to be used by the relevant competent authority and the auditors in their communications with the affected credit institution.
LCH.Clearnet believes that the approach outlined in principle 4 of the guidelines (paragraphs 35 and 36 of the Consultation) would be equally appropriate for this purpose. Further, LCH.Clearnet suggests that a written form of communication should be used where the competent authority and the auditors would like the affected credit institution to act in response to the communication. This will ensure that a record is made of any actions agreed upon to resolve an issue.
C. Trilateral meetings
Paragraph 40 of the Consultation provides that competent authorities are responsible for assessing the usefulness of organising trilateral meetings. In making such assessment, the competent authority is required to consider whether:
(i) any clarifications from the management body, senior management body or audit committee of the credit institution are necessary in relation to the particular issue to be discussed between competent authorities and auditors (sub-paragraph a. of paragraph 41 of the Consultation);
(ii) coordination of actions across the competent authority, auditor and credit institution are necessary (sub-paragraph b. of paragraph 41 of the Consultation).
LCH.Clearnet agrees that the considerations set out above are appropriate because it is often the credit institution itself that is best placed to explain the context behind, and reasons for, a particular issue. Further, in circumstances where actions are necessary to resolve an issue, the affected credit institution will always need to be involved.
In addition, LCH.Clearnet encourages the EBA to include in the guidelines a right for the credit institution itself to request a trilateral meeting. Where a credit institution makes such a request, that request should be taken into account by the competent authority when assessing whether a trilateral meeting would be useful in the circumstances (i.e. it should be added as a condition c. in paragraph 41 of the Consultation).
D. Involvement of other relevant authorities
LCH.Clearnet agrees that to ensure effective communication between competent authorities and auditors, it may be appropriate for the competent authority to invite other relevant authorities to its meetings with the auditors or to inform them of the outcomes of any discussions with the auditors (paragraph 42 of the Consultation).
However, LCH.Clearnet suggests that the guidelines be amended to require that where the competent authority decides to take such action, it must give prior notice to the affected credit institution. Further, in the event that the competent authority decides to invite other relevant authorities to a particular meeting, it should also invite the affected credit institution.
8. Are the guidelines on the frequency and timing of communication appropriate and sufficiently clear? Please provide information on any additional circumstances which may necessitate a different frequency and timing of communication.
A. Frequency of communicationLCH.Clearnet supports the proposal in principle 6 of the guidelines that communications between competent authorities and auditors should be as frequent as necessary to ensure timely sharing of relevant information. In particular, LCH.Clearnet believes that it is important for communications to be able to take place at all stages of the supervisory or audit process (paragraph 46 of the Consultation) to ensure that potential issues are fully addressed.
The guidelines provide that when in-depth communication is applied, a bilateral meeting should be held at least on an annual basis (paragraph 48 of the Consultation). For the reasons set out in our response to question 7 above, LCH.Clearnet believes that the guidelines should also recommend trilateral meetings in such circumstances, as appropriate.
9. Are the guidelines on the communication between competent authorities and auditors collectively appropriate and sufficiently clear? Please indicate any additional element which should be included in the guidelines regarding the communication of competent authorities and the auditors collectively.
A. Communications with affected credit institutionsLCH.Clearnet encourages the EBA to amend the guidelines to principle 7 to impose requirements on competent authorities and auditors similar to those set out in our response to question 7 above, namely:
(i) reports of potential issues arising out of the collective discussions between the competent authority and auditors should be made to the affected credit institution as soon as possible;
(ii) competent authorities and auditors should keep the affected credit institution up to date in relation to on-going discussions between them on any issues reported under (i); and
(iii) the affected credit institution should be given an opportunity to respond to any potential issues.
B. Involvement of other relevant authorities
LCH.Clearnet agrees that to ensure effective communication between competent authorities and auditors, it may be appropriate for the competent authority to invite other relevant authorities to the collective meetings with competent authorities and auditors or to inform them of the outcomes of discussions (paragraph 52 of the Consultation). However, as mentioned in our response to question 8 above, LCH.Clearnet believes that the relevant credit institution should be given prior notice of such action and the opportunity to attend any relevant meeting.
10.Do you agree with the impact assessment and its conclusions, having regard to the baseline scenario used for this impact assessment? Please provide any additional information regarding the costs and benefits from the application of these guidelines.
N/A11.Please provide any additional comments on the draft guidelines.
We provide the response of LCH.Clearnet Group Limited (“LCH.Clearnet”) to the EBA consultation paper on draft guidelines on communications between competent authorities supervising credit institutions and statutory auditor(s) and audit firm(s) carrying out the statutory audits of credit institutions (EBA/CP/2015/17) published on 21 October 2015 (the “Consultation”).LCH.Clearnet is a leading multi-asset class and multi-national clearing house, serving major international exchanges and platforms as well as a range of OTC markets. It clears a broad range of asset classes including securities, exchange-traded derivatives, commodities, energy, freight, foreign exchange derivatives, interest rate swaps, credit default swaps and euro and sterling denominated bonds and repos. LCH.Clearnet works closely with market participants and exchanges to continually identify and develop innovative clearing services for new asset classes. LCH.Clearnet is majority owned by the London Stock Exchange Group, a diversified international exchange group that sits at the heart of the world’s financial community.
LCH.Clearnet welcomes the opportunity to respond to the Consultation. Our interest in this issue is a result of the regulatory arrangements for LCH.Clearnet SA, which is incorporated in France and authorised as a central counterparty (CCP) under EMIR . LCH.Clearnet SA is also currently regulated as a credit institution in France. Although LCH.Clearnet SA does not engage in typical banking activities, as a CCP it is required to hold the status of a credit institution under French law.
Please note that our response provides comments only on the proposed provisions of the Consultation that impact directly on LCH.Clearnet SA, in its capacity as a regulated credit institution in France.
KEY POINTS OF LCH.CLEARNET RESPONSE
(i) LCH.Clearnet supports the EBA’s efforts to promote effective communications between competent authorities and auditors and to further converge the existing practices of Member States regarding such communications.
(ii) In order to ensure that communications between auditors and competent authorities are effective, competent authorities and auditors should not conduct such communications without input from the affected credit institution. Affected credit institutions should be made aware of potential issues arising out of communications between competent authorities and auditors, and, where appropriate, be given the opportunity to respond.
(iii) LCH.Clearnet believes that the affected credit institution should be informed of any potential issue at an early stage so that a fully coordinated response to the issue can quickly and effectively be implemented.
We hope that the our response assists the EBA in the development of the guidelines on this topic. Should you have any questions on this response or wish to discuss it in detail, please do not hesitate to contact Natalie Caldwell at Natalie.Caldwell@lchclearnet.com or Corentine Poilvet-Clediere at Corentine.Poilvet-Clediere@lchclearnet.com.