| 1. | Banks can operate in the UK as: |
| a company incorporated in the UK which is authorised1 by the Financial Services Authority ('FSA') to accept deposits, which is required to comply with BIPRU2 and is not a building society ('UK bank'); |
| a UK branch of an entity incorporated outside the EEA, authorised by the FSA to accept deposits and which is required to comply with BIPRU ('non EEA bank'); |
| a UK branch of a credit institution incorporated in the EEA which has exercised EEA Passport rights3 to carry on regulated activities in the UK ('EEA bank'). |
| A building society is a mutual society incorporated under the Building Societies Act 1986 ('BS Act 86') – ('building society'). |
| Auditors of entities that carry out similar business to banks and building societies but do not take deposits may find the guidance in this Practice Note useful. |
| 2. | This Practice Note addresses the responsibilities and obligations of the auditor concerning: |
| the audit of the financial statements in accordance with the Companies Act 2006 4 ('CA2006') and Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 20085 ('Companies and Groups Accounts Regulations 2008') – applicable to UK banks; |
| the audit of the financial statements in accordance with BS Act 1986 and Building Societies (Accounts and Related Provisions) Regulations 19986 ('BS Accounts Regulations 1998') and related obligations – applicable to building societies; |
| the right and duty to report direct to the FSA7 in certain circumstances – applicable to UK banks, non EEA banks, building societies and to EEA banks with top-up permissions8; |
| reporting on interim net profits for the purposes of their inclusion in capital resources. This is applicable to UK banks and building societies but required only if requested by the entity; and |
| reporting on a statement of particulars of transactions and arrangements concerning directors under s78(9) BS Act 86 applicable to building societies. |
| 3. | Non EEA banks and EEA banks are not subject to the audit provisions of the CA2006 and so the terms of engagement are a matter of contract between the auditor and their client who may, for example, be local or head office management or the EEA/non EEA bank's home country auditor. Such engagements take many different forms: the auditor may be asked to report on the financial statements of the UK branch or only on particular aspects thereof, and the form of their opinion will also vary from case to case. The auditor undertaking such an assignment does not have to apply International Standards on Auditing (ISAs) (UK and Ireland) unless required to by the terms of engagement but, if they are not applied, the auditor may find some of the guidance in this Practice Note of assistance. |
| 4. | In addition to accepting deposits, banks and building societies may also undertake other activities regulated under the Financial Services and Markets Act 2000 (FSMA 2000) for which Part IV permissions9 from the FSA are required. This may include one or more forms of investment business or insurance intermediation. These regulated activities are subject to FSA conduct of business rules and can give rise to auditor reporting responsibilities concerning client assets. This can occur even where the entity is not authorised to hold client assets – a negative assurance report. These reporting responsibilities are addressed in Practice Note 21, 'The Audit of Investment Businesses in the United Kingdom (Revised)'10. In addition, banks and building societies may also undertake regulated mortgage activity. While this also requires separate Part IV permissions and is also subject to FSA conduct of business rules, no auditor reporting obligations arise in relation to client assets. |
| 5. | The scope of the statutory audit of a UK bank's financial statements is no different from that of the generality of companies incorporated in the UK. Concerning a building society, in addition to the financial statements and the directors' report, the auditor also reports on an annual business statement which accompanies the financial statements. Further, the auditor of a building society is required to report on the summary financial statement that all building societies are obliged to prepare and send to all those members entitled to receive notice of the Annual General Meeting (an option to prepare summary financial statements, rather than a requirement to do so, is available under CA2006 to listed companies including listed UK banks). |
| 1 Authorised under FSMA 2000 to undertake regulated activities. |
| 2 Prudential sourcebook for Banks, Building Societies and Investment Firms. |
| 3 Exercising passport rights entitles an entity incorporated in one EEA member state ('home country') who is authorised to conduct one or more regulated activities subject to the passport rights in the home country to establish a branch and carry out those regulated activities in another EEA member state ('host country') without the need to be authorised by the host country supervisor, (in the UK the FSA) in respect of activities that are subject to the passport rights. |
| 4 Banks which are incorporated in the United Kingdom are subject to the provisions of the Companies Act 2006. |
| 5 SI 2008/410. |
| 6 SI 1998/504 (as amended). |
| 7 Provided for in s342 and s343 FSMA 2000 and Financial Services and Markets Act 2000 (Communications by Auditors) Regulations 2001 (SI 2001/2587). |
| 8 A Part IV permission granted by the FSA to an EEA bank to enable it to undertake a UK regulated activity in the UK for which authorisation to undertake the activity in the home country is not required by the home country supervisor. |
| 9 A permission granted by FSA under Part IV FSMA 2000 permitting an authorised firm to carry on regulated activities as specified in the FSMA 2000 Regulated Activities Order SI 2001/544 as amended. |
| 10 Further guidance is included in ICAEW TECH 1/06: Interim guidance for auditors of insurance intermediaries on client asset reporting requirements. |
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