Auditing and Assurance Standards and Guidance

FRC Practice Notes

PN 19 (Revised) The audit of banks and building societies in the United Kingdom (March 2011)

Legislative and regulatory framework

Financial Services and Markets Act 2000

12.	FSMA 2000 sets out the high level regulatory framework for the financial sector more generally and does not relate just to banks and building societies. Appendix 2 sets out the main parts of FSMA 2000 relevant to authorised firms which are banks or building societies.

13.	The wide scope of FSMA 2000 reflects the FSA's extensive responsibilities. These are set out in FSMA 2000 as regulatory objectives covering:

market confidence;

financial stability;

the protection of consumers; and

the reduction of financial crime.

14.	FSMA 2000 covers not only the regulation and supervision of financial sector entities but also other issues such as official listing rules, business transfers, market abuse, compensation and ombudsman schemes, investment exchanges and clearing houses.

15.

FSMA 2000 is also supported by a large number of statutory instruments. Significant components of the definition and scope of the regulatory framework are contained in the main statutory instruments. A list of important provisions of FSMA 2000 and a list of statutory instruments relevant to the auditor is included in Appendix 3.

16.

Under Part X FSMA 2000 the FSA has the power to make 'rules'. The legal effect of a rule varies depending on the power under which it is made and on the language used in the rule. Rules are mandatory unless a waiver has been agreed with the FSA. If an authorised firm contravenes a rule it may be subject to enforcement action and consequent disciplinary measures under Part XIV FSMA 2000. Furthermore, in certain circumstances an authorised firm may be subject to an action for damages under s150 FSMA 2000. In contrast, guidance is generally issued to throw light on a particular aspect of regulatory requirements, and is not binding. However if an authorised firm acts in accordance with it in the circumstances contemplated by that guidance, the FSA will proceed on the basis that the authorised firm has complied with the rule to which the guidance relates.

17.

Rules made by the FSA and associated guidance are set out in the FSA Handbook of Rules and Guidance ('the FSA Handbook') (see Appendix 4). The main FSA systems and control requirements are set out in the Senior management arrangements, systems and controls element of the high level standards block of the FSA Handbook ('SYSC').

18.	The FSA Handbook is subject to periodic change. The auditor considers carefully which parts of what sourcebook apply to the entity.

19.

It is clearly unrealistic to expect members of an audit engagement team to have detailed knowledge of the entire Handbook; rather ISA (UK and Ireland) 250 Section B requires the level of knowledge to be appropriate to an individual's role in the audit and sufficient (in the context of that role) to enable them to identify situations which may give reasonable cause to believe that the matter should be reported to a regulator. ISA (UK and Ireland) 220 requires the auditor to establish procedures to facilitate consultation and, thereby, to draw on the collective expertise and specialist technical knowledge of those beyond the engagement team of the auditor.