The MFSA has just published a consultation document in relation to new proposed Insurance Rules that will implement audit committee requirements. This is a result of the new Regulation (EU) No. 537/2014 and changes to EU Directives on statutory audits, in particular changes to Directive 2014/56/EU which removed the previous discretion to exempt non-listed public interest entities from the requirement to have an audit committee. Insurance and reinsurance undertakings fall within the definition of “public interest entities” which are now all required to have an audit committee.
The proposed new Insurance Rules require the establishment of an audit committee which fulfils the following requirements:
- the audit committee must be a stand-alone committee composed of at least 3 members;
- all committee members must be non-executive directors;
- the majority of the committee members must be independent of the undertaking;
- at least one committee member must have competence in accounting and/or auditing;
- the committee, as a whole , must have competence relevant to the business of re/insurance carried out by the undertaking; and
- the Chairman of the audit committee shall be independent and should be appointed by the members of the audit committee.
The proposed Rules also list the functions to be performed by the audit committee.
An insurance or reinsurance undertaking may benefit from a derogation from the audit committee requirements if:
(i) It is a “small and medium-sized enterprise” in terms of Directive 2003/71/EC which provides that “ small and medium-sized enterprises” means companies, which, according to their last annual or consolidated accounts, meet at least two of the following three criteria: an average number of employees during the financial year of less than 250, a total balance sheet not exceeding EUR 43,000,000 and an annual net turnover not exceeding EUR 50,000,000” or
(ii) It is a subsidiary undertaking in terms of Article 2(10) of Directive 2013/34/EU, provided the audit committee requirements are satisfied at group level.
If (i) above applies, the Board as a whole may perform the functions of the audit committee. However, if the Chairman of the Board has an executive role, such person shall not act as the Chairman while the Board performs the functions of the audit committee. The MFSA is proposing that where the audit committee forms part of the Board of Directors, the Board shall be responsible to perform the functions of the audit committee. However, there is scope for clarification of the proposed Rule 1.5 to clarify whether the requirements in Rule 1.2 still apply.
If (ii) above applies, such that an insurance or reinsurance undertaking is a subsidiary of a parent undertaking whose head office is in a Member State or an EEA State and the parent undertaking complies with the requirements of the Statutory Audit Directive at group level, the insurance or reinsurance subsidiary undertaking is exempted from the requirement to set up an audit committee.
Listed insurance or reinsurance undertakings are required to comply with the requirements of the audit committee as stipulated by the Listing Rules issued under the Financial Markets Act.
The proposed new Insurance Rules also refer to and require compliance with the requirements arising under Regulation 537/2014 , particularly Title III (Articles 16 to 19)in relation to the appointment of statutory or audit firms by public interest entities.
The consultation closes on the 14th June 2016.
The full text of the Consultation Document of the MFSA and the new proposed Insurance Rules can be viewed by clicking here.