Prudential Regulation Authority Rulebook

4.1

The PRA notes that standards and guidance for auditors are issued by the Financial Reporting Council (FRC) which apply to non-statutory audit engagements of the type required by the PRA’s rules. The PRA would normally expect auditors to comply with relevant standards in such engagements. The PRA therefore regards compliance with International Standards on Auditing (UK) (ISAs (UK)) as the primary means by which auditors will be able to demonstrate that they have complied with the External Audit Part of the PRA Rulebook.

4.2

Auditing standards and guidance will be updated by the FRC from time to time. The PRA may update this supervisory statement accordingly as appropriate.

4.2A

The scale of the matching adjustment (ie the extent to which the MA impacts on technical provisions) is within scope of audit where the PRA’s external audit rules apply.^[6] This reflects the fact that the impact of the MA falls within the ‘relevant elements’ that external auditors of the SFCR are required to form a view on.^[7]

4.2B

However, the interaction of the SFCR external audit rules and those relating to firms’ use of the matching adjustment (MA) may be complex. This reflects the nature of the MA, the role of the PRA in supervising its use, and the interaction of these with audit requirements.

4.2C

In the context of the External Audit Part, the main requirements relating to the MA can usefully be separated between the related but distinct:

• conditions of eligibility (as specified by regulation 4 of The Insurance and Reinsurance Undertakings (Prudential Requirements) Regulations 2023 (the entire regulations referred to henceforth as the ‘IRPR regulations’) and Chapter 2 of the Matching Adjustment Part of the PRA Rulebook);
• the calculation of the MA (specified by regulations 5 and 6 of the IRPR regulations, Chapters 4, 6 and 8 of the Matching Adjustment Part as well as supporting technical information published by the PRA); and
• the way that the MA is applied (specified by Matching Adjustment 2.1, 3.2 and Chapter 13 of the Matching Adjustment Part).^[8]

4.2D

The PRA takes into account the firm’s description of its process to calculate the MA during the MA application process. It does not approve the firm’s calculation methodology as part of that process. The PRA supervises firms’ use of the MA and the scale of MA benefit claimed on an ongoing basis, in a way that is consistent with the PRA’s published approach to insurance supervision. As part of supervisory work, the PRA may decide to review a firm’s MA calculation in order to ensure that this is done to an appropriate standard and complies with relevant requirements. The PRA may apply closer scrutiny and, where appropriate, would consider use of its relevant supervisory powers under s55M FSMA where it has concerns about the compliance of a firm’s MA calculation with the legislative requirements (eg regulations 5 and 6 of the IRPR regulations and Chapters 4, 6 and 8 of the Matching Adjustment Part).^[9]

4.2E

In forming the opinion required by Rules 2.1 and 4.1 of the External Audit Part of the PRA Rulebook, auditors are not required to assess whether a firm meets the eligibility conditions for use of the MA. As noted in paragraph 3.4, auditors are not expected to express an opinion on the validity of an approval, waiver or other supervisory determination.

4.2F

However, to provide the audit opinion required in relation to the SFCR, to the extent it is material to their opinion, auditors are expected to consider the scale of the MA claimed by the firm. This reflects the fact that the impact of the MA on technical provisions falls within the relevant elements that are within the required scope of audit as set out by Rule 2.2 in the External Audit Part of the PRA Rulebook. The MA calculation depends in part on the application of the MA calculation requirements (set out including in regulations 5 and 6 of the IRPR regulations and Chapters 4, 6 and 8 of the Matching Adjustment Part). However, the scale of the MA could also be affected if the assets and liabilities used to calculate the MA were not within scope of an MA permission.

4.2FA

Any additions made to the fundamental spread to ensure that it covers all risks retained, other than those arising from the uncertainty regarding the timing and amount of cash flows from assets with highly predictable cash flows, remain at the discretion of firms, and hence the PRA does not expect these to be covered by an external audit. The PRA also considers that neither the attestation report nor the underlying evidence are within the scope of an external audit, as the attestation is directed to the PRA.

4.2G

The PRA is not prescriptive about the audit work necessary to support the auditor's opinion on the SFCR, or the approach that it should take in forming its view. The PRA notes that the audit approach taken is likely to vary based on circumstances, materiality, risk and other factors.

4.2H

The MA calculation does not form part of the eligibility conditions under which the PRA would be obliged (if the conditions were met) to grant permission in accordance with regulation 4(2) of the IRPR regulations. As the calculation methodology is not part of the eligibility conditions, the PRA’s permission does not cover the firm’s calculation of the MA.^[10] Therefore, auditors should not treat these factors as being part of the framework that they audit against. Instead, auditors are expected to form their own view on the calculation of the MA, as part of their work to give an opinion as to whether the relevant elements of the SFCR are prepared in all material respects in accordance with the IRPR regulations and PRA rules on which it is based.^[11]

4.2I

Where the PRA has carried out work to review the MA calculation (including the methodologies, processes, or judgements that contribute to the MA), an auditor of the SFCR would still be expected to incorporate its own views on this calculation into its audit opinion. Similarly, the PRA does not expect auditors to assume that an absence of PRA challenge (eg in relation to the MA calculated) overrides a need for auditors to form their own views in the SFCR audit opinion.

4.2J

If through the course of their work, an auditor becomes aware that the firm may not be compliant with MA requirements (whether or not those requirements are within the scope of the auditor’s opinion on the relevant elements of the SFCR), then the PRA would expect the auditor to inform the firm in the first instance.^[12] Auditors may also choose to remind the firm of the requirement in Matching Adjustment 13.4 to inform the PRA if it is not able to comply with the conditions specified and to take the necessary measures to restore compliance as soon as possible.

4.2K

If a firm materially changes its approach to calculating the MA, then the PRA would usually expect this to be discussed by the firm with the supervisory team.^[13] However, consistent with Legacy SS7/13, if the auditor is aware that the PRA has not been informed of such a change then the auditor would be expected to pass this information on to the PRA.^[14]

4.2L

The expectations for auditor communication in paragraphs 4.2J and 4.2K above relate to information that auditors become aware of in the course of their work and are not intended to require additional audit procedures. These expectations are subject to other communication requirements that may be relevant, including the auditor’s statutory duty to report and do not override or alter existing expectations or communications requirements. These paragraphs should therefore be read in conjunction with existing communication requirements and the expectations set out in Legacy SS7/13.^[15]

4.3

ISAs (UK) specify that the auditor shall determine whether, to obtain sufficient appropriate audit evidence, he or she should use the work of an auditor’s expert, and should evaluate the expert’s competence, capabilities and objectivity. As a minimum, for firms that write life insurance business, the PRA expects that auditors, in undertaking the external audit, will obtain and pay due regard to the work of a suitably qualified actuary who is independent of the firm.