Audit Reform and its implications for the Governance of...

Audit Reform and its implications for the Governance of investment funds

11 January 2017

PwC

11 January 20172


Agenda

9h00 - 9h10 Audit Reform in a nutshell

9h10 - 9h45 Panel discussion

• Scope• Governance• Restrictions on non-audit

services

9h45 - 10h00 Questions from the audience

10h00 - 10h10 Wrap-up

10h10 - 10h40 Networking breakfast

Networking breakfastWrap-upQuestions from the audiencePanel discussionAudit Reform in a nutshellAgenda

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11 January 20173


Audit Reform in a nutshell


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11 January 20174


Audit Reform in a nutshell

Scope listed Funds

Audit firm rotation after max 10 years

with option for further 10 years in

case of tender

Prohibition of certain Non-

Audit Services and fee cap NAS

70%

Additional report to the Governance

of the Fund

New format of the audit report

(more transparency)

What’s next? (evolution of regulations applicable to PIE)

Timing:Luxembourg law of

23 July 2016 applicable for

financial period starting on or after

17 June 2016

Increased responsibilities

(CSSF sanctioning

power) for the auditor and the governance of

the Fund


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11 January 20175


Panel discussion

Scope

Governance

Restrictions on non-audit services

Panel discussion


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11 January 20176


Panel discussionSpeakers

Laurent Marx Assurance Partner

Alain MaechlingAssurance Partner

Responsible for Independence

Rima AdasAssurance Partner

Financial Services Leader

Christophe Saint-MardAdvisory Partner

Steven LibbyAWM Leader

Moderator


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11 January 20177


Panel discussionScope

Why investment funds are listed?


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11 January 20178


Scope - Why investment funds are listed?

Listed on Luxembourg Stock Exchange Main Market

Listed on Luxembourg Euro MTF Market

Market statistics on Luxembourg SE

6,294

3232,243179

4,629

1,422

97

15462

161,114

June 2014

Entities (Funds)

Sub-funds

Shares classes

Source: Fundsquare, LUXSE - December 2016


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11 January 20179



De-listing

Country of the Asset

ManagementAsset Manager

#

Funds

# Share-

classes

Canada Manulife 1 78

France La Française AM International 1 11

ItalyBanca Popolare dell’ Emilia

Romagna1 13

Italy Eurizon 1 32

Japan Nikko AM 1 1

Luxembourg Banque de Luxembourg 3 114

Luxembourg Quilvest 1 1

Germany Allianz 1 1

Netherlands Delta Lloyd 1 11

South Africa Momentum 2 7

Switzerland Banque Cantonale Vaudoise 4 45

Switzerland Global Asset Management 1 2


Source: Notices published by the Luxembourg Stock Exchange.

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11 January 201710





#

Funds

# Share-

classes

Switzerland CBH 1 10

Switzerland UBS 4 51

Switzerland UBP 1 15

Switzerland Unigestion 1 42

United Kingdom Barclay’s 1 4

United Kingdom Martin Currie 1 3

United Kingdom M&G Investments 1 4

U.S.A. Alliance Bernstein 1 7

U.S.A. Goldman Sachs 2 3

U.S.A. MFS 1 122

U.S.A. Morgan Stanley 1 26

U.S.A. Oaktree 1 1

U.S.A. Wellington Management 1 12

De-listing (continued)



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11 January 201711



Transfer from Lux SE Main Market to EURO MTF



#

Funds

# Share-

classes

Belgium Candriam 6 145

Belgium Degroof Petercam 12 155

France Amundi 5 238

France CACEIS 1 1

France BNP Paribas 2 7

Italy UBI 1 22

Luxembourg KBL 2 7

Netherlands ABN AMRO 1 229



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11 January 201712



Transfer from Lux SE Main Market to EURO MTF (continued)



#

Funds

# Share-

classes

Switzerland Crédit Suisse 11 89

Switzerland UBS 10 47

United Kingdom Aviva 2 72

United Kingdom Barclays 1 17

United Kingdom F&C Investments 2 2

U.S.A. Merrill Lynch 1 3

U.S.A. Goldman Sachs 1 207



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11 January 201713


Panel discussionGovernance

What are the main implications of the Audit Reform for the Governance of the funds?


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11 January 201714


Governance - What are the main implications of the Audit Reform for the Governance of the funds?

No Audit Committee for Funds, but responsibilities directly delegated to the Board (ManCos for FCPs)

Systematicpre-approval of Non-Audit Services

Monitoring of the fee cap limit

Monitor auditor’s assessment of the threats to its independence regarding provision ofpermissible services

Discussion on key audit matters, testingand result in auditor’s report

Oversight of auditor rotation: tendering process


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11 January 201715


Sanctions are published by the CSSF and could indicate the name of the sanctioned person

CSSF Sanction Regime

(Law of 23 July 2016)

Temporary ban (3 years)

Administrative fine up to € 500,000for natural person

Administrative fine up to € 1 mio or 5% of turnover for corporate



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11 January 201716


Restrictions of NAS apply to the PIE but also to its parents and controlled undertaking.

Who controls the fund?

Management company Main Shareholders



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11 January 201717


• New audit standard ISA 701.

• Article 10 of EU Regulation:

– A description of the most significant assessed risks of material misstatements including assessed risks of material misstatements due to fraud;

– A summary of the auditor’s response to those risks; and

– Where relevant, key observations arising with respect to those risks.

Governance - What will an audit opinion of a PIE look like?


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11 January 201718


Panel discussionRestrictions on non-audit services (NAS)


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11 January 201719


Audit

Audit

NAS authorised in accordance

with Lux Code of conduct

EU Asset Manager not listed (non-PIE)

and not a subsidiary of an EU PIE

Luxembourg SICAV listed(PIE)

Asse

t M

an

age

ment

co

ntr

act (n

o c

on

so

lidation)

Fund auditor(+ network)

Prohibition of certain NAS as per EU

Regulation + Pre-Approval required

Case study: Luxembourg fund is a PIE



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11 January 201720


Case study: Luxembourg fund is not a PIE

Audit

NAS authorised in accordance with

Lux Code of conduct

EU Asset Manager not listed(non-PIE)

Luxembourg SICAV not listed (non-PIE)

EU Bank(PIE)

Audit

Audit

Asse

t M

an

ag

em

en

t

co

ntr

act (n

o c

on

so

lida

tio

n)

Co

nso

lida

tio

n (

su

bsid

iary

)








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11 January 201721


Case study: Main shareholder is a PIE and same audit firm audits the fund and the shareholder

Audit




SICAV not listed (non-PIE)

Main shareholder listed EU entity (PIE)

Audit



> 5

0%

AU

M



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11 January 201722


Will auditor of a Luxembourg PIE fundstill be able to provide NAS?

Nature of NAS provided by the auditor directly to the Fund

Prohibition or possible subject to certain conditions?

TAX

Certification of tax reporting figuresAssimilated to assurance servicesAuthorised NAS

Preparation of tax reporting figures Authorised NAS (Luxembourg MS option)

Tax representative in certain countries where the Fund is distributed

Authorised NAS (Luxembourg MS option)

Tax reclaim Authorised but effects should not be material



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11 January 201723


Nature of NAS provided by the auditor directly to the Fund

Prohibition or possible subject to certain conditions?

ADVISORY

Assistance for regulatory filings with local regulators

Should be allowed subject to certain safeguards (not act as Management)

OTHERS

Preparation of the financial statements Not authorised

Auditor’s report on Contribution/Redemption in kind, Merger, etc.

Should be authorised as assimilated to assurance services

Will auditor of a Luxembourg PIE fundstill be able to provide NAS?



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11 January 201724


Fee cap: How will it work?

• Apply to the local audit firm and not to its network except for UK subs. of PIEs;

• Max 70% of average groups audit fees over the last 3 consecutive financial years.

First application year-end 2020



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11 January 2017

Questions from the audience

25Audit Reform and its implications for the Governance of investment funds

Questions from the audience


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11 January 201726


Wrap-up

Key matters to consider

Wrap-up


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11 January 201727


Wrap-up - Key matters to consider

Law was never intended for funds which are already highly regulated

Listing costs for investors; analysis may show no added-value

Further regulation may be imposed to PIEs (EU Regulations to monitor)

Breach of responsibilities may lead to serious penalties

Expected reinforced scrutiny/supervision of the CSSF on PIEs


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11 January 201728


Where to find more information?

Eco DA - PwC Guidance for audit committees

http://ecoda.org

ECG website including FAQ

https://www.8cld.eu

Wrap-up - Key matters to consider


http://ecoda.org/

https://www.8cld.eu/Pages/Index.aspx

https://www.8cld.eu/Pages/Index.aspx

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11 January 201729


Networking breakfast

Thank you for your attention!

Networking breakfast


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