08 July 2013

Towers Watson: Internal control system and internal audit function for IORPs

The existing IORP Directive requires IORPs “to have sound administrative and accounting procedures and adequate internal control mechanisms”. EIOPA’s advice is to build on this and incorporate much of article 46 of the Solvency II Directive, including the creation of a “compliance function".

The existing IORP Directive requires IORPs ‘to have sound administrative and accounting procedures and adequate internal control mechanisms’. EIOPA’s advice is to build on this and incorporate much of article 46 of the Solvency II Directive, including the creation of a ‘compliance function’. An edited version of article 46 is set out below for ease of reference.

EIOPA suggests that IORPs that are of a ‘less complex nature, smaller scale and lower complexity’ may be able to fulfil the compliance function within the IORP’s management board or by outsourcing to an appropriate third party. The position for the audit function is less clear, although outsourcing remains an option. The advice states that smaller and less complex IORPs ‘should be allowed to elect to implement alternative measures meeting the  general objectives of an internal audit function’. However, it later states that the audit function must be independent of the IORP’s management board. The advice is silent on what would be considered suitable ‘alternative measures’ to the appointment of an independent internal or outsourced audit function.

For many IORPs it would appear that there will be little that is likely to change in regard to existing internal control systems. For larger, more complex IORPs and those carrying out cross-border activity, it is likely that a formal, independent compliance function will be created (whether in-house or outsourced) – with a formal advisory role to the IORP’s governing board and explicit whistle-blowing duties to supervisors. For many countries it would also appear that the introduction of an internal audit function will represent no change from the present. Whether the detail of the proposals, particularly the Level 2 implementing measures, necessitates change remains to be seen. For other countries, however, an internal audit function will be a new role and likely to lead to an increase in costs.

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