GUIDANCE ON CHANGES TO THE ACCOUNTING AND AUDITING
REQUIREMENTS FOR CERTAIN SMALL FINANCIAL SERVICES COMPANIES
AND LLPS – AS AT 1 NOVEMBER 2007
1. Changes to the accounting, reporting and auditing requirement for small companies in the Companies Act 1985 (the 1985 Act) came into force on 8 November 2006. These mean that certain categories of small financial services companies and limited liability partnerships (collectively referred to as companies for ease of reference) will be able to take advantage of the small company exemptions in the 1985 Act for financial years ending on or after 31 December 2006. Previously, these companies would have been prohibited from taking advantage of the exemptions because they carried on activities that were regulated by the Financial Services Authority (FSA). This position will be replicated under the Companies Act 2006 (the 2006 Act); most of the accounting provisions of this Act will come into force on 6 April 2008, with effect for financial years beginning on or after that date.
2. Further changes to the categories of small financial services companies came into force on 1 November 2007 as a result of the implementation of the Markets in Financial Instruments Directive (MiFID). These mean that some companies that would have been able up to 31 October 2007 to take advantage of the small company exemptions in the 1985 Act (and the 2006 Act) will no longer be able to do so. See paragraphs 16-21 for further details on these most recent changes.
3. All companies are required by the 1985 Act to prepare annual accounts and to have those accounts audited. These requirements originate from EU directives. Under section 246 of the 1985 Act, small companies can take advantage of less onerous accounting and reporting requirements: they can prepare less detailed accounts and directors’ reports for their shareholders,
and need only file a shorter form of balance sheet at Companies House. They
do not have to have their accounts audited.
4. To qualify as small, a company must meet two of the following criteria
(set out in section 247 of the 1985 Act):
? its turnover in a financial year is not more than ?5.6m,
? its balance sheet total for that year is not more than ?2.8m, and
? it has not more than 50 employees.
5. Under section 249A of the 1985 Act, a company is exempt from the
requirement to have its accounts audited for any financial years if it meets all
three of the following criteria:
? it qualifies as a small company in relation to that year,
? its turnover in that year is not more than ?5.6m, and
? its balance sheet total for that year is not more than ?2.8m.
6. Certain categories of companies are excluded from taking advantage of
the accounting and audit exemptions, despite the fact that they meet the
criteria set out above. The exclusions are set out in sections 247A, 248(2),
249AA(3) and 249B of the 1985 Act.
7. Until 8 November 2006, the exclusions that relate to financial services
are of companies that:
? carry on an insurance market activity (as defined in section 316(3) of the
Financial Services and Markets Act 2000 (FSMA));
? have permission under Part 4 of FSMA to carry on a regulated activity;
? are appointed representatives under section 39 of FSMA and whose
scope of activity is limited to activities that are regulated activities.
8. “Regulated activity” is defined by section 262 of the 1985 Act as having the meaning given in section 22 of FSMA with certain specified
1exemptions. Therefore, financial services companies that would otherwise
qualify as small and able to take advantage of the audit exemption cannot do
so if they carry on any of these activities.
Provisions that came into force on 8 November 2006
9. The Companies Act 1985 (Small Companies’ Accounts and Audit)
Regulations 2006 (SI 2006/2782) come into force on 8 November 2006. The
regulations apply for financial years ending on or after 31 December 2006.
The regulations are available to download from
10. The regulations mean that, for financial years ending on or after 31
December 2006, more categories of small financial services companies will
qualify as small and will be able to take advantage of the small company
11. The following types of financial services companies that qualify as small
are able to take advantage of the small company accounting and auditing
1 As amended by regulation 17 of the Companies Act 1985 (Investment Companies and
Accounting and Audit Amendments) Regulations 2005, S.I. 2005/2280 and by article 26 of the
Financial Services and Markets Act 2000 (Regulated Activities) (Amendment) (No.2) Order
2006, S.I. 2006/2383.
? investment management companies (but not those coming under
MiFID and before it the Investment Services Directive (ISD)) – for
example unregulated collective investment scheme managers and
investment advisers that do not hold client money (but see paragraphs
16-21 for current position);
? personal investment companies (but not those coming under MiFID and
before it the ISD) – for example an independent financial adviser that
does not hold client assets (but see paragraphs 16-21 for current
? securities and futures companies (but not those coming under MiFID
and before it the ISD) – for example a corporate advisory firm or an
energy/oil market trader (but see paragraphs 16-21 for current position);
? insurance intermediaries (life and general insurance);
? mortgage lenders, administrators and intermediaries;
? service companies (companies that usually only carry on regulated
activities for firms within the group to which they belong; for example,
taking out insurance for activities carried out by other companies in the
? authorised professional firms (but not those coming under the
Investment Services Directive) – for example solicitors or accountants
that have permission under Part 4 of FSMA to give financial advice to
? Sharia compliant home finance providers, administrators and
intermediaries and home reversion plan providers, administrators and
? receivers/ transmitters and advisory firms that do not hold client money
falling within article 3 of MiFID (see paragraphs 19 to 21).
12. Other categories of small financial services companies are still
prohibited from taking advantage of the small company exemptions even
though they may qualify as small. These are companies where the
requirement to have an audit is based on a requirement in a European
directive. They are categorised as follows:
? authorised insurance companies,
? members of Lloyds,
? banking companies,
? e-money issuers,
? investment firms covered by MiFID (and before it the ISD),
? UCITs management companies (UCITs - undertakings for the collective
investment of transferable securities).
13. SI 2006/2782 introduces definitions of the last three categories:
? “e-money issuer” means a person who has permission under Part 4 of
FSMA to carry on the activity of issuing electronic money within the
2 Introduced by article 26 of the Financial Services and Markets Act 2000 (Regulated Activities)
(Amendment) (No.2) Order 2006, S.I. 2006/2383, from 6 April 2007.
meaning of article 9B of the Financial Services and Markets Act 2000
3(Regulated Activities) Order 2001;
? “ISD investment firm” has the same meaning as in the General
4Provisions and Glossary Instrument 2001 made by the FSA under FSMA.
This definition has now been replaced with the definition of MiFID
investment firm (see SI 2007/2932 and paragraphs 16-21 below); and
? “UCITS management company” has the same meaning as in the
Collective Investment Schemes (UCITS Amending Directive) Instrument
52003 made by the FSA under FSMA.
14. “Authorised insurance company” is defined in section 742C of the
1985 Act as a person who has permission under Part 4 of FSMA to effect or
carry out contracts of insurance. “Banking company” is defined in section
742B of the 1985 Act as a person who has permission under Part 4 of FSMA to
15. If a company falls within one or more of the categories in paragraph 11
and also in paragraph 12, it cannot take advantage of the exemptions.
Provisions that came into force on 1 November 2007
16. The ISD has been replaced with effect from 1 November 2007 by
MiFID. The 1985 Act and the 2006 Act were amended by the Markets in
Financial Instruments Directive (Consequential Amendments) Regulations
2007 (SI 2007/2932) to reflect this change. These Regulations are available to
download from http://www.opsi.gov.uk/stat.htm.
3 S.I. 2001/544, as amended by S.I. 2002/682.
4 FSA Instrument 2001/7, made on 21st June 2001 and published by the FSA at
5 FSA Instrument 2003/47, made on 17th July 2003 and published by the FSA at
17. In summary, these Regulations replace the defined term 'ISD investment firm' with 'MiFID investment firm'. However, more firms will be subject to MiFID than were subject to the ISD. This is mainly for two reasons.
18. First, the scope of MIFID is wider than the ISD in that it applies to a wider range of services and instruments including, for example, commodity derivatives; this means that some specialist commodity dealers will be subject to MIFID whereas they would not have be subject to the ISD.
19. Secondly, whereas receivers and transmitters/advisers who don't hold client money or securities are exempt from ISD (by virtue of article 2.2.(g) of the ISD), article 3 of MiFID creates an optional exemption relating to these firms. The UK has chosen to exercise this option so that these firms effectively have a choice as to whether or not they wish to be subject to MIFID. The main reason for opting into MiFID is to acquire passporting rights. This may be relevant, in particular, to investment advisers who currently provide cross-border services to expat clients and wish to continue to do so. The FSA has outlined the position for this category of firms in the Factsheet that can be downloaded at:
20. In essence, the policy of applying audit requirements to investment firms that are subject to the relevant directive (that is ISD/MiFID) is maintained. This is subject to an exception in relation to those small firms falling within paragraph 19 above. These firms would not have been subject to ISD and so not subject to an audit requirement. This position has been replicated (albeit now, they are MiFID firms). In other words, firms that have voluntarily opted into MiFID under article 3 may be exempt from statutory audit requirements where they continue to meet the conditions of the FSMA legislation giving effect to the article 3 MiFID exemption (and also the other conditions under the 1985 Act and the 2006 Act). In legislative terms, the relevant category
of firms under this heading are those to which regulation 4C and 9A of the FSMA (Markets in Financial Instruments) Regulations 2007 apply.
21. As to the other firms falling for the first time into the scope of the
Directive (and therefore within the requirement to appoint an auditor), they
will benefit from a transitional provision (see regulation 8). The effect of the transitional is to switch off audit and accounting requirements in the case of a firm’s financial year beginning prior to 1 November 2007 but ending after
that date. This has been done because otherwise firms would find themselves
subject to an audit requirement in respect of the current financial year, which they commenced in the expectation that there was no formal audit
requirement. This could give rise to practical difficulties for firms and auditors alike.
Small company accounting and reporting exemptions
22. Companies that will be able to take advantage of the option not to have
their accounts audited as a result of these regulations will also be able to take advantage of certain exemptions from accounting and reporting requirements.
These are set out in section 246 of the 1985 Act.
Position of groups
23. A parent company that heads a group that qualifies as small can also
benefit from these exemptions. The provisions on small groups are set out in
sections 248, 248A and 249 of the 1985 Act. A parent company of a small
group need not prepare group accounts. To qualify as a small group, two of
the following three criteria must be met:
? its aggregate turnover in that year is not more than ?5.6m (or ?6.72m
the company holding not less than 10% of the company’s issued share
capital may require the company to have an audit, by notice in writing
deposited at the company’s registered office not later than one month before the end of the financial year.
28. For further information on the small company accounting, reporting
and auditing requirements in the 1985 Act or the 2006 Act, contact Valerie
Carpenter at BERR (Valerie.Carpenter@berr.gsi.gov.uk or 020 7215 0225).
Please note that BERR cannot give advice on individual cases.
29. For further information on the categories of small financial services
company that may or may not need an audit, contact the FSA’s Firm Contact
Centre Helpline on 020 7066 0990.