Everything you need to know about the new Financial Services Code

Everything you need to know about the new Financial Services...The Financial Services Code first appeared in 2013 and aimed to strengthen the role of internal auditors in an effort to prevent scandals and mismanagement across the UK’s financial institutions.


Four years later, the Chartered Institute of Internal Auditors (IIA) has now overhauled the Code, bringing even greater responsibilities to auditing departments.


So what does this mean for auditors? Let’s take a closer look at the original Code, as well as what changes have occurred and how they impact the country’s firms.

Why was the original Code introduced?

The IIA’s Guidance on Effective Internal Audit in Financial Services, which would become known as the Financial Services Code, was published after a damning parliamentary report into banking standards in 2013.


One of the many problems highlighted with British banking was the lack of power internal auditors held within organisations. The IIA admitted that auditors had focused too much on internal processes and controls prior to the global financial crisis, while undervaluing the importance of strategic risks.


Many internal auditors lacked the status to challenge senior bankers, cultivating a culture where professionals failed to have enough objectivity and independence from the wider organisation.


As such, the IIA produced the Code after extensive industry consultation and with the support of the Bank of England, the Financial Reporting Council, the Financial Conduct Authority and the Prudential Regulation Authority.

Creating a stronger industry watchdog

The original Code put forward a number of recommendations, including that internal auditors should primarily report to non-executive directors who chair the company’s audit committee. Previously, they reported to executives directly.


Another suggestion was to ensure chief internal auditors were given statuses equivalent to board members in many organisations. At the time, the IIA claimed organisations would need to boost internal audit recruitment budgets to attract professionals with the required skills to justify a C-suite presence.


However, according to IIA chief executive Dr Ian Peters, the new Code will ensure internal audit is an “even stronger watchdog” for overseeing risk across the country’s financial services.


“The Code has already made a real difference to the profile and authority of internal audit since it was published in 2013,” he stated.


“It has driven real improvements in performance across the sector, especially in the area of culture. But the time has come to go further.”

What are the latest recommendations?

The IIA has made several key changes that are likely to affect internal audit departments.

  • Auditors should produce annual reports on whether or not their company is adhering to agreed risk appetite frameworks;
  • Internal audit teams should review the actions of the business and individuals after significant adverse events, such as regulatory breaches;
  • Organisations have been asked to make it clear that internal audit plans must be regularly reviewed and adjusted to account for new and emerging risks;
  • Chief internal auditors should have their objectivity and independence evaluated every year after they’ve held a post for seven years;
  • Businesses have been advised to emphasise the importance of internal audit’s role in assessing culture, reporting the department’s findings on behaviours, values and ethics; and
  • Internal audit should examine the organisation’s other control functions, both in terms of the processes themselves and their quality.

The expected outcomes from the new Code

Dr Ian Peters said the new measures should help further the good work the Code has already achieved in the UK, particularly regarding cultural improvements.


“Overall, the enhanced Code should help ensure that internal auditors can play their full part in effectively protecting the assets, reputation and sustainability of their organisations,” he explained.


“Internal auditors across the sector now need to drive these changes forward. They should demand, and get, stronger backing from audit committees and [the] board.”


The revamped guidelines were published on September 1st, so it’s too soon to know whether or not the new Code will have an impact on internal audit recruitment.


Nevertheless, widening the scope and responsibilities of internal auditors in financial services firms will no doubt increase the need for professionals with a broader base of skills.


Our most recent research indicates that demand for internal auditors is already rising, with zero per cent of employees we surveyed having been out of work for more than 12 months. We also found that 53 per cent of auditors believe the market for their skills is improving, up from just 38 per cent last year.


As regulations and expectations on UK financial services firms continue to become more burdensome, internal audit professionals are likely to see the need for their services increase accordingly.


If you’d like to discuss your internal audit recruitment needs, please contact one of our consultants today.


Our Market Reports combine our review of the prevailing conditions in the internal audit recruitment market together with the results of our latest employer survey.


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