AFM calls for audit rule reform to ease mutual costs

KAREN JOY BACUDO

Finance Editor

The Association of Financial Mutuals has called on the Government and regulators to reform public interest entity audit rules, arguing that smaller mutuals face disproportionate compliance costs under the current regime.

It made the case as part of a broader policy agenda aimed at removing barriers to growth for member-owned financial firms while maintaining governance and consumer protection. The group argues that some smaller mutual organisations are treated the same as much larger financial institutions, despite their very different scales and systemic importance.

Public interest entity (PIE) status imposes stricter audit and reporting requirements on organisations considered significant to the public. According to the Association of Financial Mutuals, the current framework captures mutuals that are not systemically significant, creating costs that could otherwise be spent on member services, product development or expansion.

The organisation represents mutual and not-for-profit insurers, friendly societies and other financial mutuals across the UK. It argues that a more proportionate approach to audit regulation would support a more diverse financial services market and align with the Government’s stated aim of expanding the mutual sector.

Andrew Whyte, Chief Executive Officer of the Association of Financial Mutuals, set out the group’s position.

“The current Public Interest Entity regime captures smaller mutuals that are not systemically significant and places a disproportionate burden on organisations whose primary focus is delivering value to their members. We support strong audit and governance, but the framework must be proportionate and targeted at those firms that truly warrant this level of scrutiny. Reforming the regime would free up mutuals to invest more in innovation, customer service and growth, helping to build a more diverse, resilient and inclusive financial services sector,” said Whyte.

Wider agenda

Audit reform is one part of a wider package of changes the trade body wants. Another priority is changing capital rules so mutuals can raise external funds without jeopardising their mutual tax status.

This has long constrained some member-owned firms, which cannot rely on equity markets in the same way as listed companies. The group argues that access to suitable external capital would enable firms in the sector to invest in new products, technology, and distribution channels while retaining their ownership model.

It also wants the Law Commission’s recommendations on friendly society legislation to be implemented in full, saying a modernised legal framework would remove outdated restrictions and make it easier for such organisations to operate and develop.

The trade body is also seeking a more rigorous method of assessing how regulatory changes affect mutuals. It argues that rules are often designed with larger shareholder-owned institutions in mind, even though mutuals have different structures, incentives and capital models.

It is also calling for greater clarity on product bundling and cross-selling within the mutual sector, saying clearer rules would help firms broaden their offer to members without creating uncertainty over compliance expectations.

Sector role

Mutuals occupy a distinct place in the UK financial system because customers or members, rather than shareholders, own them. That structure means profits are generally retained for the benefit of members through pricing, service levels or reinvestment in the business.

The group argues that this model can support financial resilience and inclusion, particularly if firms can expand without unnecessary regulatory obstacles. Its latest strategy says the sector could play a larger role in the market if policy settings better reflected the nature of mutual organisations.

It linked its proposals to the Government’s commitment to double the size of the mutual and co-operative sector, arguing that this ambition will be difficult to achieve unless regulation, tax treatment and legal structures are adjusted to reflect the differences between mutuals and larger listed financial groups.

For policymakers, the key question is whether any relaxation of PIE rules for smaller mutuals can be designed without weakening audit oversight. The Association of Financial Mutuals argues that strong scrutiny should remain, but that thresholds and applications should better reflect the actual public risk posed by the institutions concerned.

The debate also raises a wider issue in financial regulation: how to apply common standards across institutions with sharply different ownership structures and business models. For mutuals, the concern is that a framework intended for large public-interest firms imposes a heavier burden on smaller member-owned organisations.