FSA head of risk review outlines Authority’s planned approach to implementation

Rosemary Hillary, head of risk review at the Financial Standards Authority (FSA) presented on the FSA's firm-specific implementation work in preparation for the Capital Requirements Directive (CRD). Hilary confirmed that the FSA is trying to put the policy into practice on a firm-by-firm basis, and said the “CRD represents a step forward, in improving standards of risk management and financial soundness. Our approach aims to implement the CRD in a way that maximises the benefits of the new regime.”

Hilary spoke specifically about the FSA’s planned approach to Pillar I of the Accord, home-host issues and Pillar II.

Pillar I

The FSA’s focus up to now has been largely on the issues for firms applying for advanced approaches in line with the FSA's risk-based approach. Firms planning to use the standardised approach now have a set of draft rules in CP06/3, and should look at how these rules will be applied and how they can meet Pillar II requirements. There will be new reports to submit, and the reporting implications of the new regime will be set out in the regulatory reporting CP due to be published in May.

Regarding issues for firms planning an advanced approach under Pillar I, the FSA has been talking to firms about their intentions to apply for internal ratings based (IRB) or advanced measurement approach (AMA) permissions over the past year. Hilary emphasised that it is preferable for firms to put its application in “only when it is satisfied that it can demonstrate to us that it meets the criteria for approval, rather than sticking to an over-optimistic timetable”.

The FSA is also planning for the approval work that the authority anticipates over the next year, including a complicated visit schedule it plans to carry out in advance of receiving a formal application. Hilary stated that though the FSA increased its resources to carry out IRB and AMA waiver application reviews, she is “under no illusion that this is anything other than a massive task”.

In terms of the models themselves, the FSA has been looking at the types of decision they could reach in respect of an IRB application. The authority is looking at options such as making their decisions subject to certain conditions being met, having delayed roll-out of portfolios with shortcomings or having an additional capital buffer or multiplier in Pillar I. The FSA will look to firms to address Pillar I model shortcomings within Pillar I itself. “Where Pillar I models do not come up to scratch then we will turn down applications,” Hilary stressed.

Home host

In the presentation, Hilary noted that the home-host issues for firms, particularly those applying for an advanced approach under Pillar I in more than one jurisdiction. Hilary re-stated that the FSA will work closely with our counterparts in other countries and will take an approach consistent with the Committee of European Banking Supervisors (CEBS) guidelines for home-host relationships.
Hilary insisted that the Authority is doing everything it can to reach practical and pragmatic ways forward on home-host issues. The FSA will strive to be as clear possible about home issues, but the business decisions themselves are for the firms. If guidance is unclear to a specific firm, the FSA can only attempt to clarify their own position.

Pillar II

The FSA is still in discussions regarding implementation issues with firms and trade associations through its Pillar II standing group. The minutes of these meetings are published on the FSA website, where there will soon be a Frequently Asked Questions section. This will become the main dispersal point for information from the FSA.

One of the documents planned is a suggested template for Pillar II submissions, the Individual Capital Adequacy Assessment (ICAAP) document. It is not mandatory for firms to use this template, but it gives an idea of the issues the FSA are interested in. If a firm’s submission does not cover the topics, supervisors will expect to be questioned about any gaps during the Pillar II review.

The FSA will not be publishing any further formal rules or guidance on how firms might approach their Pillar II assessments, and expects firms to begin preparations for Pillar II reviews. Hilary expressed understanding of the enormity of the challenges facing firms, stating: “We are in no doubt that getting through the bulk of work – the reviews of IRB and AMA applications, and the roll-out of Pillar II, over the next two years is a significant task, and one that we are not complacent about. But it is one I believe we are well-positioned to deal with.”

Hilary was speaking at the CRD implementation conference.

BaselAlert.com