Basel/CRD Implementation Advisory Group - Strategic Objectives
Basel/CRD Implementation Advisory Group - Strategic Objectives
The strategic objectives of the High-Level Advisory Group are intended be high-level principles that provide a context within which the FSA will make its decisions. They complement the implementation principles set out in CP189 as well as the FSMA principles of good regulation. They are also intended to provide a basis upon which the High-Level Advisory Group for Basel/CRD Implementation may make periodic reviews of progress and success.
Each strategic objective needs to be read in the context of the others. In practice the real difficulties from applying the strategic objectives are likely to come from circumstances in which two or more objectives point in different directions.
The objectives apply to all aspects of how the FSA will in practice apply the requirements in the CRD, but are particularly relevant to those areas in which a high degree of supervisory judgement is needed. These include:
- applying the entry criteria to a regulated firm which wishes to use the Internal Ratings Based Approach for credit risk or the Advanced Measurement Approach for operational risk; and
- applying the "Pillar 2" supervisory review to a regulated firm.
The strategic objectives are:
1. The FSA will interpret and apply Pillars 1 and 2 with the aim of achieving capital standards for regulated firms that are proportionate and risk-based, and that give appropriate incentives to good risk management.
This objective recognises that – as stated in the FSA's Principles for Businesses – a regulated firm must maintain adequate financial resources. Pillars 1 and 2 provide the framework within which the adequacy of financial resources is to be judged. Except as explicitly set out in the CRD, the FSA will not apply floors to the level to which a regulated firm's capital requirement may fall as a result of the transition from the existing capital standards to the CRD. The FSA will not use Pillar 2 for the purpose of reversing, regardless of the actual incidence of risk, the capital requirement reductions that apply in Pillar 1. The FSA will, however, use Pillar 2 where necessary to set bespoke capital requirements that address risks that are not adequately taken into account in the Pillar 1 capital requirement.
2. The FSA will interpret and apply Pillar 3 with the aim of achieving risk disclosures that are relevant and reasonable (in terms of costs and benefits) relative to the aim of encouraging market discipline.
This objective recognises that the Pillar 3 disclosures are not an end in themselves. They have a purpose (encouraging market discipline). In the context of this purpose the CRD recognises, and the FSA will apply, the concepts of materiality and of the privacy of proprietary or confidential information. The FSA will also seek to avoid unnecessary duplication of overlapping or inconsistent disclosures as between Pillar 3 and accounting standards. The FSA will pursue this aim both by seeking to apply and interpret Pillar 3 in a way that is consistent with accounting concepts (as far as this is possible) and by working with accounting standard setters to influence the content of accounting standards.
The FSA's application of the standards in the CRD should appropriately take into account how Basel 2 is being implemented in other key jurisdictions, in part to minimise the potential for regulatory arbitrage and inequality.
This objective recognises (as the FSA is required to do under the Financial Services & Markets Act) that in applying standards the FSA needs to have regard to the "international character of financial services and market and the desirability of maintaining the competitive position of the UK".
It also recognises the practical problems that arise for multi-national groups that have to apply Basel 2 in several different jurisdictions. This objective includes, but goes beyond, the objective not to be legislatively super-equivalent to the CRD except where justifiable in terms of costs and benefits. In achieving this objective the FSA will work to influence regulatory practice in other member states through CEBS within the EU, through the AIG on a worldwide basis and through its bilateral relationships with other supervisors.
The FSA will compare its regulatory practice with that in other key jurisdictions to identify significant differences in the standards to which regulated firms are in practice being held. The objective is not necessarily to achieve identical regulatory practice in all circumstances, but to identify, explain and understand differences as reasonably necessary (in terms of costs versus benefits). Some differences will necessarily arise because the CRD needs to be given effect within the context of the FSA's statutory objectives and principles of good regulation which do not necessarily apply in all other EU member states, e.g. the emphasis on senior management responsibility.
The FSA will seek to achieve early clarity on the key policy and practice choices that are project critical to regulated firms' implementation plans. The FSA will base its policy and practice choices on an open and transparent process of both formal and informal consultation, and will communicate regularly with the industry on key policy and practical issues.
This objective recognises that many important aspects of regulated firms' compliance with the standards in the CRD require that systems be in place well in advance of end-2006(7). The FSA will plan its consultations, responses to consultations and issuance of 'near final' rules so that relevant information is available to firms as soon as is reasonably practicable and possible given, for example, external dependences such as the timing of the enactment of the CRD and the timing of the work of CEBS and the AIG on convergence of supervisory practice.
In addition the FSA will use informal methods to enable regulated firms to keep up to date with, and to influence, its thinking on key policy and practice issues. These methods will include the six FSA-industry standing groups (on credit risk, operational risk, credit risk mitigation, securitisation, capital and groups and market risk). Papers submitted by the FSA to these standing groups, including answers to frequently asked questions and summaries of discussions will be posted on the FSA website. As latest thinking will necessarily not always remain unchanged in the final standards (e.g. change may occur due comments received on consultation), the FSA will seek to apply final standards flexibly in so far as legal compliance with the CRD and its own statutory objectives permits.
The FSA will base its supervisory practice in applying the CRD on its Arrow Framework.
This objective recognises that supervisory decisions arising from CRD need to be made within the same context as other supervisory decisions. Where a regulated firm is supervised under Arrow on a "relationship basis" the key supervisory decisions arising from CRD, such as for example the application of Pillar 2, need to be based on a dialogue with the regulated firm appropriate to that relationship. The nature of the relationship itself will be determined by the FSA's assessment of the firm's business and control risk and of its the impact or importance relative to our statutory objectives.
When deciding how to frame and apply standards there is often a choice between more formulaic or mechanical approaches (compliance with which is easier for supervisors to verify) and more bespoke approaches that require significant time from specialist supervisory staff and the exercise of judgement by senior or experienced staff. In framing and applying the CRD standards for those regulated firms that under Arrow are supervised on a "relationship" basis we will tend toward approaches that are non-mechanical and are based on judgement where this is necessary, e.g. for the entry standards to IRB and AMA and for Pillar 2. We will seek to make available the necessary FSA resources so that these judgement-based approaches can be applied in practice in a timely manner.