The Pillar 2 regime applies to all BIPRU firms from 1 January 2008 (except for firms exempted by CAD Article 45d).

Under Pillar 2 a firm must, amongst other things, assess regularly the amount of internal capital it considers adequate to cover all of the risks to which it is exposed within the context of its overall risk management framework. The process, known as the Internal Capital Adequacy Assessment Process (ICAAP), is the firm's responsibility and forms a key input into our supervisory review process. The Handbook rules and guidance implementing Pillar 2 (BIPRU Chapter 2.2 ) provide guidance on some of the risks that firms should consider in their ICAAP.

The FSA's Pillar 2 Assessment Framework

Our review process, undertaken through ARROW, determines our overall supervisory assessment of a firm's ICAAP including, where appropriate, any resultant risk mitigation programme and the giving of Individual Capital Guidance (ICG).
We expect to have different levels of intensity of supervisory review depending on a firm's size and complexity, in line with our risk-based approach to supervision and the concept of proportionality embodied in the CRD and ARROW.
The following document is intended to give firms an insight into what they can expect of our Pillar 2 process.

Pillar 2 Pilot Programme and early reviews

As part of the Pillar 2 project we conducted a pilot programme that was completed in November 2006. The main purpose of the pilot was to test all aspects of the ICAAP assessment framework. A number of firms representing a cross section of the industry participated.

Some learning points from the pilot programme can be found in this paper submitted to the Basel 2/CRD Implementation Advisory Group on 25 September 2006.

1. Suggested ICAAP submission format

An ICAAP submission will be sought from firms when and only if we conduct a SREP review. How much detail is provided in that submission is for a firm to decide.

Set out below are two alternate submission templates which are intended to provide firms with an outline of the issues we will consider as part of our SREP. The templates are not mandatory but firms may find them useful when considering their submissions. 'ICAAP submission - larger firms' is most appropriate for firms whose activities are complex or moderately complex. 'ICAAP submission - smaller firms' is most appropriate for firms whose activities are simple.

ICAAP submission – larger firms [PDF] (last updated 22 November 2007)

ICAAP submission – smaller firms [PDF] (last updated 21 June 2007)

These documents are designed to help firms address some of the practical considerations around the ICAAP and do not constitute guidance on our Handbook rules. They may be updated and re-issued here in light of findings and lessons learned as we undertake the first cycle of reviews.

2. Initial observations on ICAAPs received to date

The following documents set out some of our early observations from the ICAAP submissions we have received to date from smaller firms. There are two documents: the first focuses on small investment firms, the second on medium to small banks and building societies. We urge such firms to consider these key messages when preparing their ICAAPs. We will provide further updates as issues arise.

Pillar 2 – some initial observations (Investment firms) [PDF]

Pillar 2 – some initial observations (banks and building societies) [PDF]

Pillar 2 – some initial observations (Limited Licence Firms) [PDF]

Cross-border issues (home/host)

There are major challenges facing the industry in implementing the new Basel framework on a cross-border basis, both from a home-to-host and host-to-home perspective. We are particularly conscious of the concerns of global groups with subsidiaries in the UK about meeting their UK Pillar 2 obligations.

The FSA Home-host statement provides a high-level view of the FSA's approach to the implementation of Pillar 2 of the Capital Requirements Directive ('CRD'), where we are a host supervisor.

Other documents

Information on the practical implementation of Pillar 2 is also contained in:

  • CP 06/11 on Integrated Regulatory Reporting published in May 2006 which focuses primarily on reporting requirements but also includes some Pillar 2 elements. In particular, it sets out our proposals for a questionnaire that investment firms will need to complete;and
  • CP06/3 Strengthening Capital Standards 2 published in February 2006 which supplemented information provided in CP 03/05 published in January 2005.

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