The FSA consults on approach to setting prudential standards

Howard Davies, Chairman of the FSA, said:

"The key proposal is that the FSAs main prudential standards should be organised as far as possible according to the risks that firms are exposed to, rather than depending on the sector from which the firm comes. This change responds to industry developments that are blurring distinctions between products and sectors. Because the new approach will involve change for firms, including internal systems development, we are proposing not to introduce the new requirements until early 2002. Ensuring that firms manage and control their risks adequately is a key part of the FSAs regulatory approach, contributing to the FSAs market confidence and consumer protection objectives."

At present, firms are subject to prudential requirements which evolved under the existing regulators who are merging to form the FSA, and these requirements differ from sector to sector. The FSAs aim will be to set out the new standards as far as possible according to the risks involved.

Implementation of the new prudential framework will take place in two stages. The first will come with the publication of the Interim Prudential Sourcebook at the time when the Financial Services and Markets Bill becomes effective expected to be the second half of 2000. This will largely reproduce in a single publication the current prudential requirements of the existing regulators. After a full

consultation process, the second stage will see the introduction in 2002 of the single FSA Integrated Prudential Sourcebook. This will set out new industry-wide prudential requirements for firms under various risk headings market risk, credit risk, operational risk, insurance risk etc.

The proposals to harmonise some of the existing requirements for banks and building societies reflect a long-standing commitment by the FSA to address as soon as possible the existing differences in treatment of similar risks. The proposed changes affect the capital adequacy treatment of certain types of business and are limited to changes that will not require significant systems development to implement. Subject to industry views, it is proposed that these harmonisation proposals will be implemented at the Interim Prudential Sourcebook stage.

The FSA is interested to hear the views of firms on the integrated approach set out in the consultation paper. Practitioner input, including from trade associations, has been helpful in developing the proposals so far and advisory groups are being established in order to continue this process. Comments on the consultation paper should be received by 7 January 2000.

Notes for editors

The Governments intention, as set out in the Financial Services and Markets Bill, is that the FSA should be a single statutory regulator of financial services business.

The Prudential Sourcebook, at both the Interim and Integrated stages, will form part of the FSAs single Handbook of Rules and Guidance.

The Bill received its Second Reading in the House of Commons on 28 June and is expected to become law during the first half of 2000.

The proposals for harmonisation of prudential requirements for banks and building societies are set out in Annex D of the Consultation Paper.

Consultation Paper 31 "The FSAs approach to setting prudential standards" is available priced 10 by sending a cheque payable to the FSA to the FSAs Sales and Distribution Department. Alternatively the Consultation Paper can be found on this Website at http://www.fsa.gov.uk/pdf/cp31annexab.pdf