Progress towards integrated prudential regulation

Clive Briault, Director of Prudential Standards at the FSA, said:

"We are publishing today a number of Consultation Papers and Policy Statements which will be building blocks towards the FSAs Integrated Prudential Sourcebook. Having in place one prudential regime operating across the whole financial sector will realise one of the key benefits of single regulation and will enable us to maintain better and more focussed oversight of the financial soundness of firms."

"We are aiming to introduce the integrated Sourcebook in several stages. The first, in 2004, will encompass a full new prudential regime for insurance companies and friendly societies as envisaged by the Tiner Project, plus systems and controls and financial resources requirements for all firms. The last will be by the end of 2006, following the implementation of the revised Basel Accord and related European Union capital adequacy legislation, when the Sourcebook will come fully into effect for banks, building societies and investment firms. In between we will bring in other provisions, notably liquidity risk and an integrated groups regime."

The Papers published today are:

• Policy Statement on Integrated Prudential Sourcebook: Feedback on CP115 (Integrated Prudential Sourcebook - timetable for implementation) and CP97 (Integrated Prudential Sourcebook). The feedback indicates wide acceptance of the principle of a single Prudential Sourcebook and the Paper outlines the revised timetable for implementation.

• Consultation Paper 142: Operational risk systems and controls. This sets out revised guidance to firms on the establishment and maintenance of appropriate systems and controls, including such areas as managing employees in relation to operational risk, managing inadequacies in a firms processes, outsourcing and business continuity management. One significant change from our earlier consultation on this topic is that we now propose to locate some of this guidance in SYSC (Senior Management Arrangements, Systems and Controls) rather than locating it all in the Integrated Prudential Sourcebook. This guidance in SYSC will apply to almost all of the firms that we regulate, and will cover both conduct of business and prudential aspects of firms operations.

• Consultation Paper 143: Integrated Prudential Sourcebook: Feedback on insurance chapters of CP97 and supplementary consultation. This covers responses to the insurance aspects of CP97 and also consults on two insurance-related issues: a) reserving for with-profits business with the aim that firms should hold assets to match both contractually guaranteed benefits and also a fair level of discretionary benefits; and b) applying credit risk requirements to insurance firms, particularly in the area of reinsurance protections. It also provides a route map for how the different strands of prudential regulatory reform for the insurance sector fit together, including confirmation of proposals to introduce new minimum capital standards.

• Consultation paper 144: A new regulatory approach to insurance firms use of financial engineering. The FSA announced last December that it would look at financial engineering as part of the Tiner Project and CP144 sets out amplified FSA guidance to insurance firms on the responsibilities of senior management for the proper conduct of financial engineering including financial reinsurance, contingent loans and other financing arrangements with a similar purpose or effect. Financial engineering can be a valid method of strengthening a firm's solvency position or accessing economic reserves within the technical provisions of life insurers. The proposed guidance emphasises the importance we attach to senior management satisfying themselves that any financial engineering which their firm uses or plans to use has a legitimate commercial purpose and effect and that, where a financial engineering arrangement involves risk transfer, the credit taken for solvency purposes is no more than is commensurate with the risk transferred and value added. It also proposes clearer presentation of the material in the regulatory returns about the effect of financial engineering on life insurers, friendly societies and with-profits funds.

Notes for editors

1. The papers published today, including contact details and timetable for comments, are available on the FSA Website www.fsa.gov.uk. CP97 was published in June 2001 and CP115 in November 2001 and they are also available on the Website.

2. Prudential regulation by the FSA requires the firms it regulates to remain financially sound. This includes specifying standards covering risk mitigation and other related requirements.

3. There are currently separate FSA interim prudential sourcebook for banks, building societies, insurance companies, friendly societies and investment firms. These will be replaced by the finalised, integrated Prudential Sourcebook.

4. The FSA regulates the financial services industry and has four objectives under the Financial Services and Markets Act 2000: maintaining market confidence; promoting public understanding of the financial system; the appropriate degree of protection of consumers; and fighting financial crime.

5. The FSA aims to maintain efficient, orderly and clean financial markets and help retail consumers achieve a fair deal.