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FSA/PN/057/2005
26 May 2005

The FSA has today invited comments from firms on what constitutes good practice in the use of stress testing. Research by the FSA found that whilst stress testing has improved, there were wide variations in sophistication and coverage between firms.

The FSA has worked extensively with firms to establish the extent and type of stress testing carried out by firms and to establish what good practice would look like. This paper will help to disseminate examples of good practice to assist firms in developing their stress testing.

Hector Sants, the FSA's Managing Director for Wholesale & Institutional Markets, said:

"Stress testing is a key component of good management practice. The FSA has worked extensively with firms to understand current practice and in particular to develop thinking about good practice in this area.

I am encouraged that firms are improving their stress testing. However, the picture is mixed, and there is certainly scope for firms to improve their stress testing and to more fully embed it within their risk management process. It is also critical that senior management of firms engage with both the process and the outcomes. Stress testing should be a key component of a comprehensive approach to risk management. We are particularly keen that this comprehensive approach includes non-market risk such as reputational and operational risk.

The FSA does not plan new rules in this area. We will continue to work with firms to help them to develop their stress testing practices on a proportionate basis, appropriate to the firm."

In the autumn of this year the FSA intends to hold a conference to discuss with firms the development of stress testing methodologies and to utilise the feedback from the conference and the discussion paper to further refine the good practice model.

Notes to editors

1. The full discussion paper, Stress Testing, is available on the website.

2. Principle 3 of the FSA's principles for businesses says that "A firm must take reasonable care to organise and control its affairs responsibly and effectively, with adequate risk management systems".

3. Since 31 December 2004, all deposit takers, insurers and own account dealers have been required to undertake stress tests in relation to liquidity risk. General and life insurers are required to consider appropriate stress tests when assessing their level of capital under the Individual Capital Adequacy Standards (ICAS) regime. The introduction of the Capital Requirements Directive is also likely to increase the use of stress testing by firms.

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; securing the appropriate degree of protection for consumers; and fighting financial crime.

5. The FSA aims to promote efficient, orderly and fair markets, help retail consumers achieve a fair deal and improve its business capability and effectiveness.