FSA Consults On Capital Requirements Directive

by Robin Pilgrim, LawAndTax-News.com, London

03 March 2006

The UK's Financial Services Authority (FSA) on Tuesday set out its proposals for implementing the EU Capital Requirements Directive (CRD).

The aim of the CRD is to introduce a modern, risk-sensitive prudential framework for credit institutions and investment firms across the EU. The CRD, which comes into force on 1 January 2007, was developed in line with the revised Basel framework which will apply from 1 January 2008.

The consultation paper published earlier this week, and entitled 'Strengthening Capital Standards 2', follows agreement of the CRD by the EU Council of Ministers on 11 October 2005. It concentrates on the main policy areas not discussed in the FSA's initial consultation, in January 2005, together with policy issues that have arisen in the intervening period.

Following its previous consultation, the FSA revealed that it has reviewed in discussion with the industry, areas where its proposals would have gone beyond the CRD text. A number of proposals (including those on economic cycle stress-tests and diversification benefits) have been rebalanced in this consultation in a more liberal direction. Work on others continues for the longer term.

Other key issues addressed in the consultation paper include:

• How the FSA intends to assess internal ratings based (IRB) and advanced measurement approach (AMA) waiver applications;
• The latest thinking on how the CRD will affect investment firms;
• The FSA's intention to establish an EU-recognised covered bond regime in the UK;
• The FSA's active involvement in the Committee of European Banking Supervisors (CEBS) and Accord Implementation Group's (AIG) work on CRD and Basel 2 implementation; and
• Reordering and clarifying various parts of the draft Handbook rules and guidance, in response to feedback from firms, to make the text easier for firms to navigate.

The consultation period ends on 28 April 2006. This is a shorter consultation period than normal, but has been agreed with industry representatives to allow as much time as possible to prepare for compliance with the new rules.

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