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Hector Sants, FSA Managing Director, said:
"The introduction of the Capital Requirements Directive will mark a huge step forward in developing a modern capital framework that will improve the risk sensitivity of capital standards for firms across the EU. Considerable uncertainties remain, however, not least in the timing of its introduction."This consultation paper follows extensive informal pre-consultation with industry. It will give firms a much better understanding of how they can prepare for the FSA's proposals to implement the CRD in the UK. We are committed to working with firms to help them to manage the introduction of the CRD and to ensuring proportionate and effective implementation. We encourage all firms to consider carefully the implications of the forthcoming changes and to engage with the opportunity offered by this consultation."
The Basel Framework, to which the CRD is linked, is based on three 'pillars':
- quantification of the risks arising from financial firms' trading and credit business;
- dialogue between regulators and firms on the risks run by firms and the level of capital needed to support them; and
- public disclosure by firms to enhance market discipline.
The CRD will apply to all deposit-takers other than credit unions, and to investment firms, though precise application of the CRD will vary across sectors. The timing of CRD implementation depends on the timing of the final agreement between the Council and the European Parliament. A number of other aspects of the CRD remain subject to work being carried on jointly by the Basel Committee and the International Organisation of Securities Commissions (IOSCO), and on the progress of EU legislation.
The implementation of the CRD will involve considerable work for those firms on which it impacts as they undertake the necessary systems and risk management work required by the directive. The FSA recognises the industry's long lead-time to make the necessary systems changes and is committed to providing firms with as much early clarity as possible, within the limitations imposed by the CRD not yet having been finalised. The CP issued today provides as much information as is possible, at this point, on the FSA's approach to implementation. It is focussed on those areas where the UK has significant national discretions to exercise and the industry seeks early signals on the FSA approach.
The CRD is the first major Directive to be implemented since the FSA and the Treasury made a public commitment not to be "superequivalent" in the UK implementation of EU directives unless there is a clear reason for requiring more than the directive text. There are a limited number of superequivalences set out in this CP, and in each case the CP explains why that is the course proposed.
Background
- CP05/3, Strengthening capital standards, closes for consultation on 29 April 2005.
- The draft Capital Requirements Directive (CRD) is not a single new directive. Rather it comprises the significant changes proposed to two existing Directives, the Banking Consolidation Directive (BCD) and the Capital Adequacy Directive (CAD). The amendments proposed would result in a 'recast BCD' and a 'recast CAD'.
- There remains considerable uncertainty about the timing of final agreement between the Council and the European Parliament on the text of the CRD. In order to allow Member States the 18 months normally allocated for implementation and to ensure that the Directive comes into force alongside the new Basel Framework, the text needs to be agreed by June/July 2005. The Parliament is currently not expected to deliver its draft Opinion on the Draft Directive before April/May 2005.
- This is the first of two CPs addressing the CRD; the second CP containing draft Handbook text for implementing all the CRD provisions is due to be published as soon as possible following final agreement of the text of the CRD. In early February the FSA will issue a Discussion Paper on Integrated Regulatory Reporting covering the reporting requirements of firms affected by the Capital Requirements Directive.
- 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.
- The FSA aims to promote efficient, orderly and fair markets, help retail consumers achieve a fair deal and improve our business capability and effectiveness.
