The Financial Services Authority (FSA) today sets out its proposals for implementing the EU Capital Requirements Directive (CRD). 'Strengthening Capital Standards 2' is the FSA's major consultation on this subject and includes the full set of draft Handbook rules and guidance.
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 (CP06/3) published today 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. These include the outcome of the Trading Book Review.
Following its previous consultation the FSA 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. The package proposed today meets cost benefit analysis disciplines and should find broad industry acceptance.
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 – a chapter has been devoted to this;
- the FSA's intention to establish a 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 for CP06/3 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. The FSA will hold a major conference on 21 March 2006 to highlight the most important aspects of the CP for firms and to discuss with them issues arising from the practical implementation of the new rules. The FSA intends to publish a Feedback Statement in July 2006 responding to comments received on CP06/3. The FSA plans to finalise the Handbook rules and guidance to implement CP06/3 by October 2006.
Background
1. The consultation paper can be found on the FSA website. The previous consultation paper, CP05/3 is also available on the website, together with the feedback statement to CP05/3.
2. Further detail on the FSA's implementation of the CRD including its consultation with UK industry can be found on the Basel 2 / Capital Requirements Directive pages of the FSA website.
3. The CRD is due to be implemented at two dates. The standardised approaches, the trading book provisions and pillar 2 and pillar 3 will take effect from 1 January 2007. The advanced approaches will take effect from 1 January 2008.
4. The FSA is working with insurance trade bodies and their members to communicate the limited but important ways in which CRD implementation and the consequent change to our Handbook will impact upon them. This is addressed in chapters 3 and 4 of CP06/3.
5. The FSA will be holding a conference on 21 March 2006 to discuss implementing the CRD.
6. At the end of May 2006, the FSA expects to publish a further consultation paper. This will contain proposals for simplifying the structure of the FSA's Handbook of rules and guidance following the introduction of the new CRD regime.
7. 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.
8. The FSA aims to promote efficient, orderly and fair markets, help retail consumers achieve a fair deal and improve its business capability and effectiveness.
