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Compliance Officer Portal - UK FSA Compliance
The Financial Services Authority (www.fsa.gov.uk, FSA) is an
independent non-governmental body, given statutory powers by the
Financial Services and Markets Act 2000.
The Treasury appoints the FSA Board, which currently consists of a
Chairman, a Chief Executive Officer, three Managing Directors, and
9 non-executive directors (including a lead non-executive member,
the Deputy Chairman). This Board sets our overall policy, but
day-to-day decisions and management of the staff are the
responsibility of the Executive.
The FSA is
accountable to Treasury Ministers, and through them to Parliament.
It is operationally independent of Government and is funded
entirely by the firms it regulates. The FSA is an open and
transparent organisation and provides full information for firms,
consumers and others about its objectives, plans, policies and
rules, including through this website. An area of this website
provides information specifically for consumers on financial
products, regulation and their rights.
The FSA
has been the single regulator for financial services in the UK
since December 2001, when they were given their statutory powers
by the Financial Services and Markets Act 2000 (FSMA).
A. Capital Requirements
Directive/Basel 2 and the FSA The original Basel Accord was agreed in 1988 by the Basel Committee on Banking Supervision. The 1988 Accord, now referred to as Basel 1, helped to strengthen the soundness and stability of the international banking system as a result of the higher capital ratios that it required. Basel 2 is a revision of the existing framework, which aims to make the framework more risk sensitive and representative of modern banks' risk management practices. There are four main components to the new framework: It is more sensitive to the risks that firms face: the new framework includes an explicit measure for operational risk and includes more risk sensitive risk weightings against credit risk. It reflects improvements in firms' risk management practices, for example the internal ratings based approach (IRB) allows firms to rely to a certain extent on their own estimates of credit risk. It provides incentives for firms to improve their risk management practices, with more risk sensitive risk weights as firms adopt more sophisticated approaches to risk management. The new framework aims to leave the overall level of capital held by banks collectively broadly unchanged. The new Basel Accord has been implemented in the European Union via the Capital Requirements Directive (CRD). It affects banks and building societies and certain types of investment firms. The new framework consists of three 'pillars'. Pillar 1 of the new standards sets out the minimum capital requirements firms will be required to meet for credit, market and operational risk. Under Pillar 2, firms and supervisors have to take a view on whether a firm should hold additional capital against risks not covered in Pillar 1 and must take action accordingly. The aim of Pillar 3 is to improve market discipline by requiring firms to publish certain details of their risks, capital and risk management. B. MiFID – the Markets in Financial Instruments Directive and the FSA MiFID – the Markets in Financial Instruments Directive – came into effect on 1 November 2007, replacing the Investment Services Directive (ISD). Amendments to UK legislation and rules to transpose to its provisions were made by the deadline of 31 January and came into effect on 1 November 2007. MiFID extends the coverage of the ISD and introduces new and more extensive requirements that firms will have to adapt to, in particular for their conduct of business and internal organisation. The aim of the ISD was to set out basic high-level provisions governing the organisational and conduct of business requirements that should apply to firms. It also aimed to harmonise certain conditions governing the operation of regulated markets. MiFID has the same basic purpose. But it makes significant changes to the regulatory framework to reflect developments in financial services and markets since the ISD was implemented. Wider scope It widens the range of ‘core’ investment services and activities that firms can passport. In addition to the services covered by the ISD, MiFID: Upgrades advice that involves a personal recommendation to a core investment service that can be passported on a stand-alone basis; Introduces operating a multilateral trading facility (MTF) as a new core investment service covered by the passport; and Extends the scope of the passport to cover commodity derivatives, credit derivatives and financial contracts for differences for the first time. Greater degree of harmonisation MiFID sets out more detailed requirements governing the organisation and conduct of business of investment firms, and how regulated markets and MTFs operate. It also includes new pre- and post-trade transparency requirements for equity markets; the creation of a new regime for ‘systematic internalisers’ of retail order flow in liquid equities; and more extensive transaction reporting requirements. Facilitate cross-border business MiFID improves the ‘passport’ for investment firms by drawing a clearer line between the respective responisibilities of home and host states and generally clarifying some of the jurisdictional uncertainties that arose under the ISD. Capital Requirements Most firms that fall within the scope of MiFID also have to comply with the new Capital Requirements Directive (CRD) which sets requirements for the regulatory capital a firm must hold. Those firms newly covered by MiFID will be subject to directive-based capital requirements for the first time. MiFID is a major part of the European Union’s Financial Services Action Plan (FSAP), which is designed to help integrate Europe's financial markets. MiFID comprises two levels of European legislation. ‘Level 1’, the Directive itself, was adopted in April 2004. In several places, however, it makes provision for its requirements to be supplemented by ‘technical implementing measures’, so-called ‘Level 2’ legislation. The Commission's Level 2 measures were developed on the basis of advice provided by the Committee of European Securities Regulators (CESR) and were the subject of negotiation at European level in the European Securities Committee (ESC). They were formally adopted by the Commission and published in the Official Journal of the European Union on 2 September 2006 (see European Timetable). Impact on firms In general MiFID covers most, if not all, firms that were subject to the ISD, plus some that were not. This will include: investment banks; portfolio managers; stockbrokers and broker dealers; corporate finance firms; many futures and options firms; and some commodities firms. In some areas, the position for firms is less clear-cut. For instance, retail banks and building societies will be subject to MiFID for some parts of their business – for example, selling securities, or investment products which contain securities, to customers - but not others. So, we have considered carefully whether that certain MiFID requirements should apply to some firms and business outside the scope of MiFID. We will consider each individual issue carefully, and consider the costs and benefits involved and consulting appropriately. Also, we have used implementation of MiFID as a catalyst for reviewing and simplifying our Handbook. We have removed rules that are no longer effective or proportionate, in line with our move towards more principles-based regulation. We have introduced a new Conduct of Business Sourcebook (COBS), which is shorter, simpler and easier for firms to use. These changes w affect all firms subject to Conduct of Business regulation, many of whom will not fall within the scope of MiFID. C. Solvency 2 and the FSA Solvency 2 is a fundamental review of the capital adequacy regime for the European insurance industry. It aims to establish a revised set of EU-wide capital requirements and risk management standards that will replace the current Solvency 1 requirements. Solvency 2 should help supervisors protect policyholders' interests more effectively by making prudential failure less likely, and reducing the probability of consumer loss or market disruption. It should also make it easier for firms to do business across the EU as the current patchwork of varying local standards will be replaced by more harmonised requirements. The framework under development consists of three ‘pillars’. Pillar 1 sets out a valuation standard for liabilities to policyholders and the capital requirements firms will be required to meet for insurance, credit, market and operational risk. Capital requirements may be calculated using a standard formula or, if firms have supervisory approval, they may use their own capital models. Pillar 2 will be the supervisory review process that focuses on evaluating the adequacy of capital and risk management systems and processes. Supervisors may decide a firm should hold additional capital against any risks not adequately covered in Pillar 1. The aim of Pillar 3 disclosures is to harness market discipline by requiring firms to publish certain details of their risks, capital and risk management. We expect that Solvency 2 will require firms to value their assets and liabilities on a market-consistent basis and that more risk-sensitive capital requirements will address asset as well as liability risks, consistent with the domestic prudential reforms that we implemented for insurers in 2004. The Lamfalussy framework’s four-level approach will be used to develop the new Solvency regime: Level 1 - Primary legislation to define broad 'framework' principles. Level 2 - The Commission adopts technical implementing measures, assisted by a regulatory committee and taking account of advice from the Committee of European Insurance and Occupational Pensions Supervisors (CEIOPS) Level 3 - Cooperation among national regulators to ensure consistent interpretation of Level 2 rules. Level 4 - Enforcement to ensure consistent implementation of EU legislation. Work on Solvency 2 is progressing well. The European Commission published its draft proposal for the Level 1 text in July 2007. The European Council Working Group (CWG) and the European Parliament have been discussing this text through Level 1 negotiations with HM Treasury, supported by the FSA, representing the UK in the CWG. At the same time the FSA is a member of CEIOPS, which provides technical advice to the Commission. Currently, CEIOPS is drafting advice on the Level 2 implementing measures and has conducted a number of quantitative impact studies (QIS) to test the financial impact and suitability of proposed requirements. --------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
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