The CRD overhauled the capital requirements for banks and investment firms within the scope of the main European Directives on financial services legislation with a new risk based framework for capital adequacy. The changes include the way capital requirements are assessed, and the systems and controls firms need to have in place.
CRD was implemented in the UK on 1 January 2007, although a number of the rules did not fully come into force until 1 January 2008. The capital requirements for all firms subject to CRD are now contained in the GENPRU and BIPRU sourcebooks.
The FSA rules allow for advanced approaches and the use of internal models, subject to various checks and balances. Substantial parts of the rules and guidance are concerned with these more sophisticated approaches, which will be of interest mainly to larger and more complex firms. Attention is now firmly on implementation for the majority of medium and smaller firms which use the less complex, standardised approaches. Firms need to be clear about how they are categorised under the new arrangements and which approaches and rules are appropriate to them.
One of the new requirements is the development of an Internal Capital Adequacy Assessment Process ("ICAAP"). Firms subject to CRD should have put in place an ICAAP by 1 January 2008. This process involves the assessment of risks and scenario testing to establish whether additional capital needs to be held. As part of FSA's Supervisory Review and Evaluation Process firms may be required to submit their ICAAP to FSA for review.
The CRD has also led to changes in the way firms report their capital position to the FSA. Firms need to understand the way in which their reporting requirements and mechanisms are changing, which includes a move to mandatory electronic reporting in the second half of 2008.
FSA have issued some practical guidance on their website on CRD. They recognise, however, that firms may need to take professional advice as this area is relatively complex.
If you need assistance, we can provide help with all or any part of the process, tailored to the particular needs of your business. For example:
- categorisation is driven primarily by existing scope of permission. If your scope of permission is wider than needed for the business you actually do, you may be required to have more capital than you strictly need. We can help you review your scope and ensure that your business is organised in the most capital-efficient way;
- we can advise on new or improved systems and controls, in line with the extended requirements of the new rules, including drafting new written procedures if required;
- we can help you devise, execute and monitor an appropriate implementation project to ensure you are fully compliant with the new rules;
- we can advise on and assist with the development of your ICAAP;
- we can help you map out the regulatory returns you will need to submit under the mandatory electronic reporting system.
See also our Briefing notes on Integrated Regulatory Reporting, Systems And Controls, and ICAAPs.