Investment firms within the scope of the Capital Requirements Directive ("CRD") have much to do in 2007 in order to prepare for FSA’s new post-transitional rules which come into effect on 1 January 2008. In a nutshell, firms must ensure that they:

  • can perform their Pillar 1 capital adequacy calculations, meet the new Pillar 1 capital requirements and satisfy FSA’s new prudential reporting requirements;
  • have developed and documented an Internal Capital Adequacy Assessment Process ("ICAAP") as required under Pillar 2; and
  • can make the public disclosures required under Pillar 3.

This article highlights some key points concerning what is required for each Pillar.

Pillar 1

By the beginning of 2008, firms must be able:

  • to calculate capital resources and capital requirements in accordance with the rules set out in GENPRU and BIPRU at whatever levels are applicable; and
  • to meet the comprehensive set of new reporting requirements specified in FSA Instrument 2006/67 Annex C, which can be found under Instruments in the Handbook section of FSA’s website.

In addition to these broad requirements, some firms may have more immediate, specific issues to deal with during 2007, including:

  • preparing their first consolidated return on FSA 009 in compliance with the consolidation rules set out in BIPRU 8;
  • determining whether the group includes a non-EEA sub-group and therefore should submit FSA 028;
  • assessing whether the firm needs to apply for limitations on its principal dealing permission in order to qualify for the limited licence or limited activity categories;
  • if the group is an investment firm group and includes no BIPRU firms which are neither limited licence nor limited activity, assessing whether it is advantageous to seek a waiver from consolidated capital requirements.

Pillar 2

The development of an ICAAP is likely to be the most challenging CRD implementation task facing BIPRU investment firms in 2007. It is also likely to be important to the firm since FSA has stated "the ICAAP will be a key input into, but not sole determinant of, the level at which Individual Capital Guidance is given".

In brief, the ICAAP is a process which management must develop for assessing the amount of capital and other resources needed to cover the firm’s current risks and its future requirements, taking into account future plans and growth prospects, adverse market scenarios and wind-down costs. The ICAAP is required:

  • on a consolidated (but not a solo) basis when the firm belongs to a UK consolidation group subject to consolidated capital requirements set by FSA;
  • on a solo (but not a consolidated) basis when the firm has an investment firm consolidation waiver.

Firms must complete and send to FSA a questionnaire on their ICAAP (data item FSA 019) within two months of their accounting reference date.

Pillar 3

BIPRU investment firms must publicly disclose on at least an annual basis and "as soon as practicable" (i.e. presumably, early in 2008) a substantial body of detailed information regarding their exposures, risk management policies, capital requirements, capital resources and ICAAP. The rules do not specify where the information is to be disclosed but if the disclosures are not made in the financial statements, the firm must disclose where they are made.

Although there is a degree of overlap between IFRS 7 and Pillar 3, it should be recognised that Pillar 3 goes well beyond IFRS 7 in some respects, particularly with regard to capital resources and requirements and quantitative information generally.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.