FSA fairly confident of ‘sensible’ op risk charge for investment firms

UK regulators are reasonably confident operational risk capital charges for investment firms proposed under new European Union (EU) rules will be “sensible”, the UK’s chief financial regulator said today.

Many UK investment firms, including asset managers and stock brokers, fear they could be heavily penalised from late 2006 by having to set aside costly amounts of capital to guard against the risk of losses from such hazards as fraud, technology failure and trade settlement errors.

Investment industry executives believe their firms have a much lower exposure to operational risks than the banks for which the new rules were initially designed.

The rules would be part of the European Commission’s third capital adequacy directive, or Cad 3, that the Commission wants to apply to all banks and investment firms in the 15-nation EU from late 2006.

UK Financial Services Authority (FSA) chairman Howard Davies said he was reasonably confident that the op risk capital charge for investment firms under Cad 3 “would be commensurate with the risk”. The FSA is the UK’s principal financial market watchdog.

But Davies said he could not be more precise because work on Cad 3 continues and is dependent also on the final outcome of the complex Basel II bank capital adequacy Accord.

Cad 3 is closely modelled on the risk-based Basel II Accord that the global banking regulators of the Basel Committee on Banking Supervision want to apply to large international banks from late 2006.

Basel II will determine how much of their assets major banks must set aside as a cushion against market, credit and operational banking risks.