Trade bodies slam FSA 'achingly difficult' guidelines to Basel II

The financial watchdog released its draft handbook on March 7, outlining its interpretation of the directive, which is intended to implement the details of the Basel II capital Accord across the European Union. Five UK financial services associations – the British Bankers’ Association, the Council of Mortgage Lenders, the European Securitisation Forum, the International Swaps and Derivatives Association and the London Investment Banking Association – released their comments this week.

The associations have complained that the handbook is too complex and unclear for financial companies to use: some sections are "achingly difficult to understand" and language taken from the directive is inadequately explained, they said.

There were also more concrete criticisms. The FSA says companies will have to hold additional capital if their capital management plan is judged inadequate. But the associations criticised this as counter-productive, adding: "This proposal is conceptually misguided, goes beyond the requirements of CRD and other regulators, and is likely to have adverse effects on the wider economy."

The associations also called on the FSA to withdraw or postpone plans for a new risk treatment for credit derivatives. The supervisor proposed to move to a new treatment based on CRD requirements on January 1, 2007. But this would be a distraction from other CRD-related changes at the same time, the associations argued, adding that the FSA again requires more capital than the CRD minimum. The FSA, however, points out that its rules would still lead to a cut of 50% in capital requirements.

The FSA was also urged to increase and improve its guidance on resolving international issues. The market was still uncertain whether guidelines from the Committee of European Banking Supervisors had the same force as actual FSA rules, the associations said. In addition, the FSA's assumption that it would only need to advise a small number of firms on an individual basis was wrong, they claimed.

"There will always be occasions on which they need to go to FSA for an authoritative view... the FSA must ensure that resources are available to deliver this guidance. As a body that imposes obligations and punishes firms and individuals for breaching those obligations, the FSA cannot properly refuse to give individual guidance," the associations argued.

The FSA plans to issue the final version of the handbook in October this year, in time for the directive coming into force on January 1, 2007.

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