FSA proposes new capital adequacy framework

Britain’s principal business regulator, the Financial Services Authority (FSA), is seeking comments on its proposed capital adequacy framework, which is designed to more closely align the amount of capital a company holds with the risks it takes.

The new framework - which the FSA said is particularly relevant to deposit-takers, insurers and investment firms with permission to take principal positions - proposes having more companies self-assess their capital requirements. “The self-assessment process should encourage ownership by the firms’ senior management and provide incentives to them to identify and manage their business risks and systems and control risks,” said the FSA.

The supervisory body said the proposed framework reflects a new risk-based approach to regulation, adding that it builds on existing requirements that currently do not capture “all the risks facing all firms”.

Clive Briault, director of prudential standards at the FSA, said: “This proposed framework... meets our overall aim of reducing the probability of prudential failure... while at the same time promoting a strong culture of risk management.”

The FSA proposes implementing the new requirements in 2004 for insurance firms. It plans to implement them for other firms at a later date, depending on progress made with the revised Basel capital Accord and European Union capital adequacy legislation.

The FSA is seeking comments by August 2002. Responses can be made online at the FSA’s website (www.fsa.gov.uk).