EU likely to meet critics on op risk capital charge, UK regulator says

The European Commission’s final proposals on operational risk in investment firms within the Commission’s new capital adequacy framework are likely to meet the objections of critics, UK Financial Services Authority (FSA) managing director Michael Foot has said.

“After two years of lobbying, I am relieved to say there are signs of real progress with the Commission,” he told a London conference on operational risk today.

Foot did not go into details.

The Commission wants to apply capital adequacy rules to all banks and investment firms in the European Union from late 2006. The new rules are closely modelled on Basel II.

Basel II will for the first time require banks to set aside capital to guard against the risk of loss from operational hazards.

Critics of the EU proposals, like Foot, argued that op risk capital charges for investment firms should not be on the same scale as those for banks. But he added, “I am most definitely not saying that the operational risk debate is irrelevant for these firms.”

Foot said by far the most difficult issue in the EU capital adequacy debate would be to get an adequately differentiated regime for investment firms.

“By this, I mean a regime that recognises that vast numbers of [investment firms] do not trade for their own account, that many do not hold client money, and that credit and market risks are hugely smaller for most than they are in the banking sector,” he said.