With firms starting to focus their attention on ICAAP requirements, the FSA has published guidance documents to help those firms encountering difficulties.
As we are now in the second half of 2007, BIPRU firms appear comfortable with the current Pillar 1 obligations, having experienced reporting under the transitional provisions. They are now turning their attention to implementing the full set of rules under the Capital Requirements Directive (CRD), which take effect from 1 January 2008. In accordance with this deadline, BIPRU firms need to finalise their Internal Capital Adequacy Assessment Process (ICAAP). However, it appears that a number of firms are having difficulty understanding exactly what is required.
The lack of precise guidance has been one of the biggest challenges as, due to the ICAAP being firm-specific, there is no generic calculation that can be applied. Consequently, there will be a variety of approaches taken, forms of documentation used, and overall assessments of capital. The Financial Services Authority (FSA) has now published three documents to assist firms with developing their ICAAP. These are outlined below and can be found at:
www.fsa.gov.uk/pages/about/what/ international/basel/info/pil2/index.shtml
1. The FSA’s Pillar 2 Assessment Framework
This covers the Supervisory Review and Evaluation Process (SREP) and is intended to help firms understand the rationale behind the SREP and the various levels of supervisory review, which depend on the size and complexity of the firm.
2. Initial observations on ICAAPs received to date – areas of weakness
The FSA has made some useful observations regarding the ICAAPs they have received, which include some obvious areas that have been overlooked. For example, a firm’s overall minimum capital requirement being lower than its Pillar 1 requirement; firms not projecting their business and capital plans for the recommended three to five years; and the ICAAP not being signed off by the board.
3. ICAAP: suggested format for smaller firms
Following on from the ICAAP submission template, published for firms whose activities are complex or moderately complex, the FSA has developed a similar template for smaller firms. While use of the template is not mandatory, it provides the headings that the FSA would expect to find in an ICAAP, in addition to the information it would expect under each heading.
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