Financial Services Bulletin - Regulatory Review


Key Points At A Glance

United Kingdom

Reports on the FSA's clarification of its new regulatory approach (particularly the FSA's development of a new risk assessment framework to deal with consumer, product, market and industry-wide issues).

Examines the FSA's single firm specific risk assessment framework.

Describes the proposals for the implementation of the European E-Commerce Directive (in broad terms restrictions on the provision of cross-border services by electronic means are to be removed with the introduction of a "country of origin" approach requiring member states to impose requirements on the outward provision of services and remove requirements on inward bound services).


Analyses the implementation of the outstanding proposals of the final report of the Committee of Wise Men on the Regulation of the European Securities Markets (the outstanding proposals are on market abuse, financial conglomerates and international accounting standards).


Reports on the Basel Committee's proposals on the relationship between banking supervisors and external auditors.

Regulatory Review

The last quarter has been relatively calm in regulatory terms certainly in comparison with the immediate pre-N2 period in the United Kingdom although some important initiatives have nevertheless either been launched or continued.

United Kingdom

The two most important areas of activity within the last quarter have been the clarification of the larger 'New Regulatory Approach' being constructed, and the implementation of the European E-Commerce Directive.

New Regulatory Approach

Focusing on its New Regulatory Approach, the FSA has issued a second report on Building the New Regulator (February 2002). This follows the original paper, A New Regulator for the New Millennium (January 2000) and a first progress report, Building the New Regulator (December 2000). The FSA's goal remains to maintain efficient, orderly and clean financial markets and assist retail consumers to obtain a fair deal. For this purpose, the FSA will assess risks which if realised would prejudice the fulfilment of its statutory objectives (taking into account the principles of good regulation also set out in the Financial Services and Markets Act). It will then prioritise activity having regard to relevant risk. A single firm specific risk assessment framework is to be constructed based on a number of impact and probability factors. This will replace, for example, the earlier bank RATE and securities FISBAM frameworks. In the last year, the FSA has developed further its strategic planning framework. This sets out its strategic aims over a three year period as well as providing a yearly review of regulatory priorities. It has tested the firm risk assessment framework on a desktop basis with sample institutions and completed work on the jurisdictional implications of the new regime including, in particular, how the FSA will work with other authorities abroad. It has also developed a new risk assessment framework to deal with consumer, product, market and industry-wide issues and has prioritised its initial work and resources for the 2002/2003 financial year.

The new operating framework set up under Progress Report 2 is based on a ten-stage cycle which includes its statutory objectives, an environmental assessment, the firm and non-firm regulatory risk analysis, its new responsibilities, strategic aims, strategic outcomes, prioritisation and resource allocation, regulatory response, performance evaluation and report on performance against objectives. The regulatory response stage is also now supported by two further eight part (parallel) risk assessment frameworks for firm risks and consumer, product and industry risks. These new frameworks included an impact assessment, discovery, probability assessment, decision on regulatory response and resource allocation, use of regulatory tools, ongoing assessment and response to risk change and performance evaluations.

The FSA has issued its Plan and Budget for 2002/2003 which is the first under the new regime. This includes a list of new strategic aims and priorities as well as performance measurement methodology and budget. The strategic aims are stated to be directed at consumers (putting consumers in a better position to be able to make informed choices and achieve fair deals), firms (ensuring that regulated entities and senior management better understand and secure their regulatory objectives), markets (ensuring that markets are efficient, orderly and clean, leading to enhanced confidence for market users including consumers and participants) and the regulatory regime (establishing proportionate and effective arrangements in which consumers, firms and other FSA stakeholders have confidence). The total budget for 2002/2003 is 180.5 million (which includes 9 million to cover additional responsibilities since December 2001)...

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