Liquidity proposals even more important in light of HBOS revelations

- foreign banks may leave UK as a result

The FSA’s consultation paper on Strengthening Liquidity Standard is set to become even more important in the light of the HBOS revelations over risk management, comes the warning from accountant and business adviser BDO LLP.

One of the key components of the new liquidity proposals is Principle 3 which states that “A firm must take reasonable care to organise and control its affairs responsibly and effectively, with adequate risk management systems”.

Fiona Raistrick, Head of the Financial Services Regulatory Practice, at BDO says: “This will require all banks, building societies and investment firms to fully review and revise their risk management policies and procedures.  As a result, the disclosures made by HBOS over the last few days look set to ensure that financial services risk management is going to become a red hot issue in the coming months.”

However, many investment firms have expressed their surprise at being included in the scope of the regime, as when the FSA initially outlined its proposed changes, many thought they were exempt. 

“In the last week or so we’ve been fielding anxious calls from investment firms who are confused as to whether the proposals are applicable to them,” continues Raistrick.  “In the current market such confusion is not helpful as firms are merely trying to keep their head above water.”

In addition to undertaking a full review of their risk policies, firms will be required to develop individual liquidity risk assessments which will need to review, assess, document and stress-test liquidity risk.  The outcome will be that firms are required to hold a reserve of highly liquid and high quality assets to act as an ‘additional defence for firms’.

“Essentially this means that firms are required to hold a buffer for when times are tough and access to credit dries up.  As this is not a ‘one size fits all’ policy, the question most regulated firms are asking is ‘how much is enough?’ as they want to avoid being penalised for not having adequate financial resources,” points out Raistrick.

“However, it is essential that firms review the consultation and consider the implications, sooner rather than later as the final rules are expected to be released in April and become effective in October 2009.  Therefore the clock is already ticking,” warns Raistrick.

Foreign banks may leave UK shores

One area that is causing considerable concern is the FSA’s clampdown on the liquidity levels held by UK branches of foreign firms.  Currently firms rely on group liquidity whereas the new arrangements would see individual branches having to be self sufficient in terms of funding or apply for a waiver from the regulator - causing significant unease for many.

“We have had a number of foreign banks who operate in the UK contact us to clarify the requirements.  When we’ve explained the process, the response has been that they would consider leaving the UK’s shores.  Some have even gone as far as labelling the requirements ‘ridiculous’,” says Raistrick.

“In light of the current economic turmoil the UK should be doing all it can to position itself as a serious financial services player and maintain its competitive advantage.  Forcing UK branches of foreign banks to close will only harm our reputation on the world’s stage,” concludes Raistrick.

ENDS

For more information, please contact Dee Crooks at BDO on 020 7893 2761 / 07815 172 051 or email dee.crooks@bdo.co.uk

Notes to editors:

BDO’s Financial Services Group is the fastest growing sector in BDO and covers a number of areas including insurance, banking, funds, internal audit, regulatory issues, retail financial services and investment management.

BDO LLP operates across the UK with over 3,000 partners and staff. BDO LLP is a UK limited liability partnership and the UK Member Firm of BDO International. BDO International is a world-wide network of public accounting firms, called BDO Member Firms, serving international clients. Each BDO Member Firm is an independent legal entity in its own country. The Belfast Firm is operated by a separate Partnership.

BDO LLP and BDO - Belfast are both authorised and regulated by the Financial Services Authority to conduct investment business.

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