United Kingdom
Implications of the FSA’s new liquidity proposals - Fiona Raistrick
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.
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”.
This will require banks, building societies and some investment firms to fully review and revise their risk management policies and procedures, specifically in relation to liquidity risk management. As a result, the recent disclosures made by HBOS look set to ensure that financial services risk management is going to become a red hot issue in the coming months.
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 some firms may be 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 may be required to hold a buffer for when times are tough and access to credit dries up.
One area that is causing particular concern is the FSA’s clampdown on the liquidity levels held by UK branches of foreign firms. Currently local branches 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.
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.
If you require clarification on how these proposals will affect you and advice on the best action to take please contact your local BDO Partner, or Fiona Raistrick who leads BDO’s Financial Serivces Regulatory Practice.