If you are a small investment firm or building society, the FSA will be expecting you to be fully up-to-speed on its new regime on liquidity. Why? Because like the larger capitalised banks, you too are subject to its implementation.
Members of Wright Hassall’s Financial Services team took part in the first industry event on liquidity, on October 29 2009, at which the FSA brought together banks, investment firms, industry experts and key players in the financial services sector in order to explain the new regime. The “headline” message was clear - banks must now maintain liquidity buffers by investing into highly liquid stocks to increase the percentage of saleable assets within their share capital. In practice, large quantities of asset backed securities and bonds will be sold and government bonds purchased in their place. The FSA expects all entities subject to the new regime to begin implementation without delay in order to meet the deadlines and create a robust system for monitoring and maintaining liquidity standards.
Under the regime, larger banks are subject to both the qualitative and quantitative requirements and must begin detailed reporting on liquidity. But what does this mean for “smaller” regulated entities - defined as those with total assets (less called–up capital, minority interests and reserves) of less than £50million? This covers firms categorised by the FSA as full-scope BIPRU investment firms and limited licence / limited activity BIPRU firms.
Unlike larger banks, smaller firms are only subject to the qualitative aspect of the regime and must ensure that they apply the systems and controls standards that adequately mitigate liquidity risk. Smaller firms are expected to implement liquidity risk management standards that are proportionate to the nature, scale and complexity of the risks specific to them.
Smaller firms must also demonstrate adequate liquidity resources and self-sufficiency to ensure that they can ‘stand alone’ without relying on any other part of their group. All firms must implement the systems and controls requirements from the fourth quarter of 2009, as there is no transitional period for implementation. Smaller firms cannot turn a blind eye to the new qualitative standards as they will find they need to complete an annual report confirming that they are compliant with the systems and controls requirements.
This distinction for smaller firms was incorporated into the regime as a result of feedback received on the FSA’s consultation paper on strengthening liquidity standards. While an individualised quantitative regime was generally accepted as appropriate for larger banks, it could have a disproportionately more significant impact on smaller firms, especially full-scope BIPRU investments firms such as stockbrokers and private client investment managers.
Under current market conditions these new liquidity requirements will impact the profitability of smaller firms as they will face increased costs associated with implementing new systems and controls.
So what happens if you do not meet liquidity standards? The FSA has recommended that you will need to put in place a liquidity remediation plan, and they will work with you to monitor the delivery and management of the plan.
In an attempt to prevent any repeat of the collapses witnessed in the case of large financial institutions in 2008 (Northern Rock; Lehman Brothers) the FSA’s new regime means smaller firms will be subject to increased compliance costs. This may prompt some senior managers to postpone implementation, but the FSA has warned that firms will have to face the consequences if their systems and controls prove inadequate.
For further information on the impact on your business and implementation of the FSA rules on liquidity please contact Steven Janes on 01926 884752 or Tim Goodman on 01926 884674.
December 2009
We have taken care to ensure the accuracy of this publication. However, the publication is written in general terms and you are strongly recommended to seek specific advice before taking any action based on the information it contains. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication.
