The Financial Services Authority (FSA) has set out its proposal today for a new capital adequacy framework which would link the amount of capital a firm is required to hold more closely to its specific risks.
The new approach would contain two elements: a self-assessment undertaken by firms, and a supervisory assessment under which a company may be required by the FSA to hold additional capital.
The FSA said the move is intended to ensure the financial soundness of the firms it regulates. It will also harmonise the approach taken to determining adequate capital levels in the various financial sectors.
FSA director of prudential standards Clive Briault said: "The purpose of the proposed framework is to reduce the likelihood that consumers will suffer loss or that markets will be disrupted as a result of the financial failure of a firm, although the possibility of failure can never be removed altogether.
"The main benefits of this proposed framework are that it meets our overall aim of reducing the probability of prudential failure, in a cost efficient way that creates greater transparency in the arrangements for setting regulatory capital levels, while at the same time promoting a strong culture of risk management."
"We have included within this paper proposals for the setting of an enhanced risk-based capital regime for insurance and for major securities firms. It also includes proposals on how we intend to meet our supervisory responsibilities under the new Basel Capital Accord."
The FSA reiterated that it proposes to implement its new regulatory requirements in 2004 for insurance firms.
