RBS 2003 Annual Report Download - page 217

Annual Report and Accounts 2003
215
Additional information
The FSA’s statutory objectives are to maintain confidence
in, and to promote public understanding of, the UK financial
system; to secure an appropriate degree of consumer
protection; and to reduce the scope for financial crime. In
achieving these objectives, the FSA must take account of
certain “principles of good regulation” which include
recognising the responsibilities of authorised firms’ own
management, facilitating innovation and competition and
acting proportionately in imposing burdens on the industry.
1.2 Authorised firms in the Group
Currently, around 30 companies in the Group, spanning a
range of financial services sectors (banking, insurance
and investment business), are authorised and regulated to
conduct regulated activities by the FSA. These companies
are referred to as ’authorised firms.’
The FSA supervises the banking business of the UK-
based banks in the Group, including The Royal Bank of
Scotland plc, National Westminster Bank Plc, Coutts & Co,
Ulster Bank Limited and Tesco Personal Finance Limited.
General insurance business is principally undertaken by
companies in the Direct Line and Churchill Insurance
Groups, which form part of the RBS Insurance division,
whilst life insurance business is undertaken by Royal
Scottish Assurance plc and National Westminster Life
Assurance Limited (with the Group’s joint venture partner,
the AVIVA Group) and Direct Line Life Insurance Company
Limited. Investment management business is principally
undertaken by companies in the Wealth Management
Division, including Adam & Co Investment Management
Limited and Coutts & Co Investment Management Limited.
1.3 The FSA’s regulatory approach and supervisory standards
The regulatory regime focuses on the risks to the FSA of
not meeting its statutory objectives and uses the full range
of regulatory tools (including the authorisation of firms,
rule-making, supervision, investigation and enforcement)
available to the FSA. It is founded on a risk based,
integrated approach to regulation.
The FSA can request information from and give directions
to, authorised firms. It may also require authorised firms to
provide independent reports prepared by professionals.
The FSA can exercise indirect control over the holding
companies of authorised firms via its statutory powers to
object to persons who are, or will become, “controllers” of
these firms.
Given the number of authorised firms in the Group and the
range and complexity of business undertaken by them, the
FSA has carried out a comprehensive risk assessment of
these firms and generally, they are subject to direct and
on-going FSA supervision.
Setting standards for firms
The FSA carries out the prudential supervision and
conduct of business regulation of all authorised firms and
also regulates the conduct of their business in the UK.
Currently, the application of its conduct of business rules
to banking business and general insurance business is
limited but the FSA will be assuming powers to regulate
general insurance intermediation activities from January
2005 (as noted below) and this will have a significant
impact on that sector.
Prudential supervision includes monitoring the adequacy
of a firm’s management, its financial resources and internal
systems and controls. Firms are required to submit regular
returns to the FSA which provide material for supervisory
assessment. Different prudential requirements have applied
to different sectors of the financial services industry.
However, the FSA has prepared an Integrated Prudential
Sourcebook (aimed at applying a more harmonised and
consistent approach to prudential regulation across the
whole industry) and this is expected to be implemented in
stages, from the end 2004 until the end of 2006.
The EU Financial Groups Directive comes into force on
1 January 2005 and is to be implemented as part of the
Integrated Prudential Sourcebook. This will create an
additional set of regulatory requirements recognising the
insurance, investment and banking business of the Group
as a financial conglomerate with banking, investment and
insurance businesses.
Many of the standards relating to the capital which firms
must hold to absorb losses arising from risks to its business
are determined by EC legislation or are negotiated
internationally. The current capital adequacy regime requires
firms to maintain certain levels of capital, of certain specified
types (or tiers), against particular business risks.
A parallel process of reviewing and revising the current EU
Capital Adequacy requirements is also underway. This will
impact on all European banks and investment firms. The
EU Risk Based Capital Directive is expected to be finalised
in 2004 so that it can be implemented by Member States in
parallel with Basel II, at the end of 2006. In the UK, the
relevant changes will be implemented via changes to the
FSA’s Integrated Prudential Sourcebook.
In its supervisory role, the FSA sets requirements relating
to matters such as consolidated supervision, capital
adequacy, liquidity, large exposures, and the adequacy of
accounting procedures and controls. Banks are required to
set out their policy on “large exposures” and to inform the
FSA of this. The policy must be reviewed annually and any
significant departures from policies must be discussed with
the FSA. Large exposures must be monitored and controlled.
As regards the insurance industry, the FSA’s primary
objective is to regulate and supervise the industry so that
policyholders may have confidence that they have bought
appropriate products, that UK insurers are able to meet