RBS 2006 Annual Report Download - page 248
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RBS Group • Annual Report and Accounts 2006
Additional information
1.3 The FSA’s regulatory approach and supervisory standards
The regulatory regime 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 experts. 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.
As part of its regulatory approach the FSA carries out
regular risk assessments of the Group which is also
subject generally to direct and on-going FSA supervision.
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 is limited, but detailed conduct of
business requirements apply to general insurance
intermediary activities, mortgage business and investment
business activities.
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. Following the official adoption in the UK of the
EU Capital Requirements Directive, new prudential
sourcebooks were issued to take effect from 1 January 2007.
Many of the standards relating to the capital which firms
must hold to absorb losses arising from risks to its
business are determined by EU 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.
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 records 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 have confidence that they have bought
appropriate products, and so that UK insurers are able to
meet their liabilities and treat customers fairly. The FSA sets
requirements relating to ‘margins of solvency’ (i.e. the
excess of the value of assets over the amount of liabilities).
Companies carrying out insurance business are required
to submit regular returns covering reserves and solvency to
the FSA.
Firms must also meet standards relating to senior
management and internal controls and systems and must
comply with rules designed to reduce the scope for firms
to be used for money laundering. Revised Joint Money
Laundering Steering Group Guidance Notes were
published in February 2006 and came into force six
months later. The EU has published its draft Third Money
Laundering Directive which will supersede the two previous
Anti Money Laundering Directives. Implementation is
required by December 2007.
Conduct of business standards essentially govern key
aspects of firms’ relationships with customers, and require
the provision of clear and adequate information, the
managing of conflicts of interest and the recommending
of products suitable to the needs of customers. The
marketing of financial products (particularly investment
products) is subject to detailed requirements. The FSA is
scheduled to issue new conduct of business rules during
2007 to comply with the implementation of the Markets in
Financial Instruments Directive in November 2007.
1.4 Focus on customers
An important element in securing an appropriate degree
of consumer protection is ensuring that suitable
arrangements are made for dealing with customer
complaints. Firms are required to establish appropriate
internal complaint handling procedures and to report
complaints statistics to the FSA. Where an issue cannot be
resolved by the parties it may be referred for independent
assessment to the Financial Ombudsman Service.
The FSA's high level principles require all regulated firms
to treat their customers fairly. The FSA has undertaken a
number of industry wide thematic reviews on this issue,
and it has remained a primary supervisory theme
throughout 2006. The FSA has indicated that it will include
assessment of firms’ effectiveness in this area in regular
risk assessments of firms.
The Financial Services Compensation Scheme (financed
by levies on authorised firms) is available to provide
compensation up to certain limits if a firm collapses owing
money to investors, depositors or policyholders.