Principles not prescription preferred for Operational Risk Management

Their comments come in a Feedback Statement issued following responses from 45 financial sector firms and industry bodies to its Consultation Paper (CP05/3) 'Strengthening Capital Standards' which laid down the regulator's initial proposals for the Capital Requirements Directive (CRD). The Directive will be used across the EU to implement the Basel II Accord.

The consensus from respondents to the consultation paper was that requirements for the use test should take the form of guidance provided through high-level principles. This reflected a general concern that adopting a prescriptive approach could take the initiative away from firms. Several respondents also believed that the use test should be applied to the operational risk management framework, rather than just the operational risk measurement system.

Initiative and a sound risk management culture orchestrated by good governance is something the FSA is keen to encourage. They have indicated that for an operational risk framework to be successful it is essential it is closely integrated into a firm's day-to-day risk management processes rather than just be implemented for regulatory purposes. The framework must be embedded into a firm's culture, incorporating both the measurement and management of operational risk, and provide demonstrable benefits to the organisation. The FSA intends to include principles along these lines in the Prudential Sourcebook for Banks, Building Societies and Investments Firms (BIPRU).

The European Parliament is expected to deliver its opinion on the Capital Requirements Directive later in September. For standardised approaches, implementation will be effective from 1 January 2007 with implementation for the advanced approaches from 1 January 2008. A second consultation paper on the Capital Requirements Directive will be issued by the FSA around February next year.