What Is the Financial Services Authority?

The Financial Service Authority (FSA) in the United Kingdom was reorganized in October 1997 from the Securities and Investments Board (SIB) established in 1985 as an independent non-governmental The organization intends to become the unified supervisory body of the British financial market, exercise statutory duties and report directly to the British Treasury.

Financial Services Regulatory Authority

Correct

According to the Financial and Market Services Act 2000, there are four aspects:

(1) Maintenance of the United Kingdom

United Kingdom as a global

Oversees banking, insurance and investment businesses,

Currently accepting

November 29, 2012

UK Financial Services Regulatory Authority Regulatory Process

FSA's regulatory process:

Step 1: Risk identification;

Step 2: Risk management;

Step 3: Assigning responsibilities;

Step 4: Prioritize work;

Step 5: Risk mitigation and monitoring.

In these steps, the overall risk profile of interest is assessed, then trends in risk are identified, and then the responsibility for risk supervision is delegated to specific departments of the UK Financial Services Authority.

UK Financial Services Regulatory Experience

Invited by the Australian Securities and Investments Commission (ASIC) to elaborate on the UK Financial Services Authority's (FSA) risk-based regulatory approach. There are several aspects discussed: the meaning of risk-based supervision, the reasons for adopting risk-based supervision, the practical significance of risk-based supervision, in other words, how to implement risk-based supervision in practice, and finally An important aspect is that some difficulties encountered in the actual work of risk-based supervision, focusing on the progress made in improving the supervision process.

With a brief introduction to the responsibilities of the UK Financial Services Authority and its ins and outs, let everyone know about this institution that I am introducing to adopt a risk-based regulatory approach. According to the Financial Services and Markets Act 2001, the UK Financial Services Authority was established as an independent regulatory body led by the Board of Directors. It was the merger of ten regulatory agencies before the establishment of the UK Financial Services Authority. The Act gives the UK Financial Services Authority four statutory goals: to maintain public confidence in the financial system; to promote public understanding of the financial system; to properly protect the interests of financial consumers; and to strive to reduce financial crimes.

It is worth noting that the above statutory objectives make the UK Financial Services Authority a unique and comprehensive financial regulatory agency in two ways: First, the UK Financial Services Authority's responsibilities include prudential supervision and consumer protection. In many countries, Prudential supervisory responsibilities are assumed by one supervisory authority, while consumer interests (and their business practices) are protected by a separate supervisory authority; the second is that the Financial Services Authority's responsibilities span the banking, insurance and securities industries. In many countries, these responsibilities are shared by three regulators. For example, in France, the banking industry has a banking regulatory commission, the securities industry has a financial transaction authority, and the insurance industry has an insurance and mutual aid authority (ACAM).

Principles of the Financial Services Regulatory Authority

The content of the risk-based approach is not first discussed from the British Financial Services Authority, but first from a financial institution to analyze the content of risk management of a financial institution. The basic characteristics are as follows:

1. A detailed description of the risks that the institution is prepared to take. This process is usually not strictly described as determining the risk appetite of the institution. The determination of this risk appetite may be ambiguous or clear

2. Identify capital, reputation, income, brand and other risks faced by the institution, as well as various business activities or events that will cause credit risk, market risk, operational risk, event risk, etc .;

3. Unified methods of quantifying the above risks, such as loan rating to quantify credit risk, value at risk to quantify market risk, credit risk, and operational risk, and stress testing to quantify event risk. There are many technical problems with each method, such as correlation, "fat tail" distribution, continuous validity of model relationships under fluid pressure, and lack of a clear and reasonable basis for determining the degree of stress testing;

4. Design and install a system capable of generating the above quantified risk information;

5. Determine and use internal control measures to manage the above risks. Typical control measures include setting limits (such as value at risk, credit exposure or other standards, etc.), authorization authority, etc .;

6. Assign the responsibility for managing risk to management personnel. This includes two parts of management personnel: one is the business management personnel who are engaged in various businesses or functions, and they have the primary responsibility for the organization's business management, including controlling risks within the previously recognized scope; the second is independent risk management personnel, Its mission is to challenge the identification, quantification and control of risks.

The UK's Financial Services Authority and financial institutions' risk management principles are very close to each other. They contain the same elements: setting goals (for us it is a statutory goal rather than a financial goal), determining our risk appetite, Risks faced by statutory targets, formulate uniform risk quantification standards, monitor these risks, and manage these risks through business managers who have direct management responsibilities and risk managers who raise objections. In a nutshell, the risk management processes of the UK Financial Services Authority and financial institutions are the same, and from a more abstract level, both are also the same for identifying, measuring, mitigating, controlling and monitoring risks. Cyclic process. As I said, after explaining the principles concisely, I will return to the practical application of risk management principles.

Reasons for the UK Financial Services Authority's implementation

At present, the UK Financial Services Authority adopts a risk-based regulatory approach, not because we should adopt the same policies as the regulated institutions, but for some more important reasons.

First, as a guiding principle, we have a clear goal of not pursuing a zero-failure attitude, that is, we do not try to prevent the failure of all regulated institutions, but believe that the failure of some institutions is inevitable, and in fact it is also Logical. The so-called inevitable is that no one regulator can control all the regulated institutions, so unexpected things will inevitably happen; the so-called logical is because returns and risks are accompanied by each other, and trying to control the risks to prevent all financial failures, then Will unduly restrain financial institutions. But we obviously do not ignore the major failures, because it will bring risks to the realization of our regulatory goals. Therefore, some means are needed to identify the most important issues. This is the essence of risk-based supervision.

Second, we know the scope of our regulatory responsibilities: 29,759 financial institutions, 165,544 employees, and an industry that accounts for 5% of GDP. We are obviously not a panacea. We need a mechanism that can distinguish which jobs should be prioritized.

Third, when the UK Financial Services Authority was established, we needed to build a common basis for risk analysis and regulatory approaches, not just a collection of regulatory approaches, namely the Securities and Futures Authority, the Securities and Investment Commission, and the responsible banks. Regulatory methods of the Bank of England, the Ministry of Trade and Industry and the Treasury related to insurance, the Committee on Building Mutual Aid, etc. Regardless of whether it is clear or not, each regulator has its own set of supervisory methods and practical practices, and what we need is a common supervisory method. This is why the UK Financial Services Authority has very explicitly proposed a risk-based supervisory method. s reason.

The practical significance of the UK Financial Services Authority

First of all, the risks we are concerned with are related to the four statutory objectives of the UK Financial Services Authority, namely maintaining public confidence in the financial system, promoting public understanding of the financial system, properly protecting the interests of financial consumers, and combating financial crime. . It should be noted that although the risks involved in these four statutory objectives may be related to the risks of financial institution management, they are still different. In fact, these statutory goals are extremely broad, so we need tighter and more focused risk management tools. To this end, we need to focus on specific sources of risk based on institutions and more generally.

1. Mainly based on institutional risk sources: financial failure; misbehavior and mismanagement; financial fraud; abuse of market power; money laundering; decline in market quality, etc.

2. Mainly based on non-institutional sources of risk: insufficient consumer understanding; failure to implement strategic priorities; damage to the reputation of the UK Financial Services Authority; and no economic and efficient use of our resources.

The practical significance of risk-based regulatory principles:

First, the risk-based supervision principle establishes our approach to supervision of institutions. We classify institutions according to their potential impact (can be replaced by the size of the institutions), and are divided into four categories: high, medium high, medium low, and low. The degree of attention to these four types of institutions is completely different. It is one extreme of tight and continuous regulation of institutions (basically a professional group monitors a major institution such as HSBC or Santander in the UK) to the other extreme, ie Extremely trust in special research, statistical analysis, and irregular sampling inspections (thus, for general insurance brokerage companies, we just collect data, understand the type of business the brokerage company engages in, analyze the overall situation of the brokerage company, and in the normal business process We do not require a visit or inspection of a brokerage company). Overall, the UK Financial Services Authority regulates 29,759 institutions, which are subdivided into the following categories:

Potential impact	Number of institutions	Regulation type
high	87	Strict and continuous
Medium high	423	Periodic inspection
mid Lo	900	Long-term temporary inspections
low	28,349	Statistical analysis / special research

As a result of this classification, about 90% of the institutions we supervise are never checked during normal business processes. We have adopted a similar regulatory approach for hedge fund management agencies. There are more than 300 hedge fund management agencies in the UK. We put information collection work on about 27 institutions (less than 10% of the total) as a way to manage this. The best means of risk in an industry.

The second is that the principle of risk-based supervision provides us with a general method of how to transform risk assessment into risk mitigation. We have Rules of Thumb for different levels of risk and decide when to take steps to mitigate the risks. These rules are:

1. Low risk: no need for slow-release measures;

2. Low and medium risk: there is no need for slow release, and corresponding reasons are needed to take appropriate slow release measures;

3. Medium and high risk: slow-release measures should be taken. If appropriate slow-release measures are not taken, corresponding reasons are required;

4. High risk: Mitigation measures must be taken.

It should be noted that there are factors of subjective judgment here: for low and medium risks, we may take mitigation measures as usual; on the contrary, for medium and high risks, we may also take measures as usual without taking measures This situation is questioned and requires explanation. In fact, our analysis is slightly more complicated and detailed, and we need to distinguish between different levels of impact and probability of occurrence. However, the central principle is that a consistent risk assessment method and the application of uniform decision rules are needed to determine whether measures to mitigate risks are needed. A risk-based approach to regulation determines how we need to take action.

Third, we use risk-based supervision methods to implement what is often a slogan of so-called "risk appetite". For example: In our work, as an institution with listing regulatory responsibilities, we changed the internal review process to reflect our risk assessment of prospectuses and announcement documents. Our risk assessment is based on a series of easy-to-understand factors, focusing on the type and complexity of the transaction, the size and status of the issuer, and other relevant factors. The level of risk derived from the assessment determines the depth of our review of the documents And the amount of resources we should invest in the review process. The benefits of doing so can enable us to focus our resources on real risk areas. The issuer files with the lowest risk level need only be subject to a limited scope of review, while the higher risk level The issuer's documents will be thoroughly reviewed by our most senior staff, or the measures we take when responding to financial issues are compatible with the risk assessment.

Problems and Improvements of the Financial Services Regulatory Authority

First, there is a political issue related to a clear policy of not pursuing zero failures. Despite the prior understanding of the logic of this policy, it was easily forgotten after the incident. When the fact of failure is captured, the regulatory agency is not considered to prevent the type of failure that has occurred from happening again. Expenses included in the total cost. When the failure has been criticized for having direct and adverse effects on consumers, it is difficult for the regulator to answer that he has made a judgment that it is not worthwhile to seek measures to prevent the failure of the institution, but sometimes it must be given reason. The same is true within the regulatory body, so that there is a firm attitude so that the staff of the UK Financial Services Authority understand that they sometimes need to choose not to take action (and bear the consequences), and sometimes they need to choose to take action. Although taking no action may have some adverse consequences, a decision not to take any action is not necessarily a wrong decision. But it must be a disturbing decision, and those who make it need the support of their senior management.

Second, we need to recognize that there are bound to be a number of factors in our regulatory process that require judgment. There is no algorithm that allows us to enter data and decide whether the UK Financial Services Authority should invest an additional £ 5 million to improve its ability to control market fraud, or to improve the general public's financial knowledge, or to use To improve the management information system within the UK Financial Services Authority or for any of our other potential resource needs. All of these decisions require judgment. Of course, judgment needs to be supported by risk analysis. At the same time, we need to use the most complete source of information we have, but in the end it still requires the use of judgment. For example: We have increased the annual funding of the British Financial Services Authority in popularizing public financial knowledge, from the two million pounds plan two years ago to ten million pounds. We believe that the current low level of public financial knowledge has given us legality Targets create risks and justify this adjustment, but it is still a judgment. We can improve our data collection and information processing processes, but these contents are always only the consideration of final judgment, and final judgment is still subjective, which is brought by the different legal objectives given to the British Financial Services Authority Inevitable results.

Third, much of the UK Financial Services Authority's data and market information is based on regulatory relationships with financial institutions. Although this information gives us a lot of insight, the information provided is not concentrated, so there is often a tendency to consider only a series of individual problems and ignore the potential patterns and themes that can connect them . For example: When I first joined the Financial Services Authority, I was trapped by two things: on the one hand, I was busy dealing with the difficulties faced by the independent financial advisory network (IFA) network in the UK; on the other, it affected the distribution of financial products The major legal and regulatory adjustments, the so-called depolarisation, have received relatively little attention. In order to overcome this imbalance, we have set up industry groups (for example: industry groups that study banking, asset management, insurance, accounting, etc.) to improve our systematic understanding of the economic drivers of the businesses we supervise. They will help correct imbalances in understanding specific institutions in detail, and rarely in a continuous dynamic understanding of the comprehensive issues affecting an industry.

Finally, we need to improve the flexibility of the UK Financial Services Authority in identifying and assessing new risks. We constantly adjust resources to reflect the results of new risk assessments, but this adjustment is often very slow, partly because we are better at adding new tasks, but not so good at ending existing tasks, and partly because staff are adapting to tasks The ability to convert needs to be improved. We need to speed up the response to newly identified risks and changes in risk focus. On the one hand, we have many measures to improve training to improve the mobility of our staff; on the other hand, our management information system is also being improved to make our resource allocation clearer.