Capital adequacy – it’s not just numbers

For information about Securities & Investment Institute events, visit www.sii.org.uk. Reporting by Timon Molloy.

The mere mention of capital adequacy tends to make compliance professionals grimace and turn quickly to the accounting technicians to crunch both the acronyms and numbers. Andrew Marsden-Jones, Head of Compliance, Morley Fund Management, part of Aviva, the insurance group, was very ready to concede that he’s not a boffin on the mathematical detail but in his presentation to the Securities and Investment Institute Compliance Professionals Summit 2007, he enumerated a clear role for compliance in the Internal Capital Adequacy Assessment Process (ICAAP); this is not something that should be avoided under the risk based approach, he suggested. Not only does the FSA want to understand all the business risks that a firm is running, which will have a direct bearing on the level of top-up capital it will need to hold above the regulatory minimum, but from a compliance angle this can be traced directly back to the Principles for Businesses, notably 3 (organise and control affairs responsibly and effectively, with adequate risk management systems) and 4 (maintain adequate financial resources). The definition of capital is no longer a strict arithmetic calculation, everything above Pillar 1 is “largely subjective and the compliance team may be in a position to advise the business on where the FSA is coming from.” He added, “You have to be able to advise senior management on a lot more matters these days and talk to FSA about a lot more or else risk being marginalised.” The main internal capital assessment (ICA) work at Morley was carried out by a combination of the business risk and finance teams, said Marsden-Jones, “I wasn’t managing but overseeing and putting [the results] in an FSA context.”