BIPRU 12.9 Individual liquidity guidance and regulatory intervention points

The FSA will give individual liquidity guidance to a standard ILAS BIPRU firm. Ordinarily, the FSA will give individual liquidity guidance after a review of a standard ILAS BIPRU firm's ILAA. The FSA will, however, issue individual liquidity guidance to such a firm whenever it is considered appropriate.

In assessing the adequacy of an ILAS BIPRU firm's liquidity resources, the FSA draws on more than just a review of the submitted ILAA, or in the case of a simplified ILAS BIPRU firm, the submitted ILSA. Use is made of wider supervisory knowledge of a firm and of wider market developments and practices. When forming a view of the individual liquidity guidance to be given to an ILAS BIPRU firm, the FSA will also consider the firm's ARROW risk assessment and any other issues arising from day-to-day supervision.

The FSA will take a risk-based and proportionate approach to the review of a firm's ILAA or ILSA, focusing where appropriate on that firm's approach to dealing with the risks it faces.

As part of the SLRP, the FSA will give a standard ILAS BIPRU firm individual liquidity guidance advising it of the amount and quality of liquidity resources which the FSA considers are appropriate, having regard to the liquidity risk profile of that firm. In giving individual liquidity guidance, the FSA will also advise the firm of what it considers to be a prudent funding profile for the firm. In giving the firm individual liquidity guidance as to its funding profile, the FSA will consider the extent to which the firm's liabilities are adequately matched by assets of appropriate maturities. In both cases, the FSA will have regard to the adequacy of a firm's systems and controls in relation to liquidity risk when judged against the standard described in the rules and guidance in BIPRU 12.3 and BIPRU 12.4. Individual liquidity guidance will therefore have two components:

1. (1)

   guidance about the firm's liquid assets buffer; and

2. (2)

   guidance about the firm's funding profile.

The FSA will ordinarily not expect to give individual liquidity guidance to a simplified ILAS BIPRU firm. However, if after review of such a firm's ILSA, the FSA is not satisfied that the simplified buffer requirement delivers an adequate amount and quality of liquidity resources for that firm, having regard to its liquidity risk profile, the FSA will issue the firm with individual liquidity guidance and may also consider revoking the firm's simplified ILAS waiver.

In giving individual liquidity guidance, the FSA seeks a balance between delivering consistent outcomes across the individual liquidity guidance that it gives to every ILAS BIPRU firm and recognising that such guidance should reflect the individual features of a firm. Comparison with the assumptions used by other firms will be used to trigger further enquiry.

Following an internal validation process, the FSA will write to the standard ILAS BIPRU firm whose ILAA it has reviewed, providing both quantitative and qualitative feedback on the results of the FSA's assessment. This letter will notify that firm of the individual liquidity guidance that the FSA considers appropriate together with its reasons for concluding that such guidance is appropriate. The FSA will adopt the same process where it chooses to give individual liquidity guidance to a simplified ILAS BIPRU following a review of that firm's ILSA.

Where the amount and quality of liquidity resources which the FSA considers a firm needs having regard to its liquidity risk profile are not the same as the firm's own assessment of those resources under its ILAA, the FSA expects to discuss any such difference with the firm.

Consistent with Principle 11 (Relations with regulators), the FSA will expect a firm to notify it if the firm does not propose to follow its individual liquidity guidance. The FSA will expect any such notification to be accompanied by a clear account of the firm's reasons for considering the individual liquidity guidance to be inappropriate. The FSA will expect to receive any such notification within one month from the date on which it gives individual liquidity guidance to the firm. If agreement through further analysis and discussion cannot be reached (including through use of the FSA's powers under section 166 (Reports by skilled persons) of the Act), then the FSA will consider using its powers under the Act (for example, its power under section 45 to vary, on its own initiative, a firm's Part IV permission or its power of intervention under section 196) so as to require a firm to hold such liquidity resources as the FSA considers are adequate having regard to the liquidity risk profile of the firm.

In relation to an incoming EEA firm or third country BIPRU firm, where the FSA gives that firm individual liquidity guidance in relation to its UK branch, it will have regard to the liquidity risk profile of the branch. In the absence of a whole-firm liquidity modification, the effect of BIPRU 12.2.1R (2)(b) and BIPRU 12.2.3 R is to require the firm to hold a liquid assets buffer of the amount identified as appropriate in its individual liquidity guidance (or in the case of a simplified ILAS BIPRU firm, the amount of its simplified buffer requirement unless this has been superseded by the FSA issuing individual liquidity guidance to the firm in question) in the form of a local operational liquidity reserve. Further guidance is given in BIPRU 12.5.39 G in relation to the local operational liquidity reserve. In determining the appropriate size of such a firm's liquid assets buffer the FSA will have regard to all relevant factors, including the extent to which the FSA has adequate data to enable it to assess accurately the liquidity risk elsewhere in the firm beyond its UK branch.

BIPRU 12.2.9 G records the FSA's recognition that in periods of stress a firm's liquid assets buffer may be eroded. It may also be the case that in such periods a firm's funding profile deteriorates such that it no longer conforms to the prudent liquidity profile described in the individual liquidity guidance given to the firm. Deviation by a firm from the terms of the individual liquidity guidance given to it by the FSA or, as the case may be, from the simplified buffer requirement, does not automatically mean that the FSA will consider that the firm is in breach of, or likely to breach, threshold conditions.

The FSA will examine any deviation on its own facts and will always want to understand clearly the reasons for that deviation and the firm's plans for remedying it. Deviation is, however, likely to prompt a re-examination by the FSA of the firm's compliance, and likely future compliance, with threshold conditions. The FSA will have regard to the information provided by the firm and to any other relevant factors in assessing the firm's continuing ability to satisfy threshold conditions. BIPRU 12.9.13 R to BIPRU 12.9.18 R set out a number of requirements which apply to an ILAS BIPRU firm that deviates from its individual liquidity guidance, or as the case may be, from the simplified buffer requirement.

1The FSA expects that a firm will respond dynamically to any deterioration in its liquidity position and will take contingent action as set out in its contingency funding plan well in advance of a potential event.

As part of the FSA's enquiry into the reasons for a firm's deviation, or expected deviation, from its individual liquidity guidance or, as the case may be, its simplified buffer requirement, the FSA may ask for further assessments and analyses of a firm's liquidity resources and the risks faced by the firm. The FSA may consider the use of its powers under section 166 of the Act to assist in such circumstances.

Consistent with Principle 11 of the FSA's Principles for Businesses (Relations with regulators), if a firm has not accepted individual liquidity guidance given by the FSA it should, nevertheless, notify the FSA as soon as it becomes aware of either of the events identified in BIPRU 12.9.14R (2)(a) or (b).

The FSA will assess the adequacy of the liquidity remediation plan submitted by a firm, including the likelihood of its success. A firm should expect that the FSA will want to discuss the terms of the liquidity remediation plan submitted to it under BIPRU 12.9.18 R. In its re-examination of the firm's compliance, and likely future compliance, with threshold conditions taken as a whole, the FSA will have regard to the adequacy of the firm's liquidity remediation plan.

Other things being equal, the FSA will expect a firm which is not experiencing a period of stress to restore its liquidity resources more rapidly than one which is under stress at the time that it deviates from its individual liquidity guidance or, as the case may be, from its simplified buffer requirement.

If agreement through discussion with the FSA cannot be reached as to the necessary actions and timescales to remedy deviation from that guidance, the FSA will consider using its powers under the Act (for example, its power under section 45 to vary, on its own initiative, a firm's Part IV permission or its power of intervention under section 196) so as to require the firm to take such actions as the FSA considers are necessary to return the firm to conformity with the terms of its individual liquidity guidance or, as the case may be, with its simplified buffer requirement.

Although BIPRU 12.9.17 R to BIPRU 12.9.21 G set out the FSA's likely approach, the FSA will take whatever action it considers appropriate in the particular circumstances of a given case.

A firm that deviates from current individual liquidity guidance that it has accepted or, as the case may be, from its simplified buffer requirement, will be experiencing a firm-specific liquidity stress for the purpose of the reporting rules in SUP 16 (Reporting requirements). Those rules require the firm to report specified data items more frequently than would otherwise be the case. Additionally, a firm that is implementing a liquidity remediation plan should expect that the FSA will wish to monitor its implementation of that plan. The firm's progress in achieving the remedial actions identified in its plan is a matter to which the FSA will have regard in considering the firm's compliance, and likely future compliance, with threshold conditions.

Although BIPRU 12.9.25 R requires notification and submission in the way prescribed in that rule, the FSA expects that a firm would also bring to the attention of its usual supervisory contact at the FSA the fact that it had made such a notification or submission.

For the purpose of the notification expected under BIPRU 12.9.26 G, the FSA would expect any such notification to be made in the way envisaged in BIPRU 12.9.25 R.