5 - Systems and controls

Summary

Evolution of FSA's approach

FSA's current approach to firms' infrastructure is a hybrid development from both banking and securities regulation. The former started with the 1987 Banking Act under which the licensed bank had to ‘conduct its business in a prudent manner’ and, for this purpose, ‘maintain … adequate systems of control … to enable the business to be prudently managed and comply with the duties imposed … under this Act’ and the Bank of England, as supervisor, had to ‘publish … a statement of the principles in accordance with which it is acting … in interpreting the[se] criteria’. Initially the Bank stated that ‘considerations include … management arrangements; … general strategy and objectives; planning arrangements; policies on accounting, lending and other exposures … and recruitment arrangements and training to ensure that the institution has … experienced and skilled staff … to carry out its activities in a prudent manner’.

However, by the mid-1990's, ‘internal control systems should provide reasonable assurance that:

1. (a) the business is planned and conducted in an orderly and prudent manner in adherence to established policies;

2. (b) transactions and commitments are entered into in accordance with management's … authority;

3. (c) management is able to safeguard the assets and control the liabilities of the business …

4. (d) the … records of the business provide complete, adequate and timely information;

5. (e) management is able to monitor on a regular and timely basis … the adequacy of … capital, liquidity [and] profitability …

6. (f) management is able to identify, regularly assess and … quantify … risks.