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FSA to increase monitoring of banks’ private equity exposure

The Financial Services Authority says its approach to dealing with the potential risks posed by private equity has been endorsed by market participants in their feedback to a discussion pa

The Financial Services Authority says its approach to dealing with the potential risks posed by private equity has been endorsed by market participants in their feedback to a discussion paper that examined the impact of growth and development in the private equity market on the FSA’s regulation of the UK’s wholesale markets.

However, the UK financial regulator plans to increase its scrutiny of banks’ exposure to leveraged buyouts and will in future require private equity firms to provide information of committed capital as well as on funds actually drawn down.

The UK financial regulator says it views private equity as an important and growing part of a dynamic and efficient capital market. In Discussion Paper 06/6, entitled Private Equity: A Discussion of Risk and Regulatory Engagement, the FSA identified the risks it perceived as being posed to its statutory objectives by the growth in private equity and outlined the measures it has taken to mitigate these risks.

According to the FSA, the feedback it has received represents confirmation that it has correctly identified and prioritised those risks and that the proposed regulatory approach to dealing with them is appropriate and effective.

The regulator says the most significant risks that it identifies in relation to private equity, posed by market abuse and conflicts of interest, will remain key areas of regulatory focus, and that the alternative investments supervision team will be conducting further work in relation to conflicts of interest in private equity firms.

To strengthen its oversight of the potential impact of the private equity market, the FSA says it will improve its data collection through a bi-annual survey of banks’ exposures to leveraged buyouts as well as by enhancing regulatory reporting requirements for private equity firms to incorporate information on committed capital in addition to the existing requirement to report drawn down capital.

The regulator also says that reflecting the increasing complexity of financing and risk distribution typically associated with leveraged buyout transactions, it will conduct a targeted fact-finding exercise to understand the issues and risks inherent in dealing with financial distress and default in a heavily traded corporate name.

The FSA will chair the work of a task force commissioned by the International Organisation of Securities Commissions to assess the impact of recent developments in the private equity market and identify issues which can be addressed within its remit.

Says Hector Sants, the FSA’s managing director of wholesale business: ‘The feedback we have received to the November paper has confirmed that the current approach to supervising this market is broadly appropriate.

‘However, we remain committed to working with firms to ensure that our supervisory capability continues to remain highly focused on the key regulatory issues. When considering this document it is important to understand that we have restricted ourselves to addressing those issues which fall within the FSA’s remit.’

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