Costs of Living Wills Requirements Likely to be Considerable But Are Hard to Estimate, Says Kinetic Partners’ Shrimpton

The UK Financial Services Authority (FSA) has just released a new consultation paper on its proposals for recovery and resolution planning requirements, which estimates that the direct costs of implementation will be between £4 million and £35 million for “high impact” firms and the ongoing compliance costs to the industry will be between £150 million and £400 million. Andrew Shrimpton, member at financial advisory firm Kinetic Partners, explains to Reference Data Review that the true costs of the changes are likely to be considerable, but are hard to determine fully at this point in time.

“Firms will be faced with a considerable expense in preparing the plans and structures necessary to meet the FSA’s requirements, however, it is difficult to estimate at this stage exactly what the costs will be,” says Shrimpton.

On this note, he indicates that the resolution plan requirements are much harder to quantify than recovery plan requirements. “Recovery plans can be implemented fairly quickly, and become part of management’s ongoing contingency planning, without extensive additional cost to the firm. The resolution plan requirements, however, are completely new, and experience of other new regulations previously implemented suggests that the costs stated could be underestimates,” he explains.

Firms won’t have long to find out the initial implementation costs, given that the FSA is planning to publish the final rules in the first quarter of next year. At that point certain provisions will come into effect that will mean firms will be required to submit the first draft of their recovery and resolution plans in June 2012. Firms will therefore have six months to get the necessary data infrastructure in place to be able to pull together the required data on demand.

“Firms will have to go through many iterations and likely seek expensive external advice to ensure they have met all the requirements,” adds Shrimpton.

Back in November 2009, Fed board governor Daniel Tarullo indicated that in order to meet living wills requirements firms will need sufficiently robust data management systems in place to track data quality and provide audit trails for regulators. He therefore noted that a “very significant upgrade of management information systems (MIS) may be the only way for the firm to satisfy living will requirements”.