[A-List] Financial regulatory crisis

["Keaney Michael" <Michael.Keaney@xxxxxx>]

CBI to lobby government over FRS 17:
Business is hoping to force changes to the controversial accounting
standard, say Michael Peel and James Mackintosh:
Financial Times; Feb 14, 2002
By JAMES MACKINTOSH and MICHAEL PEEL

The Confederation of British Industry is to ask the government to help
force changes to FRS 17, a controversial accounting rule that makes
companies reveal more about the health of their pension funds.

The CBI said it was concerned about the extra volatility in accounts
resulting from the new standard, which forces companies to reflect
movements in the market values of pension funds.

It reflects growing tensions in the business community between
enthusiasm for the extra transparency offered by FRS 17 and worries
about its effects on market sentiment and financial management.

"We will be seeking to raise it . . . with the government," said Susan
Anderson, CBI director of human resources policy. "What we have got now
is an accounting standard . . . that is very volatile and is having
unintended consequences."

The standard, which is being introduced in three stages ending in 2003,
is an attempt to make company pension fund deficits and surpluses
clearer.

The rule's insistence on annually-updated figures for pension fund asset
values ends the practice of using actuarial estimates that can differ
sharply from reality.

One concern relates to the standard's allegedly deleterious effect on
traditional occupational pension schemes under which companies promise
staff a pension based on a percentage of their final salary.

Both the CBI and the National Association of Pension Funds argue that
the volatility stemming from FRS 17 will make companies more reluctant
to guarantee pay-outs.

Another worry relates to the possible practical constraints that big
pension fund deficits could have on companies' ability to honour banking
covenants and pay dividends.

Concerns have been raised that disclosing big pension fund liabilities
may cause companies to breach solvency requirements, putting directors
at risk of legal action.

Banks and building societies are worried that the new rules could go
beyond accounting presentation and have an impact on their capital base.

"We would be concerned if UK rules looking different to other countries
meant there was a prejudicial effect on capital for banks operating
here," said the British Bankers Association.

The Financial Services Authority, which demands a minimum amount of
capital from each bank and society, is close to deciding if it will
avoid using the new accounting standard in its measure of capital.

It fears the standard could introduce too much volatility into a bank's
reserves, as a large pension fund deficit would directly hit its core,
or "tier one", capital. The bank would then have to set aside more
reserves to satisfy regulatory capital limits.

The Accounting Standards Board, which issued FRS 17 late in 2000, says
it gave companies plenty of time to consult on the new standard and kept
the government aware of its intentions. The board has always said the
standard is doing no more than drawing the attention of investors to
issues already facing companies.

The dilemma for many in the business community is that they are
concerned by some of the consequences of FRS 17, but are reluctant to be
seen as arguing against better disclosure.

The Institute of Directors and the Association of British Insurers,
which represents institutions controlling a quarter of the stock market,
are among those ambivalent towards FRS 17. "We haven't taken a decision
on whether FRS 17 is a good thing or a bad thing," said Richard Baron,
of the institute's policy unit. "We can see arguments both ways."

Full article at:
http://globalarchive.ft.com/globalarchive/article.html?id=020214001853&q
uery=Michael+Peel

Michael Keaney
Mercuria Business School
Martinlaaksontie 36
01620 Vantaa
Finland

michael.keaney@xxxxxx