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The FSA will probe private equity risks

The Financial Services Authority will continue to probe the risks posed by private equity of market abuse and conflicts of interest.

The regulator today published its feedback to Discussion Paper 06/6 Private Equity: A discussion of risk and regulatory engagement, which examined the impact that growth and development in the private equity market has on the FSA’s regulation of the UK’s wholesale markets.

The FSA views private equity as an important and growing part of a dynamic and efficient capital market.

In DP06/6 the regulator identified the risks it perceived were posed to its statutory objectives by the growth in private equity and outlined the measures taken to mitigate these risks.

The feedback received confirmed that it had correctly identified and prioritised those risks and that the proposed regulatory approach to dealing with them was appropriate and effective.

The most significant risks that the FSA continues to focus on in relation to private equity are those posed by market abuse and conflicts of interest.

These will remain key areas of regulatory focus and the alternative investments supervision team will be conducting further work in relation to conflicts of interest in private equity firms.

In order to strengthen its oversight of the potential impact of the private equity market the FSA will improve its data collection on this market through conducting a bi-annual survey on banks’ exposures to leveraged buyouts.

It will also enhance regulatory reporting requirements for private equity firms to incorporate information on committed capital in addition to the existing requirement to report drawn down capital.

Additionally, reflecting the increasing complexity of financing and risk distribution typically associated with leveraged buyout transactions, the FSA will be engaging in 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.

Also, the International Organisation of Securities Commissions has commissioned a taskforce to assess the impact of recent developments in the private equity market and identify issues which can be addressed within its remit.

The FSA will be chairing the work of this taskforce.

Hector Sants, managing director of wholesale business at the FSA, says: “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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