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Citigroup® Global Transaction Services
Fiduciary Services
Citicorp Trustee Company Limited
Informal Compliance Update; September 2005
The changing face of ARROW and how you can prepare for an ARROW assessment

CTCL home page

This document is solely for information and we will not be responsible for updating any information contained herein. It is not intended to provide specific advice on any other matter. If advice is required you should consult your own advisors, legal or otherwise. No responsibility for any loss occasioned as a result of using this document is accepted. Under no circumstances is it to be considered an offer to sell or a solicitation to buy any investment or product. Citibank International plc (Luxembourg Branch) is regulated by the Financial Services Authority.
Citigroup(®)Global Transaction Services
© Citibank, N.A. 2005. All rights reserved. The information and materials contained in these pages, and the terms, conditions, and descriptions that appear, are subject to change. Any unauthorised use, duplication or disclosure is prohibited by law and may result in prosecution. Citibank, Citidirect, Citigroup and the Umbrella Device are registered service marks of Citicorp throughout the world. Citibank, N.A. is incorporated with limited liability under the National Bank Act of the U.S.A. and has its head office at 399 Park Avenue, New York, NY 10043, U.S.A. Citibank, N.A. London branch is registered in the U.K. at Citigroup Centre, Canada Square, Canary Wharf, London E14 5LB under No.BR001018 and is authorised and regulated by the Financial Services Authority. VAT No. GB 429 6256 29. Ultimately owned by Citigroup Inc., New York, U.S.A.

United Kingdom

Citicorp Trustee Company Ltd
Citigroup Centre
Canada Square
Canary Wharf
London E14 5LB
United Kingdom

Luxembourg

Citibank International Plc (Luxembourg Branch)
58 Boulevard Grande Duchesse Charlotte
L-1330
Luxembourg

Ireland

Citibank International plc Ireland Branch
1 North Wall Quay
Dublin 1
Ireland

Contact details

Sean Quinn European Head of Fiduciary Services sean.quinn@citigroup.com Tel: +44 (0)20 7500 5619 Fax: +44 (0)20 7500 5835	Stefano Pierantozzi Head of European Fund Compliance stefano.pierantozzi@citigroup.com Tel: +44 (0)20 7508 6651 London	Adam Willis Compliance Resource adam.willis@citigroup.com London
Darren Burrows Head of UK Funds Compliance darren.burrows@citigroup.com Tel: +44 (0)207 500 8847 Fax: +44 (0)207 508 0363 London	Cian O’Callaghan Compliance and Technical Manager cian.ocallaghan@citigroup.com Tel: +44 (0)207 500 8834 Fax: +44 (0)207 508 0363 London

Sean Quinn
Managing Director
Citicorp Trustee Company Limited

From discussions with our clients over the past number of months, it emerged that many of them are preparing for forthcoming FSA ARROW visits. In addition, those who had recently experienced an ARROW visit generally felt that both the tone and nature of the visit had changed somewhat from the earlier ARROW visits that they had undergone in previous years.

For this reason, we approached the FSA in order to gain a better understanding of their ARROW visit approach in order to gauge what our clients can now expect.

We are pleased to present an article written by Lyndon Nelson from the Risk Department (Finance, Strategy & Risk Division) of the FSA, on the ARROW visit concept, what changes are occurring and importantly, how such changes affect you and how you can prepare for such a visit.

In the article, Lyndon sets out what the FSA’s approach to ARROW will be in the wake of changes to the approach, as well as how firms can best prepare to make an ARROW visit as successful as possible.

We are very grateful to Lyndon for having written this article and hope that you find it useful.

The changing face of ARROW and how you can prepare for an ARROW assessment

By Lyndon Nelson, Financial Services Authority

The FSA is currently implementing changes to its ARROW framework. The ARROW framework guides the way in which we risk-assess and supervise firms, and some of the changes will result in visible differences for regulated firms.

The FSA launched ARROW in January 2001 in 'New Regulator for the New Millennium'. ARROW is central to the FSA's operation as a risk-based regulator, and it is this risk-based approach that is widely recognised as putting the FSA at the forefront of international regulatory best practice. Given the broad scope of the remit and the wide range of firms supervised, ARROW is rightly regarded as a good product.

However, the FSA recognised the need to review the operation of ARROW in its first few years and to draw on lessons learned. The very substantial increase in the number of smaller firms brought into the regulatory remit by Mortgage & General Insurance regulation provided an ideal opportunity for this. In reviewing the practical operation of the ARROW frameworks, the FSA has received feedback from a wide variety of stakeholders including regulated firms, trade associations and supervisors and has sought to ensure that the ARROW methodology remains central to how the FSA operates as a risk-based regulator.

What is ARROW?

ARROW is the methodology used by the FSA to undertake risk-based regulation, including the supervision of individual firms within our remit of responsibility, and thematic work covering actions relating to consumers, sectors or multiple firms. ARROW is used to analyse risks to our statutory objectives and to decide on appropriate responses.

The diagram outlines the fundamental principles of the ARROW framework, including the risk cycle. The ARROW methodology is grounded in identifying, assessing, prioritising and mitigating risks that arise from whatever source, including individual firms, which may impact on our statutory objectives. The methodology is designed to aid the FSA in prioritising the biggest risks and allocating suitable and sufficient resources and regulatory tools to them.

In supervising firms, the ARROW methodology directs the supervisor to make an assessment of the probability of business and control risks occurring within a firm and the impact, should they occur. This assessment drives the resources allocated to, and intensity of, the supervision of the firm by the FSA.

Although we are making changes to ARROW, the fundamentals of the methodology remain. However, we are making some amendments to associated procedures to improve ARROW's practical operation. An understanding of the basis of our ARROW approach is key to preparing for an ARROW visit.

What is changing?

The current ARROW project aims to address concerns that have arisen from a variety of stakeholders, both internal and external, about both the firm facing and thematic frameworks. Changes to the vertical (or firm facing framework) will be most visible to practitioners. The ARROW project is working towards a number of key outcomes, and those that will affect a firm’s experience of an ARROW assessment are outlined opposite.

Better communication with firms concerning our assessment of them

We have planned a number of changes to the process to help improve our communication with firms. In particular, the ARROW assessment letters to firms have been extensively revised to provide more focus on the main issues and what we expect firms to do about them. They will give firms a more helpful explanation of our view of the risks and how we view individual firms in the context of their peers. Following the roll-out of the new style letter, firms will be provided with draft copies of ARROW letters and risk mitigation programmes (RMPs) to allow correction of factual inaccuracies and misunderstandings and reduce surprises in the final letters.

Greater efficiency and effectiveness

In the near future we plan to make more and better use of thematic working by developing enhanced processes to identify those risks within firms that would be better dealt with through thematic working. In addition, we are developing and testing tools that will allow supervisors to leverage off the knowledge of the wider organisation, such as the work of sector experts and the experience gained from supervising other similar firms. These streamlined processes and improved IT support for supervisors will cut down on wasted time and allow supervisors to focus on the risks that matter.

Greater proportionality and consistency in response to risks – applying our resources where they will make the most difference

We are currently conducting a major overhaul to our risk framework to allow better comparison of risks in different areas, so that we can more reliably devote resources to the greatest areas of risk. We will also be exploring and testing options for placing greater reliance on well-controlled firms in our assessment work, which would allow for a lighter touch in these cases as well as a more informed assessment that makes better use of firms' own knowledge of the risks.

Improved skills and supervisory knowledge of staff

We are building on our current training and development provision for staff to provide them with more effective and comprehensive support and guidance to help them assess and mitigate the key risks that we face. In the near future we will plan to operate a training syllabus, similar to that for a professional qualification and leverage, as far as possible, off the industry's own training programmes whilst continuing to build on our extensive use of secondments.

How can you prepare for an ARROW visit?

An understanding of the FSA's risk-based approach is fundamental to a successful ARROW visit. When preparing for a visit, always remember that the FSA will be focused on assessing the risks that your firm may pose to the FSA's statutory objectives. The key to a productive ARROW assessment lies in preparation – thorough preparation will pay dividends by ensuring that you appear focused and coordinated.

Pre-assessment

You will find an indication of what is likely to come up in the assessment from the pre-visit information request. Taking time to prepare this information will help ease the assessment. Simple things, such as ensuring your firms' abbreviations are decoded, can aid understanding. Don't be afraid to prepare summaries of key issues and projects, rather than providing a full “blow-by-blow” account in the first instance. Take note of the FSA's Financial Risk Outlook and Business Plan – these will indicate the key areas that the FSA is focusing on. In the same vein, make sure you keep up to speed with what the FSA Sector Leaders are saying as sector priorities also feed supervisory priorities.

At this stage, also remember to keep in touch with your relationship manager –relationship management is a two way street, and an ARROW visit without surprises for the relationship manager is more likely to be a good visit for the firm.

Brief those who are likely to be interviewed. If they have a clear understanding of the FSA's aims and objectives this will help keep the interview focused. For those who have no previous experience of an ARROW assessment it may be useful to hold mock interviews. Encourage those who are being interviewed to bring key documents with them. They should have the detail to hand, but be ready to present the high level first. Remember that the FSA assesses risk in terms of business and control risk, and framing issues in this context can help get your points across clearly and concisely.

Assessment

During the visit you can stay on top of things by having a dedicated place that your staff can go to receive briefings. Agree with the FSA whether there will be note takers in meetings. Be prepared to accept that the FSA for some meetings may not feel a note taker is appropriate or perhaps a note taker from a certain area for that meeting. Many firms have benefited from having a close of day debrief on what issues have come up during the FSA interviews. It would help to provide the FSA with somewhere to work and carry out some interviews, but again don't be surprised if the FSA asks to hold some meetings in interviewees' offices.

Post assessment

Following the changes made to the post-assessment communication process, draft letters and risk mitigation programmes (RMPs) will be sent to firms. This is the stage at which you should ask questions about anything that is unclear. If you want to negotiate on anything in the draft letter or RMP then make sure you base your negotiations on outcomes if you feel you can achieve the same outcome that the supervisor wants but in a different way, that may be more timely or effective for you, then put that case. Your supervisor will consider your comments before sending a final version of the letter and RMP to the Board.

We feel that it is in the interests of both regulator and regulated that the ARROW risk assessment is as appropriate to the firm’s risk profile as possible. Although it may be too much to hope that it is an experience that will always be enthusiastically welcomed, we hope that the changes we are making will foster more understanding and cooperation. This will lead to a more efficient and effective process and help make the FSA easier to do business with.

Citigroup^®Global Transaction Services

www.transactionservices.citigroup.com

(c) 2005 Citibank, N.A. All rights reserved. The information and materials contained in these pages, and the terms, conditions, and descriptions that appear, are subject to change. Not all products and services are available in all geographic areas. Your eligibility for particular products and services is subject to final determination by Citigroup and/or its affiliates. Any unauthorised use, duplication or disclosure is prohibited by law and may result in prosecution. Citigroup, WorldLink and the Umbrella Device are registered service marks of Citigroup. Citibank, N.A. is incorporated with limited liability under the National Bank Act of the U.S.A. and has its head office at 399 Park Avenue, New York, NY 10043, U.S.A. Citibank, N.A. London branch is registered in the U.K. at Citigroup Centre, Canada Square, Canary Wharf, London E14 5LB under No.BR001018 and is authorised and regulated by the Financial Services Authority. VAT No. GB 429 6256 29. Ultimately owned by Citigroup Inc., New York, U.S.A.

Contents

Citigroup® Global Transaction Services Fiduciary Services Citicorp Trustee Company Limited Informal Compliance Update; September 2005 The changing face of ARROW and how you can prepare for an ARROW assessment CTCL home page

Citigroup® Global Transaction Services
Fiduciary Services
Citicorp Trustee Company Limited
Informal Compliance Update; September 2005
The changing face of ARROW and how you can prepare for an ARROW assessment

CTCL home page