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Our financial referee must tell us the rules

As any manager at the World Cup will tell you, it is important that they and their players understand how the game is going to be refereed so they can adapt their playing style and tactics accordingly.

And what’s true for football is true for the mortgage industry. Understanding how the mortgage market is regulated is essential.

The referee in the world of mortgages, the Financial Services Authority, has made it clear in the past 12 months that it wants to change the way it regulates financial services. Rather than relying on a vast and indigestible rulebook the regulator will carry out more of its work using principles.

The FSA claims principles-based regulation will allow for greater innovation and concentration on the goals of regulation rather than simply conforming to rules. Firms will have more flexibility in deciding for themselves how to meet their regulatory responsibilities.

I support this rebalancing of regulation away from the rulebook (that stands at more than 8,000 pages) toward principles, but it holds a number of difficulties.

The FSA principles are full of terms that are open to interpretations. Notoriously, Treating Customers Fairly, encased in Principle 6, raises questions.

To give just one example – are lenders that charge different rates through brokers than through their own branches breaking the principle?

This is where guidance is essential. The principles give an overall thrust to regulation, but little help with specific issues. Good communication between the FSA and the market is at the heart of this. It requires a commitment from both regulator and regulated.

For example, it is important to keep abreast of areas in which the FSA is looking for improvements. But the FSA must realise that we also need easily contactable compliance officers for difficult cases.

This adds another dimension to the market. Understanding and adapting to the changing system of regulation could give firms a competitive edge. Embracing the principles while producing innovative and technologically-driven ways to embrace them will bring benefits.

There is a worry about the loss of certainty in moving away from prescriptive rules toward principles and this worry is valid. There will be a bedding down period during which there will be more uncertainty. But as long as the FSA acts sensibly the unacceptable vagueness that surrounds the principles should disappear as interpretations become accepted.

We all have to accept the change and firms that adapt quickly and efficiently will reap the benefits.

Mike Culhane is cheif executive of The Oakwood Group

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