The feedback for most areas was positive, requiring no change. But Waters said some rules have turned out to be over-prescriptive, which is why he thinks better regulation would be achieved with a principles-based approach.
The FSA favours this approach because it emphasises processes less and outcomes more, shifting the focus to the clients experience.
The FSAs Treating Customers Fairly initiative is one example of principles-based regulation which has resulted in some excellent borrower protection. Those few brokers and lenders who had a do the minimum attitude were forced to abandon their tick boxes and obliged to create a comprehensive philosophy for their sales process. TCF has also helped to influence changes to lender exit fee policies.
The FSAs principle 7 is integral to the new approach and states: A firm must pay due regard to the information needs of its clients and communicate information to them in a way which is clear, fair and not misleading.
I was initially concerned at Waters suggestion that financial promotions would be an area for the new principles-based approach because of the scope for misuse. Financial promotions range from non-real time to real time advertising to telephone calls. By its nature, printed material can remain in the public domain for months.
The MCOB rules stipulate what financial promotions should contain. For example, they specify terms such as higher lending charge that should not be substituted. This means that offenders can be easily identified either an ad contains an offending term or doesnt. It will be interesting to see how much detail the FSA leaves in as being mandatory. For now, the market will have to reach some level of acceptance when it comes to standardised terms.
But as the success of TCF so far has shown, in practice brokers and lenders are likely to respond well to principles-based regulation, continuing to communicate with clients in a manner that has been deemed fair in the past. They will have the ability to add to this by further examining how customers interpret promotional messages. Most importantly, it means we will have the discretion to be more creative with ways to benefit customers.
Finally, another positive aspect of the TCF initiative is the way it is addressing the inappropriate use of APRs in advertising. Unfortunately, the European Union insists on this format but discussion will highlight the benefits to customers of receiving independent advice including client-
specific true cost calculations.
Changes to come may include the FSA separating financial promotions types by level of risk and deeming some more appropriate than others for the purposes of principles-based regulation. I support the FSA in its willingness to tackle problem areas as we will all benefit from customers being better informed than they are.