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FSA starts to focus on the big ideas

The FSA’s shift toward a principles-based approach to regulation makes sense of the big ideas that underpin the system and is therefore not something to be feared, says Bill Warren

As we enter the second year of statutory mortgage regulation, the phrase “principles-based approach” is increasingly appearing in communications from the Financial Services Authority.

In his recent speech on the subject of the Treating Customers Fairly initiative, Clive Briault, the FSA’s managing director of retail markets, told delegates: “The more principles-based approach to regulation that we want to move towards requires that we, as the regulator, avoid a prescriptive approach to telling firms how they should discharge their responsibilities to treat their customers fairly.” Pulling back from the everyday necessity to act within the rules in order to focus on the principles may seem a tall order for hard-working mortgage advice firms but it’s a way of thinking we must all take on board.

A few weeks ago I looked at some of the eleven Principles for Business set out in the High Level Standards part of the FSA Handbook which form the backbone of what the FSA expects of approved firms. These were the principles that dealt with the ‘what and how’ of dealing with customers, as well as managing and controlling your business. This week, it’s the turn of the remaining principles that deal with attitude and commitment.

The principles that are grouped around the way we think and behave – as opposed to those that refer to the way we organise and perform within our businesses – are numbers 1, 2, 6, 9, and 11. These deal with concepts such as integrity, due care and diligence, fairness, trustworthiness, and openness and cooperation.

Looking at these five principles it is also important to remember the close relationship that the Principles for Business have to the other set of principles within the FSA’s High Level Standards – the Statements of Principle and Code of Practice for Approved Persons.

Business Principle 1 is that a firm must conduct its business with integrity. While this might seem to be a rather open-ended category, with integrity meaning different things to different people, the Code of Practice for Approved Persons is more specific when outlining what is meant by the Statement of Principle 1: “An approved person must act with integrity in carrying out his controlled function.” In the Handbook, section APER 4.1 gives a comprehensive outline of what does not constitute integrity. A few selected highlights include deliberately misleading a client, falsifying documents, destroying documents, failing to inform a customer that his understanding is incorrect and deliberately misusing confidential information.

Business Principle 2 is that “A firm must conduct its business with due skill, care and diligence” – and is also repeated in the Approved Persons Code of Practice. Behaviours laid out as not conforming to this principle include failing to inform customers of material information, failing to disclose details of charges and making a recommendation without understanding the liability of that action. The final point in section APER 4.2 mentions training and competence. I think T&C is the cornerstone of compliance with the “due care and diligence” principle. Only with proper training and knowledge can this principle be adhered to – without this there is little chance.

Business Principle 6,”A firm must pay due regard to the interests of its customers and treat them fairly”, is the basis of the FSA’s TCF initiative, on which there is currently plenty of published comment and information.

Moving to the last two principles that deal with more intangible topics, Business Principle 9 is about the relationship of trust with customers. For mortgage firms, the relationship of trust is linked to quality and suitability of mortgage advice, and whether it matches the needs of the client.

Principle 11 is about dealing with the regulator in an open and cooperative way and disclosing everything about the firm of which the FSA would reasonably expect notice. These requirements are reflected in the Approved Persons Statement of Principle 4, which gives useful examples of when approved persons will be considered to be transgressing.

The watchdog’s declared shift of emphasis to a principles-based approach is not to be feared. Instead, it starts to move the focus from the mere mechanics of regulatory compliance to the big ideas that underpin the system and make sense of it.

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