Principles based regulation to cost firms less

A study into the cost of regulation has revealed that the Financial Service Authoritys shift towards a more principles based approach to regulation should have consequential cost advantages for firms.

Commissioned jointly by the FSA and the Financial Services Practitioner Panel and prepared by Deloitte & Touche LLP, the study says the cost of regulation is the single biggest issue of concern to regulated firms.

Responding directly to findings of the panels last survey of regulated firms in 2004, the FSA decided to undertake, in partnership with the panel, a gritty and in-depth cost accounting study into regulatory costs, the scope of which was revealed in March 2005.

The study focuses on three specific industry sectors, corporate finance, institutional fund management and investment and pension advice. The objective of the study has been to identify specific rules from the FSA Handbook in these sectors where regulatory costs are not justified by the benefits they aim to secure.

Roy Leighton, chairman of the Financial Services Practitioner Panel says: The low incremental costs of regulation in the corporate finance and institutional fund management sectors suggests that regulatory burdens in wholesale markets are generally not seen as a barrier to the nation’s international competitiveness, and may be one significant factor among many in its popularity as a destination for mobile capital and investment banking activity.

Across all three sectors, the direct FSMA fees collected by the FSA and compliance with record keeping arrangements spread across a large number of separate rules incurred the highest incremental regulatory costs. Unsurprisingly the retail-oriented investment and pensions advice sector had the highest incremental regulatory costs; including human resource related activities such as training & competence and compliance with certain of the Conduct of Business rules.

Leighton adds: The highly prescriptive nature of these requirements as currently framed in the FSA Handbook is what generates the significant incremental costs in the retail sector. The key issue is what the FSA does with these results. The Panel expects the FSA to take quick and decisive action by removing rules from the FSA Handbook where their costs are not proportional to the benefits that they were intended to secure, and I urge the FSA to produce a clear and detailed action plan to do just that.

The industry rightly has an expectation that this study will contribute to seeing real and meaningful improvements in the way that it is regulated and, specifically, on the issue of costs. The Panel urges the FSA not to let them down. The FSA is committed to better regulation, we will play our part in ensuring that practitioners support those efforts.