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FSA proposes principle-based approach to regulation

The Financial Services Authority has today published plans for further moving the balance of financial services regulation towards high level principles rather than detailed rules and guidance.

In its Better Regulation Action Plan, the regulator summarises more than 30 recent or proposed improvements to the way it regulates.

These include:

* Introducing simpler, more up-to-date listing rules, reduced in length by 40% with further simplification to be proposed in 2006, and encouraging industry, rather than regulatory, solutions for problems relating to soft commissions, bundled brokerage and contract certainty. This means regulation will be considered only if market failures remain uncorrected.

* Removing barriers restricting access to retail financial advice, allowing alternative business models to remove barriers that impede competition and innovation.

* Flexible rules for collective investment schemes, and simpler conduct of business rules relating to dealing with retail customers, to include removing rules that are no longer effective or proportionate or which overlap and reviewing the balance between high-level and prescriptive rules.

* Lifting audit requirements for smaller regulated firms, saving around 9,000 firms from having to have annual accounts independently audited, making application packs shorter and reducing the average time from application to authorisation by 25%, and cutting bureaucracy for approved persons.

The current approach to regulation is a hybrid of high level principles and detailed rules and guidance. However, the FSA believes better outcomes will be produced by encouraging a focus on the best actions to take in a particular situation rather than simply following a mechanistic process.

The FSA says this will not, as some have argued, result in any loss of predictability in the regulatory approach.

However, a spokeswoman for Savills Private Finance says: “While its important to review the regulation process regularly to ensure its achieving its goals, too much chopping and changing is confusing. The mortgage industry needs stability so it can get used to regulation. Principles sound good in principle, but in practice they are open to interpretation.”

James Rodea, commercial director of Cluttons Private Finance, agrees: “Having a principle-approach approach is okay for some things but not for others. Its like football referees at the end of the day, there has to be an offside rule so players and fans know where they stand.”

The FSA will continue to provide guidance to firms, support industry solutions to problems that might otherwise be addressed through regulation, where these are appropriate, and take action against firms only when they are in clear breach of the principles.

John Tiner, chief executive of the FSA, says: “A shift towards a more principles-based approach will take time to implement, as much care will be needed to ensure that we retain rules that clearly add value in maintaining efficient orderly and fair markets or helping consumers secure a fair deal.

“Ultimately, though, this approach will produce better outcomes for both consumers and the financial services industry.”

The plan also sets out areas in which regulation may increase, particularly through the requirement to implement European Directives. Here, the FSA is committed to implementing directives in a sensible and proportionate way.

It is obliged to implement the minimum requirements, even if these would fail a cost-benefit analysis from the UK’s viewpoint, but it will not “gold-plate” EU requirements. It will add requirements only when they are justified in their own right.

In addition, the FSA’s scope is due to be widened by the government to include Self-Invested Personal Pensions, home reversion schemes and Islamic home finance products. HM Treasury is also reviewing how a number of other sectors are currently regulated. including firms providing consumer credit.

Andrew Moody, managing director of, says regulating the secured loans sector makes a lot of sense. He adds: “Regulation would not only raise the profile of the sector and secured loan products, but also mean less competition for firms such as that embrace regulation.”

In a parallel piece of work, the FSA and the Financial Services Practitioner Panel are conducting a project to establish more authoritatively the costs of regulation on a firm and to highlight areas where the costs may exceed the benefits. This was due to be completed early next year, but will now report during Q2 of 2006 to allow time for further data collection.


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