The Financial Services Authority recently published its proposals for a radical move to principles-based regulation. What will this mean for the industry and what are the pitfalls?
Market viewsAndrew Sykes, FSAOn 31 October the Financial Services Authority (FSA) published a draft of a new conduct of business sourcebook (NEWCOB), which will apply to all firms doing investment business, including life insurers and advisers. It will come into force on 1 November 2007.
NEWCOB is part of a radical shift by the FSA towards more principles-based regulation. This means a move away from detailed rules, which set out procedures to be followed, in favour of higher-level rules, which concentrate on the outcomes for consumers.
We are aiming to produce a NEWCOB rule book that is substantially shorter and easier to understand. But the most important change will be in the type of rules we set out. Wherever possible we will make rules that set out the outcomes we want, rather than the method that firms must use to achieve them. Such rules will be less prescriptive, so box-ticking approaches to compliance will be discouraged. Instead, firms will have more flexibility to innovate and to develop ways of achieving these outcomes that reflect their particular business models. But there will be no relaxation of the standards of behaviour we expect. More principles-based regulation does not involve reducing consumer protection.
The move towards more principles-based regulation will not end with NEWCOB. Over time, we intend to extend this to other parts of our handbook. Work has now begun on a review of our general insurance rules, in the insurance conduct of business sourcebook. We expect to consult on this in the middle of next year.Peter Le Beau, Le Beau Visage:
While I regard the development of principles-based regulation as a positive thing I must admit to general bemusement at the labyrinthine path that financial services regulation has taken over the 20 years since the Financial Services Act came into force, and in particular the 10 years since the Financial Services Authority (FSA) was formed.
A more cynical man than me may feel that consultants have been brought in whose style is to advise all clients that are zigging to zag and vice versa.
The change in direction reminds me very much of the rather random way in which much of government policy seems to have been developed. I wonder whether they use the same consultants?
Nevertheless, a move to principles-based regulation, if it means a less prescriptive environment, which facilitates creativity and above all leads to customers getting value and developing confidence in the industry, is a very good thing.
People often suggest the industry gets the regulation it deserves and this may have been true in places in the past but I note a real desire to move forward among the people I talk to regularly within the industry.
I would ask only two things. Firstly, that we are given a chance to make this succeed before the FSA reverse the philosophy again and secondly that the industry embraces the new regime rather than regarding it as another obstacle to circumvent. If this happens we may be on the threshold of exciting times.
Stephen Haddrill, ABI:
The FSA is finally set to transform Britain's financial services regulation. Its direction of travel is clearly right.
While no one suggests a bonfire of regulations, the emphasis on risk-based regulation highlights the fundamental changes in retail regulation now underway. Customers will benefit greatly from the move to NEWCOB, which is focused on customer outcomes.
Of course, the changes will be challenging for individual firms and the FSA.
Insurers are ready to embrace that challenge. Through our Customer Impact Scheme, the Association of British Insurers has made a start on this, producing a number of consumer guides. We were encouraged by the FSA's recently stated intention to find a formal place for such guidance - this is essential for principles-based regulation to work. But companies must retain their freedom to innovate, and to decide for themselves how principles should apply.
While industry guidance is useful, it should not be constraining.
But better regulation is firmly on the agenda, and if we keep focused on that goal, it must be good news for everyone.
Arthur Davies, Baigrie Davies:
For the progressive and conscientious IFA, this is nothing new. The vast majority have always embraced the principles involved in regulation rather more readily than the FSA has given them credit for. True principles have underlined a spirit of treating their customers fairly that has often been missing in regulators' view of our work.
So what may this mean in practice? First, as the FSA is keen to state, the responsibility is shifting to senior management, where the ethos of any good firm has its roots. Those firms not 'on message' must deliver a significant change in the way their firms treat customers, and that message must come from those at the top.
Second, the principles-based approach offers greater flexibility in determining how best to run businesses, and in deciding how best to deliver fair treatment to customers in a way that is consistent with commercial objectives. This is wholly right, as a business that struggles to survive will not treat clients at all well. Or at all.
Third, flexibility rather than detailed processes should mean firms innovate more effectively in the quality of customer service and value for money. The outcome matters more than the route taken to get there.
This move towards more principles-based regulation is the best way of making a real difference to consumers, because they are put at the centre, and the FSA, the IFA, the product providers, the commentators, are all on the edge of the circle.
At the centre is the client, where, for so many of us, they have always been.
