FSA Outlines Future Of Regulation In UK

by Philip Morton, Investors Offshore

25 April 2007

The UK's Financial Services Authority (FSA) on Monday announced that it has published a paper setting out its current thinking on the move towards a more principles-based regulatory regime.

The paper, entitled 'Principles-based Regulation - Focusing on the Outcomes that Matter', accompanied a conference also held on Monday at which FSA senior management, financial services industry leaders and other interested parties debated the challenges and opportunities presented by a move away from more detailed rules to a principles-based environment.

Callum McCarthy, Chairman of the FSA, explained that:

"We have set ourselves and the industry on a course towards more principles-based regulation. We are pursuing this with determination, but recognise there are difficult issues as well as excellent opportunities for us as a regulator, the industry and consumers. Today's paper and conference are designed to explore those issues as we attempt to move further towards delivering a more outcome-focused regime."

John Tiner, Chief Executive of the FSA, added:

"Financial services markets are dynamic and innovative. To be effective, regulators must be able to adapt their regimes to keep pace with market changes. We believe principles which focus on an outcome are more enduring while at the same time better foster innovation and competition."

"More principles based regulation is the natural next step in the evolution of our regulatory system. It will give firms more choice over how they meet our requirements bringing for many a closer fit with their business processes and more clearly placing the responsibility for key regulatory decisions at more senior levels in firms."

"We have already embarked on this journey. During the past two years, the FSA has increasingly taken a principles-based approach to resolving issues in both retail and wholesale markets such as the proposed new regime for the conduct of business, our Treating Customers Fairly Initiative and the work on contract certainty within the wholesale market."

"It is clear that this approach will require changes in behaviour by both firms and FSA staff. For the FSA's part we are ready to meet the challenge and our 2007 Business Plan sets out our plans to invest in the recruitment, development and training of our staff to ensure they have the market knowledge, competencies and skills to make the judgements necessary to make more principles based regulation work."

"We are also aware there are external issues that need to be addressed: the current preference of the EU Commission to adopt specific rules; the inevitable and proper establishment of precedent by the Financial Ombudsman Service (FOS); and the role of consumers of financial services in a more principles based environment. All of theses issues need to be examined carefully and will not be ignored as we plan and pursue our course."

Speaking at the conference, Economic Secretary to the Treasury, Ed Balls observed that:

"Of course, when the FSA was first created, many City figures feared that that it might prove to be not a competitive advantage but a disadvantage for the UK - a heavy-handed and inflexible regulator, stifling innovation. That those fears have not proved right is a tribute not just to the FSA but also all those who worked so hard to get the Financial Services and Markets Act legislation right and avoid these risks."

"One of the features of principles-based regulation, as John has pointed out, is the flexibility that it offers senior management in firms to take the decisions that are right for their business and their customers. And flexibility is also a key element of the legislative framework in which you operate. FSMA sets out the broad regulatory framework and leaves the detail to the FSA. This is one important reason why the FSA has been able to take forward this more dynamic regulatory approach."

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