The Financial Services Authority’s (FSA) decision to move towards a more principles-based regulatory environment has provoked much debate in the mortgage market. Commentators are divided over the benefits of adopting a more risk-based approach to regulation, with some welcoming a break away from the 9,000 page rule book, while others have slammed the move as woolly and unclear.
Although the 11 high level principles have been in place since the advent of the Financial Services Markets Act, the increased focus on their adoption has provoked slight panic and uncertainty in the sector.
While it will take some time before the impact of principles-based regulation on the sector becomes evident, exactly what the regulator is looking for is crystal clear. In adopting a more risk-based approach, the FSA is shifting its focus on the outcomes of firms’ business practices rather than its processes, leaving the interpretation of the principles to each individual company. It is not discarding of rules however, which will remain embedded in its ethos and governed by EU legislation.
This has been lauded by some as an ideal way to regulate the mortgage market as it moves away from a ‘one-size fits all’ notion and gives greater scope for the differing operational methods employed by various firms.
However, there are obviously some points of concern, as Rob Clifford, managing director of Mortgageforce, points out. He says: “The issue of the FSA’s principles versus rules is something of a dichotomy. Principles based regulation gives more latitude to businesses to interpret the rules as they deem fit and that best suit the style and size of their operation.
“However, when the Mortgage Code Compliance Board was in force five to six years ago, it found that its principles-based approach was imprecise and that many firms were not sure if they were complying at all. It created confusion and promoted a lack of clarity.”
The FSA is aware of the concerns of the broker community however, and in its business plan for 2006-07, John Tiner, chief executive of the FSA, stressed that firms would get support in the adoption of the principles. He says: “I recognise that many firms may prefer the clarity and certainty associated with a rules-based approach. However, I believe that organisations, such as industry associations, can have a significant role in helping both larger and smaller firms in specific sectors to develop acceptable practices within a more principles-based regime.”
Indeed, the Association of Mortgage Intermediaries (AMI) has done some work in this area by creating a series of good practice notes and plain English guides. However, the results of its recent intermediary census shows there is still some negativity towards principles-based regulation, with 57 per cent of AMI members believing the new stance will only bring greater uncertainty in the sector.
However, AMI’s associate director, Rob Griffiths, says the move will benefit the market in the long term.
He says: “AMI is not here to be a pseudo regulator or to police members. But what we can do is help members out by writing good practice notes in plain English to make sure our members know how best to implement the principles in practice. The move to a principles-based approach provides a lot more flexibility than the current prescribed rules regime. It is a case of short term pain for long term gain,”
Tony Jones, managing director at Pink Home Loans, backs the view that the short term hassle will be worth it in the end. He says: “Currently, there are roughly 9,000 pages of rules, and while these are very clear in detailing what is expected, it is an enormous amount of information to wade through. While principles-based regulation is less clear at the outset as brokers try to understand what is required, it will be good for everyone in the long term.”
In fact, it is not just lenders and brokers who have to change the way they operate in a bid to comply with the changing regulatory regime. The FSA itself is also undergoing a bit of an overhaul. It has introduced a new regulatory curriculum for its staff that looks at the technical, regulatory and management skills necessary to implement its risk-based approach and 700 supervisory staff are currently taking part in its training and development initiative.
It seems the whole move towards a risk-based approach to regulation will be a learning curve for all. By maintaining a core set of rules and a set of operational principles, the FSA is adopting a hybrid approach to the way it operates. The raft of rules will clearly outline what can and cannot be done in practice, while the principles will guide firms into operating efficient methods that provides the best outcome for their clients – something that can only be a good thing.
