“More principles-based regulation will produce significant benefits for firms, markets and consumers,” stated John Tiner, chief executive of the Financial Services Authority (FSA), at the launch of its Business Plan for 2007/8. Outlining its objectives for the next financial year, the regulator highlighted more principles-based regulation to be a key feature of its work, continuing along a theme which it claims will bring less prescriptive rules for advisers to follow.
However, as in many things in life, improvements don’t come cheap and the FSA is recouping the cost of improving its systems and staff by garnering a £50 million fund from advisers over the next 10 years by way of increased fees. While Tiner insists the increase in fees will see patrons ‘benefit from having a regulatory system which focuses increasingly on achieving desired outcomes and from dealing with a more efficient, more responsive, better-focused organisation’, there are some who are more sceptical.
Rob Griffiths, associate director of the Association of Mortgage Intermediaries (AMI), says it is waiting for its smaller members to see any benefit.
“It’s all well and good taking money from firms but if they are acting compliantly then they should be feeling the benefits,” he says. “The FSA is not putting the brakes on fee rises and for small firms paying what is a significant amount for them, we should see the beginning of some sort of payback.”
Looking to the benefits
Many larger firms though are looking towards the benefits that principles-based regulation will bring. For lenders, the implementation of principles means a clearer regulatory environment, as Chris Lawrenson, head of legal services at the Building Societies Association, comments:
“If you look at all of the legal rules and the codes of practice that are in place to ensure fair play for the customer, it shows how many rules and regulations there are and how confusing for everyone it is. I don’t understand how people could follow them so that is why we like the idea of principles-based regulation.”
For larger broker firms, the freedom which principles-based regulation gives is one of the biggest advantages. Bill Warren, director at Complete Mortgage and Loans Service, admits that the best thing about principles-based regulation, and the added investment which the FSA is putting in, will be the improved service from the regulator.
He says: “In terms of the 10 per cent increase, no one wants it but I’ve listened to what the FSA director of small firms, Stephen Bland, has said and the training that has been organised for the staff is intensive so it gives me a great deal of confidence that this is the best thing for the regulator and the industry.”
Unanswered questions
While many firms are looking towards the benefits that principles will bring, there are still some questions which need to be answered.
One of these is how a principles-based regime will be incorporated into a mortgage market which is already focused on complying with ‘Treating Customers Fairly’ (TCF). Those both for and against principles-based regulation believe there is too much uncertainty regarding how these two will sit alongside each other.
Warren believes: “What makes it more difficult to plan and to evolve into principles-based regulation is the lack of clarity around TCF. If you put the two together then there is a lot of uncertainty.”
A spokesperson for the FSA agreed that many of the details regarding how principles-based regulation would be incorporated, including how it would fit alongside TCF, were still unclear as it had been concentrating on the investments sector and the introduction of principles in conjunction with the Markets in Financial Instruments Directive (MiFID). However, as TCF was ultimately a principle, it shouldn’t have too many problems.
“TCF is actually a principle so it is part of principles-based regulation and how we want firms to behave without being specifically told what to do. Principles-based regulation encompasses TCF and all the other principles. TCF is more prominent but they will work together.”
Personal indemnity insurance
The other main unknown in the equation is the impact of MPBR on personal indemnity insurance (PII). Regardless of which regime is in place – rules-based or principles-based – the senior management of a firm will still be ultimately responsible for compliance.
However, as Warren says, if the regulator is talking to organisations such as trade bodies regarding what firms should be doing and these organisations then pass on its interpretations onto its members, will PII firms accept this?
“The difficulty is as principles-based regulation is exposed, would PII providers accept a position where we are accepting guidance from anyone else but the FSA? I think this is the bigger PII issue which needs to be considered further.”
In the regulator’s eyes, a firm which is following the rules in a code of practice endorsed by the FSA itself should not encounter enforcement action. However, it warns that it is not a completely ‘safe harbour’.
“If a firm is following the guidance which a trade body publishes, which has received semi-formal recognition from us, in normal circumstances they would be very unlikely to encounter enforcement action,” the spokesperson says.
While there may still be some uncertainty surrounding the finer details of what the FSA is doing when it comes to principles-based regulation, it is not due to be implemented until 2010, so there is still time for this to become clearer.
