He believes the move to erode clearly defined rules in the financial services sector, in favour or a reliance on PBR risks encouraging rogue businesses while simultaneously penalising those firms which genuinely try to treat their customers fairly.
He warned the fuzzy legislation will lead to:
• More small firms taking advantage of the lack of specific rules. These companies are likely to be small enough to creep under the regulator’s radar with the ability to change their processes quickly to appear that they are doing things correctly should they ever be challenged.
• Medium-sized companies that make reasonable attempts to run their businesses correctly but occasionally get things wrong, coming under unwarranted surveillance by the regulator.
• Large organisations that are more risk adverse suffering because of the lack of clear rules. A reliance on principles will see these organisations become over cautious with a subsequent squeeze on resources and profits.
“These are genuine concerns that need addressing,” said Walker. “I am especially concerned by the plethora of small organisations that could attempt to take advantage of the fluid nature of principles-based legislation by avoiding it altogether through their size and the absence of a past history with the regulator. Their advertisements are unlikely to be mainstream and may not come under scrutiny due to the size of their business, which, combined with their ability to duck and dive, means that they will never upset too many people. However, the potential number of such companies is huge, which, when combined, can add up to significant customer detriment. The recent announcement that 78 per cent of small firms already fail to meet TCF deadlines only heightens my concern.
“There will be significant monetary consequences for big firms who, eager to appease the regulator, will "over egg the pudding" resulting in more costly and cumbersome financial promotions and sales processes making them less competitive and vulnerable to competitors.
“Often small companies don’t have the resource to effectively interpret principles and consequently like clearly defined rules. Businesses need a yard stick by which to easily measure themselves. As rules give way to principles, we should not be surprised to see some firms making more genuine mistakes and other firms knowingly “making mistakes” to gain commercial advantage.
“So the penalty for being over compliant may be to lose market share and the prize of being non-compliant may be to gain market share, all of which may be aided and abetted by the smokescreen of principle based regulation. Certainly, I don’t believe the FSA has set out to disadvantage properly-run organisations, strengthen less compliant organisations and increase the potential for customer detriment. However, I fear this may be an outcome if clearly defined rules disappear in favour of a principles approach.
“Looking forward, given the difficulty of regulating small firms in a principle-based environment, we should also be wary of this responsibility being pushed on to the master broker to mirror the network structure seen in the mortgage industry. Given the current pressures in the secured loan arena, the economic fall out of potential changes in payment protection insursnce, and the impact of forthcoming regulation, brokers can ill afford additional regulatory costs which would, most likely, see the customer paying any extra cost of principles rather than rules.”
