The Financial Services Authority (FSA) is making solid progress in delivering the principles-based regime it is seeking for the mortgage and insurance markets and has most noticeably made significant steps forward in regard to principle six; the need to treat customers fairly.
In total there are 11 principles for business, as illustrated in the box below, around which the FSA has based its approach to the market and they outline a basic code of conduct for regulated firms to abide by.
Although a lot has been made in recent months of the FSA’s publicised shift away from detailed and prescriptive rules towards these higher level principles, the truth of the matter is that they have always existed. It is just that they had been lost behind the myriad rules which were put in place to ensure regulated firms delivered the outcomes the FSA was seeking.
Problems with rules
According to the regulator there are a number of problems with running a rules-based regime. In the first instance it is incredibly difficult to come up with a set of rules, which is all encompassing and takes account of every commercial model in the market. As such there will inevitably be loopholes, which the unscrupulous seek to exploit.
Rules, by their nature, are very rigid and the regulator also believes that by moving to a more principles-based approach it will be able to communicate what firms have to achieve without prescribing how they actually have to do it. This, in turn, should allow commercial diversity in the market to flourish without undermining the level of protection which is afforded to consumers.
In many ways, regulation through a set of over-arching principles is a much more interactive way of dealing with the market. Rules simply require firms to follow them to the letter and compliance can quickly become a soulless tick-box exercise.
However by setting out the basic tenets that regulation encapsulates and describing the way in which firms must operate with a small number of principles, those who wish to be compliant have to take the time to really think about how to go about it.
Understanding the principles
Managements must look at how they can align their own business practices with the principles and develop plans that deliver both in terms of commercial success and compliance.
It is up to firms to look and interpret the principles and make sure that the core values embedded in the company are compatible with them. Not only this, but businesses will also have to make sure they can demonstrate that their activities work in tandem with the principles.
Clearly there is a significant amount of work involved in understanding what the principles mean for each company and assessing how each and every part of a commercial operation will fit in with them.
All aspects of a firm’s business processes will be marshalled by the principles. There is no part of a business that is exempt and so moving into this new environment will force companies to have a much better understanding of how their business operates and to design corporate governance strategies which are all encompassing.
Commercial opportunities
By pulling the various departments of a company together in this way, there are also going to be a number of commercial opportunities that arise, from the work done, to be compliant.
Because it is up to companies to prove they are adhering to the principles, it is going to be necessary to collect and record higher levels of management information.
By having this information to hand, it will not only be possible to use it to prove that firms are acting in accordance with the principles, but they should also be able to use it as a way of better understanding their clients.
The better they understand their clients, the better they can meet their needs and the better the business should perform. Whether regulation actually ends up creating a virtuous circle like this will depend very much on how each firm tackles it, but certainly there are distinct possibilities.
Establishing an effective principles-based regime is not going to be easy and requires significant changes from all involved. However, it does offer numerous advantages and those who are quickest to implement both the spirit and letter of the principles will be best placed to take advantage of them.
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