There is much general support for the concept of principles-based regulation, and this is merited. F...
There is much general support for the concept of principles-based regulation, and this is merited. First, because successful principles-based regulation will lead to greater innovation and entrepreneurial activity and second because we all know and understand the basic principles that should be followed in running ethically and financially-sound financial services businesses.
Rulebooks that run to thousands of pages stifle innovation and entrepreneurial drive. How many words does it take to say risks and charges as well as terms and conditions should be explained in the clearest terms?
How long does it take to explain to advisers that they should understand their clients' circumstances and recommend the best products free of commission bias?
In a principles-based regime, it shouldn't take long. Unfortunately, there are drivers that have sunk the best of intentions. Compliance officers in regulated firms have a natural desire to know precisely what they can and can't do. It gives them confidence that, provided they stick to the rules, they will be all right. Monitoring and enforcement professionals at the regulator also like precise rules, so they know with certainty when a breach has occurred.
The FSA is laudably trying to turn its style of regulation from the detailed and prescriptive to the principles-based. The irony is that every time it makes a significant deregulatory move, the industry cries foul.
This schizophrenia must make life hard for the FSA but it must persist in driving through reform. Yes, a principles-based regime is more touchy-feely and it is hard to know exactly where wrongdoing begins. Yes, firms will only be formally punished for behaviour that is clearly abusive of the principles. But the FSA should still pursue the goal.
Success will bring the reward of slashing compliance costs, stimulating innovation and prompting consumer communication, which is more than simply fulfilling bureaucratic regulations.
Daniel Godfrey is director general of the Association of Investment Companies (AIC)