Principles based regulation and industry guidance

I do not agree at all with Ian Morley when he writes in the Financial Times (“Uphold the principles of financial services regulation”, February 7, 2007) that the Financial Services Authority in the UK is taking an unhelpful stand regarding Industry Guidance about its regulation. Morley’s complaint is about the FSA’s discussion paper of November 2006.

First of all, I found it puzzling that Morley publishes his piece about this discussion paper a few days after the comment period on this paper closed on February 1, 2007. If the purpose was to stimulate a debate, it would have been helpful to publish this a little earlier so that more people could respond to the FSA before the close of the response period.

Second, after reading the discussion paper carefully, I find nothing in it to complain about. Principles based regulation is a move away from the certainty of precise rules. Morley wishes to bring the certainty back and he seems to suggest that this could be done by industry bodies writing precise rules and the FSA granting them the force of law so that those who blindly follow these rules cannot be sued. Unfortunately, this is not a prescription for principles based regulation. It is a prescription for detailed rules with the rule making outsourced from the FSA to the industry bodies. Such a scenario would be the worst of all possible worlds. The FSA came into existence partly through a merger of several self regulatory bodies that made their own rules. It is pointless to turn the clock back.

The FSA has embarked on a tortuous journey towards principles based regulation that would take several years to complete. I hope that they succeed. Morley’s piece suggests that more than the regulator, it is the financial services industry that fears principles based regulation.

Posted at 11:58 am IST on Fri, 9 Feb 2007         permanent link

Categories: regulation

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