Michael Faulkner talks to Andrew Honey of the FSA's small firms division, and asks how the move toward a more principles-based regime will affect brokers
In June, FSA chairman Callum McCarthy gave a speech to the Smith Institute on the future of financial services regulation and the challenges faced by the regulator.
One of those challenges was how to succeed in moving towards a more principles-based regulatory regime. "We are determined to first halt and then reverse the growth in rules and replace, whenever we can, detailed rules with general principles," said McCarthy.
But, as the FSA acknowledges, the implications of such a move are "profound" and present real challenges for both the regulator and regulated firms. For brokers, many of whom lack the resources to employ a full-time compliance department, it can be particularly problematic.
High-level thinking
Andrew Honey, head of insurance at the FSA's small firms division, admits that it is a "real challenge" getting firms to understand what the principles mean.
"In achieving regulatory outcomes that are more principles-based we have to communicate how principles sit alongside rules. We want to make sure firms understand that where there is a rule they need to consider the principle as well," he says. "We want to encourage firms to think more about the high-level principles."
He gives the example of the FSA's treating customers fairly initiative (TCF). "It is not just about meeting all the rules, there are other things firms can do. Take complaints, for example: if a firm is getting complaints, is there an underlying problem that needs to be fixed?"
This of course presents challenges for the FSA itself, not least in communicating its messages to brokers. Honey insists the FSA did not underestimate the challenges it faced in doing this.
"We put a lot of effort into communicating with firms through trade associations and the firm contact centre, roadshows and e-learning packages - a client money package will be available later," he says.
"We have to make sure the information is presented in a way that firms understand.
We are increasingly using case studies and greater use of examples to do this."
He adds: "We have found a simple form of communication and that is appreciated. We have been successful but there is still more to do."
Meticulous approach
The move to more principles-based regulation also presents challenges to the
FSA in terms of its approach to supervision. The regulator has come under fire for its supervisors' implementation of the principles.
Last month, the Financial Services
Practitioner Panel warned of an apparent "disconnect" between what senior management at the FSA were saying about principles-based regulation and what the supervisors were doing in practice.
"Anecdotal evidence has reinforced the fear that FSA supervisors' application of
TCF in practice might sometimes be highly detail-orientated and meticulous, signalling a disconcerting departure from the FSA's commitment to high-level principles," the panel said in its annual report.
Honey admits principles-based regulation raises important issues for the FSA in terms of staff training. "An enormous amount of time has been spent on looking at the implications for supervisors - the skill set, knowledge and the way decisions are taken.
"We have to give a considerable amount of thought to this. We need to ensure our staff know the market."
The FSA has also been criticised for the disproportionate cost burden of regulation on smaller firms. Earlier this year research commissioned by Biba and the Federation of Small Businesses found the cost burden on small firms was nearly five times as much as that on the largest firms - 5.2% of annual income compared with 1.13% for companies with an annual income of more than £1m.
Honey admits that the cost of regulation is "considerable" for small firms. "We are aware of this and initiatives such as making the FSA easier to do business with are taken seriously. It is important that we are good value for money. We want to provide a good service and where firms have questions we will deal with them pragmatically."
He insists that the cost burden of regulation is taken into account in determining whether to implement or keep a rule. "If there are parts of the rules that are more costly than the benefits, we will take that into consideration."
But he also argues that firms themselves have a part to play in reducing their cost burden. "Costs have increased where firms have done more than they need to do [to implement the rules], such as around disclosure."
Will more principles-based regulation reduce costs for firms? Honey says it is "difficult to tell at this stage". He says:
"If we can be satisfied that regulatory outcomes can be achieved through principles with rules withdrawn, that could improve costs. If we can improve processes that could also reduce costs." IT
