The FSA and the government must tread carefully in their 'principles-based' regulation crusade, says Michael Faulkner

' Fewer rules, fewer consultations, a simplified handbook: that's what the FSA and the Treasury are proposing.

Sounds good doesn't it? After all, less burdensome regulation must surely be good for firms and their customers. Firms can get on with running their businesses without the hindrance of too much red tape; consumers can enjoy a market that operates efficiently and fairly and with the necessary safeguards.

Well, yes, in principle. The practice may prove somewhat different.

In his pre-Budget report, the Chancellor announced a 10-point action plan to modernise FSA regulation that includes proposals to reduce its number of consultation papers.

At the same time, the FSA is in the process of simplifying its handbook, removing "unnecessary rules and guidance". It has also published its Better Regulation Action Plan, espousing its aim of moving away from detailed rules and guidance towards a more "principles-based" approach to regulation.

The FSA argues that the changes will reduce the cost burden of regulation on firms and give them more freedom to determine how best to act in any given situation, rather than just slavishly following a "mechanistic process" of applying rules. The Chancellor's plan is similarly aimed at reducing compliance costs and improving competition.

But these moves could herald the potential problems of uncertainty and confusion.

The FSA's rule book is no stranger to jargon indecipherable to all but lawyers and compliance experts. The guidance that accompanies it is vital for most firms if they are to understand and properly comply with the regime. Take it away and they will be left even more in the dark about what they need to do.

Go one step further and begin to remove some of the detailed rules, instead relying on the higher level principles to govern firms' behaviours, and even more uncertainty could be thrown into the melting pot.

One only has to look at the FSA's Treating Customers Fairly (TCF) initiative. The FSA has been lambasted in some quarters for its failure to articulate specific objectives for TCF, relying on case studies and examples of good practice rather than guidance.

The FSA argues that reliance on a high-level principle "means TCF can be applied in a more flexible way to reflect business size and purpose". Critics, however, say it simply isn't clear what the regulator requires and how firms should apply the principles to their particular circumstances.

Surely, if the regulator extends the principles-based approach to other aspects of its regime, similar problems could arise?

Not so, says the FSA. It argues that it will "continue to provide guidance to firms...and take action against firms only when they are in clear breach of the principles".

Equally, of its drive to simplify the handbook, the FSA claims this will "help all firms, particularly smaller ones which do not have access to expert advice".

Yet the increased uncertainty of a principles-based system has a cost: without explanatory guidance and detailed rules, expensive compliance consultants may be even more necessary than they currently are.

The FSA's move towards a principles-based focus must not get in the way of predictable and cost-efficient regulation. IT