Industry should not fear principles-based regulation

The insurance industry should not fear the increasingly principles-based approach to market regulation which is being taken by the Financial Services Authority, according to Moore Stephens. But it warns that the industry must engage with the spirit of the rules, and not simply adopt a tick-box approach to compliance.

Writing in the latest issue of the Moore Stephens Insured Interest newsletter, Simon Gallagher, head of the insurance industry group at Moore Stephens, said: “Principles-based regulation will enable changes in the commercial and legal environment affecting the insurance industry to be absorbed more easily, without the need for wholesale amendment of the rulebook. Hopefully, it will also mean that firms will be encouraged to make objective decisions driven by senior management, rather than following the rules without consideration of stakeholder outcomes.

“Senior management has a vital role to play in ensuring that the insurance industry complies with principles-based regulation

Simon Gallagher, head of the insurance industry group at Moore Stephens

He added: “Senior management has a vital role to play in ensuring that the insurance industry complies with principles-based regulation. This compliance can be achieved within a proper risk management structure, wherein the quality and effectiveness of decision-taking can be appropriately challenged. This structure should also include a proper, independent verification of procedures using a level of internal audit depending on the size of the firm.”

Urging the market not to be afraid of regulation based on risked-based principles, Gallagher said: “On the contrary, it should be seen as a spur to improved performance and profitability. And rather than signalling an end to prescriptive rules, it is a welcome reminder that the rules were drafted to help companies achieve the overriding principles originally set out by the FSA as the basis of its regulatory ambit.”