Michael Faulkner says the Treasury is concerned that regulation is hitting financial exports and scaring off capital

When is a principle not a principle? When it's a rule. Simple enough, it would seem.

But not when it comes to the FSA. In recent weeks the regulator has come under fire over its efforts to create a more principles-based regime.

Last week, the Financial Services Practitioner Panel, comprising some of the industry's top executives, criticised the FSA for treating some of its principles more as hard and fast rules. The panel said supervisors were in some cases adopting a "highly detail-orientated and meticulous" approach, which signalled a "disconcerting departure" from the FSA's commitment to high-level principles.

The panel also raised concerns that the FSA could undermine its attempt to create a lighter touch principles-driven regime by creating a "second tier" of rules by the "back-door" using of 'Dear CEO' letters, speeches and press releases. Such rules would be created without the appropriate consultation processes, warned the panel.

The panel's criticisms are to some extent an embarrassing warning shot over the regulator's bows. They come at a time when the FSA is trying to deal not only with the pressure from the government to cut back on burdensome regulation, but also calls from the regulated community for clear guidance as to what is expected of them.

Not only that, but the FSA is also dealing with the growing concern that a sizeable proportion of firms, particularly brokers, are failing adequately to get to grips with sections of the regime - the client money rules being an obvious area of worry,

Yet it must also be remembered that the regulator is trying to achieve a difficult balancing act and instigate changes that will require a significant culture change within the organisation. The FSA is, as one senior compliance expert puts it, in a "state of flux" at the moment as it attempts the move towards principles-based regulation.

Nonetheless, the government appears to be growing increasingly concerned that the FSA's regime in its current form could become a threat to the UK's financial services sector. In recent weeks, the Treasury has been taking soundings from the industry asking why there have been so few start-ups in the London market when capital has been pouring into the likes of Bermuda.

Gordon Brown's worry is that the thousands of pages of FSA rules is discouraging new capital from London, which in the longer terms could be highly damaging to the UK economy.

Recent export figures paint an alarming picture. The first drop in net exports of the UK financial sector for 10 years was blamed on the insurance sector. Net exports of the UK financial sector declined from £21.7bn in 2004 to £19bn in 2005, with insurance falling from £5bn to £1.6bn. This was the first drop in 10 years.

While Hurricane Katrina-related claims were a major cause of this fall, lower reinsurance exports - indicating more premium is going out of the economy than coming in - were also a factor.

If insurance companies continue to move operations abroad or choose not to set up in London in the first place, the value of insurance exports is in danger of plummeting further. Brown will be acutely aware of this and, as the noises coming out of the Treasury suggest, he will be keeping a close watch on how the FSA develops its regime in the coming months.

What Brown wants - along with the vast majority of the regulated community - is a slimmed down FSA rulebook, coupled with clear guidance and swift authorisation procedures.

While the practitioner panel's comments may be embarrassing for the FSA, the Treasury's displeasure will pack a far greater punch. IT