Martin Shaw says the FSA's move to a principles-based regime gives more freedom, but it comes at a price

' In a recent speech FSA director of retail themes Vernon Everitt explained that a new complaints rulebook is soon to emerge as part of a shift towards principles-based regulation and a rewrite of the FSA's conduct of business rules.

Based on all the available information, I see two compelling reasons for change: first, the FSA determined a couple of years ago that it would move to principles-based regulation; and, instead of writing more rules, it would rely on its principles for business to explain how it expects companies to behave. This would in turn pave the way for replacing the current conduct of business regime with a more limited rulebook, together with explanatory guidance.

The focus is, therefore, shifting towards defining good outcomes for customers rather than prescribing the way companies achieve them. Furthermore, the complaints rules are five years old. Over that time the rules have supported a move towards significantly improved complaints handling processes. But the July paper on Treating Customers Fairly (TCF) indicated there are still concerns about whether some firms deal with complaints effectively and treat customers fairly.

Everitt's speech served to remind the industry that the FSA is working to a deadline for a substantive implementation of TCF by March 2007. But there is also the general issue about whether firms are doing enough to avoid complaints being escalated to the Financial Ombudsman Service (FOS), or to co-operate and learn lessons when cases do go to the Ombudsman. This rather indicates that the FSA's imperative will be to create a new complaints sourcebook that fosters best practice complaints handling.

In the past, the financial services industry has been a little schizophrenic about principles-based regulation. Detailed rulebooks do after all give some certainty, and principles leave more open to interpretation. And the absence of detailed standards means the FOS has less regulatory guidance to "have regard to". However, companies that are keen to develop a cultural rather than compliance-driven approach to complaints should welcome the freedom.

But this freedom does come at a price: a shift to principles-based regulation will put more onus on companies to consider how best to handle complaints, and to act on issues that affect the timeliness, fairness or effectiveness of their processes. By the same token, the increasing influence of the FOS in articulating fairness means companies need to focus on fair outcomes for their customers and to get better at learning lessons.

In all likelihood the new rulebook will need careful interpretation by companies and the very short timescales for consultation and implementation will also be a challenge.

And at an operational level the shift in style of regulation calls for companies to have better intelligence on how well they are handling complaints. IT

' Martin Shaw is an independent consultant