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Matter of principle

One common complaint we hear from some parts of this profession is that retail financial services is over-regulated. It is an easy accusation to make. Principles-based regulation appeals enormously but only if it reduces the burden of regulation rather than replacing the rules-based regulation with which we are all familiar.

On one level, I agree with the view expressed by independent consumer advocate Mick McAteer that 60 per cent of regulatory rules might be replaced with principles. A profession that worked solely on the basis of principles-based regulation would be an attractive place to work and might help build businesses that were client centric. But this assumes that those principles were easy to translate and interpret.

To complete more or less any activity in a regulated capacity seems to require a great deal of box-checking, form-filling and compliance scrutiny. Complying with the often challenging combination of rules and principles-based regulation makes for an “interesting” regulatory environment.

Where a clear rule no longer exists for a specific action, reference to principles (on the first occasion at least) can be time-consuming, often with the need to seek a second opinion.

So, rather than replace a great swathe of rules with principles, what about having one or the other?

A clear set of principles easily understood by every practitioner must take preference over a complex interaction between rules and principles. Knowing that, before taking any significant business action, decisions should be referred to a set of principles or a set of rules which would make life much easier for the typical IFA.

Ambiguity is what makes life difficult for the practitioner. Having a clear set of principles against which to assess every action and every decision within your business life would be a wonderful goal to reach.

It would be wonderful as long as the application of those principles was easy to understand. But then isn’t that exactly what TCF has done by setting out clearly six required outcomes? And that is where the potential problem lies.

Having a clear set of principles that everyone could readily understand is not much different to having entirely rules-based regulation. A principle with no ambiguity and easy application is essentially a rule.

Yes, you could argue that there is a greater degree of flexibility associated with principles-based regulation but you would need a sound reason to behave contrary to a clear principle.

Maybe the main driver behind the current combination of rules and principles approach to regulation is fear that a principles-only system would be abused.

Certainly, the behaviour of the banking sector suggests that clear and precise rules are essential to keep them in line. The mortgage sector would also appear to benefit from a clearer path on which to run.

Maybe one positive outcome from the retail distribution review will be greater clarity about the roles and responsibilities of each type of adviser.

What I guess many advisers would fear is regulatory simplification that looked anything like pension simplification or pension complexification as it turned out to be. Rather than cutting down on superfluous rules and principles, we could end up with a completely new system that still fails to meet the stated aim of simplification.

Nobody could argue that pension simplification did not result in lots of opportunities for pension advisers and technical gurus, particularly in the short term, but the long-term achievement of the goal to encourage more people to save for their retirement…. well, that remains a slightly more ambitious, unfulfilled goal.

Martin Bamford is a chartered financial planner and joint managing director of Informed Choice

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