This month sees a key milestone in the FSAs much discussed move towards more principle-based regulation, when we consult on proposals for a radically revised conduct of business sourcebook (Newcob), to come into effect from November 2007.
We intend this to be a step in encouraging firms and senior management to rethink their approach to regulation and to strike another blow against compliance as a “tick-box” activity.
Our 11 high-level principles for businesses have been in place since 2001. They set requirements for all financial services firms and crucially focus on what our regulatory regime is trying to achieve. They are expressed in terms of outcomes rather than processes or procedures.
Despite this, the current Cbo sourcebook has developed into a rather unsatisfactory hybrid of thousands of detailed rules, which sometimes prescribe requirements at a micro level, sitting underneath these high-level principles.
We see benefits for firms, markets and consumers in tipping the balance towards the principles and high-level rules and away from prescription, as far as external considerations allow.
a general presumption against retaining or creating detailed rules, wherever possible, except where required to implement European legislative requirements or are the only practicable way of achieving a regulatory outcome.
We want to give firms flexibility to decide how to comply with principles and high-level rules because we think this will align good regulation with good business practice. It is an approach that is consistent with the emphasis we place on senior management responsibility, a core principle of good regulation.
But more principle-based regulation will not involve a relaxation of the standards of behaviour we expect. There is no reason why principles and high-level rules should not provide an equivalent level of consumer protection. Less prescriptive regulation should not be interpreted as a lowering of regulatory standards. Firms may find that certain specific current rules are not carried forward to Newcobbut this is generally because we see the issues as being addressed through other requirements or standards which will remain.
You should expect Newcobto look different, both in structure and presentation. Our aim is to produce something which is easier to understand, comply with and amend than the present version. We are not tinkering with or amending the Cob sourcebook but producing a new sourcebook which will be substantially shorter.
The presentation will be simplified and we plan to label core high-level rules to get an overview of the regime. We also plan to publish a transition map between Cob and Newcob.
Mifid is a significant driver for changes but many changes are relevant to all regulated firms operating under the FSA conduct of business regime even where Mifid itself is not. The areas particularly affected include client categorisation, financial promotion and how the suitability test is expressed. MCOB and Icob are not affected.
Newcobwill be brought into effect at the sametime as Mifid in November 2007, with transitional provisions where possible and appropriate. Mifids conduct of business provisions cover much of the same ground as our current sourcebook, at least as far as those products within the scope of the directive are concerned.
But Mifid does not seek to lay down standards on the full range of business we regulate. What Mifid does cover,
it does not necessarily do in the same way we do now.
Implementing Mifid in Newcob is complex. We have had to consider if it makes sense and is justified on cost/benefit grounds to use a particular Mifid standard or formulation as the common basis of the relevant new Cobprovision. There has been no automatic read-across to non-Mifidsectors and we have been discussing these issues case by case with the industry and other stakeholders in developing the proposals that we will publish this month.
For example, Mifid introduces new client categories which are not identical to our current private customer, intermediate customer and market counterparty categories. We had to consider if it made sense for firms and customers for the Newcob regime to accommodate two parallel systems. Feedback so far favours a consistent approach,with some modifications.
We are proposing to use the Mifid formulation of suitability and know your customer standards for investment advice and discretionary portfolio management as the basis for a single regime in Newcob for both Mifid and non-Mifid retail business (including life and pension business). On the basis of our stakeholder discussions, we believe this approach is justified by the degree of consistency between the Mifidand current Cob requirements, and the value of a coherent approach in Newcob.
Among other things, the Reforming Cob Regulation CP will also cover our proposals on new requirements for product disclosure, taking account of our recent review, the basic advice regime and payment menu and IDD. It will also explain our less prescriptive approach to specific requirements such as the content of product risk warnings and to client agreements.
We will also describe the new Mifid “appropriateness” requirement for certain non-advised activities, not to be confused with the suitability requirements for advice and discretionary management. This is an example of where, except in relation to a specific set of more complex products, we do not propose to apply the Mifid requirements more widely.
Alongside the Reforming Cob Regulation CP, we will also be publishing a CP on the new financial promotion regime. Even before Mifid we were looking to move towards a more principle-based regime in this area, and Mifid sits well with this approach and our objectives. The key requirement remains as now, that communications are “fair, clear and not misleading”. This will be reinforced by high-level rules, with many detailed rules and most product-specific rules removed.
This approach will allow a more dynamic response to marketing that should have benefits for both firms and consumers, with promotions tailored more closely to the needs of the group to whom the promotion is directed.
These CPs will not be the last from the FSA on these changes. We will supplement the two CPs with roadshows and workshops to help firms prepare for the new regime. But in the meantime this consultation is important for all regulated firms subject to our current Cob rules so please take the opportunity to review the proposals and give us your views.