Any positive benefits resulting from the move towards principles-based regulation could be cancelled out by industry guidance and firms’ own compliance procedures brought in to support the treating customers fairly initiative, warns the Better Regulation Commission.
BRC chairman Rick Haythornthwaite says he supports the FSA’s focus on principles-based regulation and the drastic reduction of the sourcebook through Newcob.
But he has concerns that as one vast layer of prescriptive regulation is stripped away, another one will be placed on the industry, unless the FSA acts now.
Haythornthwaite says: “Principles-based regulation is only meaningful if it has an impact on the marketplace. It is noticeable that no sooner does the FSA create space than lawyers and compliance departments come up with their own sets of rules, thus preventing any positive impact.”
The BRC is an independent body advising the Government across all industries. Haythornthwaite says the same problem is occurring in other areas – notably in health and safety – but the big flow of funds in financial services and the more litigious nature of the sector means it is even more acute.
He says there is clearly a sense of risk aversion in the retail financial services sector, perhaps exacerbated by the level of sanctions or concerns of sanctions if things go wrong, which he says must be tackled to ensure that one set of rules is not simply replaced with another.
Haythornthwaite says the BRC’s challenge to the FSA is how it can translate its leadership on this issue into a real and noticeable change on the ground.
He says: “You can only do this by influence, not edict, and what we would like to see over time is everyone – regulators and the industry – asking the question of what is standing between them and greater success in business and is this new rules-based environment in the interests of companies and shareholders?” He says it could take a long time to answer this question but the first step would be simply to ask it. He adds that he does not hear anyone raising this point earnestly at the moment.
“Everywhere I look, we are seeing these rules replacing the void that has been created by the move to principles but no one is saying what we are going to do about it?” he says.
Another concern voiced by Haythornthwaite is that communications in the financial sector are driven more by a desire to eliminate regulatory and legal risk than to genuinely inform the customer.
He says the results are long disclaimers that do not leave customers any wiser about risk and able to make informed decisions.
“Despite the goals of TCF, the practicalities suggest that consumers are never truly informed enough to sufficiently promote, reintroduce or revitalise the concept of caveat emptor,” says Haythornthwaite.
The Government recently announced its acceptance of the BRC’s report – Risk, responsibility and regulation: whose risk is it anyway? – which called for risk to be managed in a sensible and proportionate way.
The BRC carries out an annual report on the FSA, along with a host of other regulators, to identify administrative burdens and to aim to reduce these burdens by 25 per cent. The FSA’s current administrative burden is £855m, with £255m being third-party information costs, says the BRC.