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The principle prize

The ABI is looking forward to the challenge of the FSA’s change of course

Many doubted if they meant it, even more did not think it was possible but now it is happening.

The FSA really does mean to shift its approach towards principle-based regulation and regulation is being transformed.

A series of announcements and consultation papers from Canary Wharf confirm the new direction of travel. In what is effectively a relaunch of the approach to financial services regulation, FSA chairman Sir Callum McCarthy and CEO John Tiner are walking the walk of better regulation.

The emphasis on better and risk-based regulation points the way to the fundamental changes in retail regulation that are under way.

First, there was news of significant internal changes at the regulator. The FSA’s 2010 project should create a leaner but fitter regulator, focused on doing what it needs to do really well.

Since the FSA is funded by the industry, we very much want this project to succeed. In a global and competitive market for financial services, the new FSA recognises it will need to be more self-confident, more expert, more outward-looking and less bureaucratic.

Then came the practical implementation of the move away from a detailed rule book and towards a principles-based approach. A consultation document proposed radical changes to how investment products are sold. This move should be of enormous benefit to customers as well as the industry . Instead of a long, complex and prescriptive set of rules, the FSA is proposing that firms are regulated against a handful of principles and high-level rules focused on customer outcomes.

Similar mood music is emerging from the FSA review of general insurance regulation. Much of this market is competitive and transparent and needs only a light-touch approach. Some of the detailed rules have got in the way of efficient and customer-friendly service.

The changes will be challenging for individual firms as well as for the FSA. The rulebook can be a source of comfort as well as irritation. It is easy to believe that compliance with the rules is synonymous with serving the customer. They are not the same thing.

But the challenge is worthwhile and the insurance industry will embrace it with enthusiasm.

A central part of our response will be guidance produced by the industry itself. At the ABI, we have made a start on this through our customer impact scheme for driving up customer service in the life industry.

Our recent initiative to improve the transparency of unit-linked life products is another example. The FSA says it will welcome similar initiatives and that market-based solutions to problems, such as on contract certainty in the commercial insurance market, are more effective than regulatory imposition.

We were greatly encouraged when the FSA also signalled it will find a formal place for industry guidance produced by trade associations or other routes. This is essential for principle-based regulation to work.

Crucially, the regulator has accepted that industry guidance must not become an ersatz rulebook. It is essential to principles that there is room for different interpretations of how they are applied. Companies will have the freedom to innovate and to decide for themselves how the principles should apply. Industry guidance is a useful, perhaps essential, route map. It cannot and should not be a straitjacket.

Better regulation will have the best impact for customers if it also leads to positive change in the market for advice and distribution. Sir Callum McCarthy recently spoke of the challenge this represents. There is a complex web of regulatory and business issues. Regulation creates business practice, which in turn can feed further regulation. Our objective is a market shaped by customer needs.

The FSA’s recently announced distribution review gives the industry a renewed opportunity to achieve reforms that will help customers and companies.

But the trend is now clear. Better regulation is firmly on the agenda. We must keep our eyes on the prize.

Stephen Haddrill is director general of the Association of British Insurers

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