One of the centrepieces of the move of Britain’s Financial Services Authority to principles-based regulation is an effort to ensure that retail clients get a fair shake. The FSA’s so-called “treating customers fairly” initiative provides an example of the risks and rewards of relying on principles.

The TCF initiative requires financial industry firms to review their operations — everything from product design to governance, disclosure, compensation methods and complaint handling — to ensure that their clients are being treated fairly.

Under the principles-based approach, TCF doesn’t prescribe how products must be designed, what must be disclosed to clients or how complaints are to be treated. Instead, it imposes on senior management the obligation to adhere to the principle of TCF, and expects them to figure out how to do so.

In public comments, FSA staff have set out what they expect to see. But this doesn’t close the conversation. Indeed, at the end of September, the FSA published a discussion paper to invite debate about the responsibilities imposed on both product manufacturers and distributors to treat customers fairly.

The FSA indicates it expects the publication of its views to provide additional clarity for firms, noting: “Some have found that questions on responsibilities arise when they put TCF into practice. They and others also argue that some firms are not giving these matters appropriate emphasis.”

The paper spells out that, under the TCF initiative, the primary responsibilities of the product manufacturers are to ensure that their products are well designed for their target markets; are sold with clear, understandable information (both for distributors and retail clients) through appropriate distribution channels; and that they perform as the firm promise.

Distributors’ primary respon-sibilities are to ensure that customers have the information they need to make decisions; that the products distributors sell are suitable for the clients; and, that their post-sale service meets the expectations they create.

Despite the uncertainty created by a principles-based approach, British firms seem to prefer it to prescriptive rules. The Financial Services Practitioner Panel, an independent body created to provide industry views to the FSA, welcomed the paper and its invitation to ongoing, open debate.

“The paper’s high-level positioning by the FSA, without the need at this stage for further prescriptive rules or guidance, is in keeping with the well-publicized move toward a more principles-based regulatory regime and greater reliance on market-driven solutions,” says Jonathan Bloomer, deputy chairman of the panel. “The panel has been broadly supportive of that shift in approach, and views this as a good example of how principles-based regulation can — and should — work.”

Consumer advocates in Britain have been less impressed. Earlier this year, the FSA Consumer Panel, the consumer equivalent of the industry panel, said it believes that in too many financial services firms, the benefits of the TCF principle have not yet reached the consumer.

“The culture change required by ‘treating customers fairly’ is not filtering down to the staff who control the relationship with customers on a day-to-day basis,” it warns. “The FSA says senior managers have signed on to the principle of TCF. But firms’ advertising, documents and advice-giving is at the heart of the consumer interface with financial services firms, and all these must be improved.”

This open-ended approach to regulation is a far cry from the Canadian tradition of rule-making, which can take years from conception to final rule as regulators and commentators hash out specifics and strive to provide for every eventuality.

Whether such an unstructured process could work here in Canada is an open question. But it seems that firms in Britain, at least, prefer to muddle through to their own solutions rather than wait for regulators to tell them how to run their businesses.

— JAMES LANGTON