The UK’s Financial Services Authority published a paper today setting out its current thinking on its move towards a more-principles-based regulatory regime.

The paper accompanies a conference also being held today at which FSA senior management, financial services industry leaders and other interested parties debate the challenges and opportunities presented by a move away from more detailed rules to a principles-based environment.

Over the next few years the FSA will move to more principles-based regulation. This is a continuing process, which will require significant change of behaviour by both firms and the FSA, it said.

“Firms will have increased flexibility in how they deliver the outcomes we require. Many will find a closer fit between meeting their business objectives and meeting regulatory requirements. Responsibility for key regulatory decisions will move to more senior levels, challenging firms’ compliance, risk management and internal audit functions as they provide the necessary support to senior management and boards,” it explained. It also said that principles-based regulation will achieve benefits for consumers by fostering a more innovative and competitive financial services industry.

The FSA noted that there are constraints on how far and how fast it can move towards principles-based
regulation, including the inevitable and proper establishment of precedent by the Financial Ombudsman Service and the current preference of the EU Commission to adopt specific rules and regulations. “We will continue
to work actively with stakeholders and other regulators both domestically and internationally to make more principles-based regulation a reality,” it pledged.

“We have set ourselves and the industry on a course towards more-principles based regulation. We are pursuing this with determination, but recognise there are difficult issues as well as excellent opportunities for us as a regulator, the industry and consumers,” said Callum McCarthy, chairman of the FSA.

John Tiner, chief executive of the FSA, said, “Financial services markets are dynamic and innovative. To be effective, regulators must be able to adapt their regimes to keep pace with market changes. We believe principles which focus on an outcome are more enduring while at the same time better foster innovation and competition.”

“More principles based regulation is the natural next step in the evolution of our regulatory system. It will give firms more choice over how they meet our requirements bringing for many a closer fit with their business processes and more clearly placing the responsibility for key regulatory decisions at more senior levels in firms,” Tiner added. “We have already embarked on this journey. During the past two years, the FSA has increasingly taken a principles-based approach to resolving issues in both retail and wholesale markets such as the proposed new regime for the conduct of business, our Treating Customers Fairly Initiative and the work on contract certainty within the wholesale market.”

“It is clear that this approach will require changes in behaviour by both firms and FSA staff. For the FSA’s part we are ready to meet the challenge and our 2007 Business Plan sets out our plans to invest in the recruitment, development and training of our staff to ensure they have the market knowledge, competencies and skills to make the judgements necessary to make more principles based regulation work,”Tiner said.