FSA to reward good "principles-based" practice

Firms seen by the UK Financial Services Authority as being “well-controlled and managed” in terms of its regulatory processes could potentially see lower capital requirements and supervision as a result of adopting principles-based regulation.

According to a report published today by the Financial Services Authority, which looks at the implications of shifting from rules-based to principles-based regulation, firms that take on greater responsibility for how they meet regulatory obligations and engage positively with the FSA can expect to see “a difference in how [officials] behave towards them”.

The FSA says it will “give greater recognition to firms’ own management and controls, and this will be reflected in areas such as capital requirements and supervisory intensity” if firms are seen to be engaging positively and openly with FSA officials. This could mean “relatively lower levels of regulatory capital, less frequent risk assessments, greater reliance on firms’ senior management or a less intensive risk mitigation programme”.

The report says there will be cost, management and innovation benefits for all concerned – the regulator, firms and consumers alike – but also recognises that the move will be most difficult for small firms. The FSA says it will put more resources into its contact centre to help guide them through the change, with a pilot project due later this year.

At the same time, however, the FSA notes while it believes the shift to principles-based regulation is feasible and beneficial – because it is easier to issue guidance in the form of ‘Dear CEO’ letters than to change prescriptive rules – the European Commission’s desire to implement a single financial market regime could complicate matters as it is, in some cases, applying prescriptive rules.