Historically, regulated firms have looked to the FSA’s detailed rules to determine what is required from them by the FSA. However the FSA is moving towards becoming a Principle led Regulator.
In his keynote address to the annual FSA Enforcement Law Conference on the 16 June 2006, the FSA chief executive, John Tiner, made it clear that future Enforcement action will be based on the 11 Principles for Businesses (“the Principles”) rather than breaches of the FSA sourcebooks. Mr Tiner commented that:
“From a legal perspective, our Principles have the status of rules and we can take enforcement action on the basis of a breach of them.”
Citing the recent £6.4m financial penalty imposed by the FSA on Deutsche Bank (see above) Mr Tiner stated: “ …that we can and do take Enforcement action on the basis of Principles alone and it is our intention to go down this route…. The Principles are rules and we intend increasingly to take enforcement action on the basis of those Principles alone where this is appropriate”
This theme was reflected in the speech by the Insurance Sector Leader, Sarah Wilson, at the Investment and Life Assurance Group’s Annual General Meeting on the 15 June 2006. Ms Wilson described:
“…the shift away from the current largely prescriptive approach to regulation (where senior management are held accountable for managing their firms but there are many detailed rules specifying how they should conduct much of the business) towards a regime in which outcomesfocused principles come to the fore.”
While Principle-based regulation may give the existing regime greater flexibility there is also the risk of an inconsistent approach. The high-level Principles refer to key concepts such as “integrity” (principle one) and “fairness” (principles six, seven and eight) however these important terms are not defined. Differing interpretations of these concepts by the FSA could create uncertainty for both the Regulator and regulated sector.