In the March Epsilon E-zone I touched on the thorny questions of Principle based regulation and what it might mean for firms as MiFID began to drive it through the regulatory agenda. The FSA put out a seminar invite on the subject and had over 600 enquiries forcing them to book a bigger venue so it’s obviously a hot topic right now.

Of course there is nothing new under the sun and as far back as Discussion Paper 18 the FSA put out the feelers on how they saw the evolution of firms from mechanical compliance through to values based firms who went beyond just having a compliance culture or even being beyond compliance to a utopian vision of mature relationship benchmarking built on ethos and values that drives a firm to question its motivations and challenge behaviour from within.

In an ideal world then we could see principle based regulation as one here firms embedded the values of ethical behaviour in everything they did and rules and compliance would become a thing of the past. However this is not an ideal world but nevertheless principle based regulation is upon us or is it?

In fact MiFID brings with it a set of new rules and requirements that will be less flexible than the past. Like other directive led regulation where the directive imposes a requirement the FSA have to follow it through and firms have no choice but to comply. However the gaps and high level aspirations are where it becomes interesting and that is where principle based regulation comes into its own.

Less is more and as with treating customers fairly a simply sentence or two as a principle leads to much greater questioning, procedures and soul searching than anyone quite imagined. Where gaps exist and high level requirements have to be met the challenge is to strike the right balance whilst meeting the overall goals expected. This is where a values based ethical firm can overcome any regulatory risks through constantly re-examining its progress and doing what is right or what any reasonable person would instinctively know to be right in the circumstances.

There will be many more debates to be had and it is from these debates that better outcomes should be achieved. The tick box approach never did work, as anyone trying to approve a financial promotion against a check list will realise. The holistic approach is always best and it requires the kind of ‘out of the box’ lateral thinking that should be at the heart of any dynamic and forward thinking company. It’s not just about getting rich quick and to hell with the customer and neither is it purely about customers being right all the time.

A values driven organisation will begin to appreciate the benefits of principle based regulation. It should not be something to be afraid of but to be integrated into everything we do. Doing what’s right is the way we do business and long term that is also the best and most profitable way to do business as well.

Whatever happened to the mass sales forces of the past who were taken off the street selling milk one week and a couple of week’s later explaining the benefits of pension planning after a basic training course. I recall someone talking about the madness of the situation at the time it was happening and it wasn’t that long ago! So surely we could see through the obvious flaws in that business model today but are there other hidden depths in the financial markets that are just as cynical and crying out for reform? I’m sure we could all think of some dubious practices that still go on, which are still largely tolerated or just part of the wallpaper and go without noticing.

This is what principle based regulation is really all about. It’s about noticing the wallpaper. Asking why we do it that way and questing whether it meets the high level principles we should expect to operate by. Is it possible that firms can move towards the values based organisation that can lift itself out of the burden of compliance and just get on with the job of being great?

Well in my line of work you have to be a believer and however cynical I may become along the way I know it’s possible to achieve but rarely ever accomplished. If anything, principle based regulation is likely to keep me in work for many years to come as I take my steamer along to look at the writing on the wall and see it was dated many years ago.

Anthony Smith FCII APFS FCoI Chartered Insurance Practitioner
Director AJS Consultancy Services Ltd
Member of the Association of Professional Compliance Consultants