Principles-based regulation uses the broad set of principles of conduct set out by the financial services regulator.
These principles are then left to regulated parties to decide how to most appropriately implement them.
This differs from rules-based regulation which leaves less to the regulated parties to decide, and requires the regulator to set out a more specific rule book.
What are the benefits of principles-based regulation?
In short, principles-based regulation will sustain the current rigorous regulatory environment for UK financial services.
The regulator’s approach to supervision will rely increasingly on principles and outcome-focused rules rather than detailed rules prescribing how outcomes must be achieved. This means big changes for both our associates and our clients who will be at the forefront of these advancements.
Firms will have increased flexibility in how they deliver the outcomes that the regulator requires, and many will find a closer fit between meeting their business objectives and meeting regulatory requirements. In addition to this, 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. This is very relevant to Grovelands as we specialise in senior contract and permanent compliance experts.
Well controlled and managed firms, who engage positively and openly with the regulator and the outcomes that they are aiming to achieve, should expect to experience real benefits in the form of a ‘regulatory dividend’.
For consumers, principles-based regulation will be of benefit by fostering a more innovative and competitive financial services industry. Principles-based regulation also offers effective protection as senior managers drive the changes necessary for their firms to meet the principles. UK consumers can play a role in achieving this as, over the long term, they become more financially capable.
Principles-based vs. rules-based regulation
The decision to follow principles-based rather than rules-based regulation will be contentious for some, as rules-based regulation does have its merits.