Prof. Jayanth R. Varma’s Financial Markets Blog

A blog on financial markets and their regulation

Principles based regulation and industry guidance

I do not agree at all with Ian Morley when he writes in the
Financial Times
(“Uphold the principles of financial
services regulation”, February 7, 2007) that the Financial
Services Authority in the UK is taking an unhelpful stand regarding
Industry Guidance about its regulation. Morley’s complaint is
about the FSA’s discussion
of November 2006.

First of all, I found it puzzling that Morley publishes his piece
about this discussion paper a few days after the comment period on
this paper closed on February 1, 2007. If the purpose was to stimulate
a debate, it would have been helpful to publish this a little earlier
so that more people could respond to the FSA before the close of the
response period.

Second, after reading the discussion paper carefully, I find
nothing in it to complain about. Principles based regulation is a move
away from the certainty of precise rules. Morley wishes to bring the
certainty back and he seems to suggest that this could be done by
industry bodies writing precise rules and the FSA granting them the
force of law so that those who blindly follow these rules cannot be
sued. Unfortunately, this is not a prescription for principles based
regulation. It is a prescription for detailed rules with the rule
making outsourced from the FSA to the industry bodies. Such a scenario
would be the worst of all possible worlds. The FSA came into existence
partly through a merger of several self regulatory bodies that made
their own rules. It is pointless to turn the clock back.

The FSA has embarked on a tortuous journey towards principles based
regulation that would take several years to complete. I hope that they
succeed. Morley’s piece suggests that more than the regulator,
it is the financial services industry that fears principles based


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