Risk Management, PRMIA

To understand the dilemma one must first define what Principles Based Approach to regulation really means and that is best characterized by looking at the opposite. Non Principle Based Regulation. In reality there are two forms of Policy Enforcement that a regulator can entertain, the first which is opted by most regulators, is a set of rules that are created to ensure that regulated entities remain on a narrow road of practice; penalties are outlined for such institutions that decide to or accidentally waver from that path of practice. Each mistake is classified as a breach and can attract damages which are usually financial in nature but on extreme cases involve custodial sentences or license suspensions.

The benefit of such aphorisms is that they are usually transpicuous in nature however difficult such rulemakings are to meet or test. Where the problem lies is that different banks, products, processes and customer groups vary substantially and the regulator then has to use a nebulous gauge on each firm to understand whether the bank is behind or on the line. The concept of Principles Based Approach is top down and goals are set for firms on activities they work with rather than a staircase of rules that has to be ascended to reach the goal. As the FSA puts it, there is an emphasis on outcomes rather than how they are achieved and in many respects a room full of people given the same problem, are likely to go about solving it in alternate ways. While that generates plenty of new practices albeit some unorthodox the argument is then transferred to the result, has the goal actually been met.

Clearly the FSA is looking at a wider set of issues rather than a rule book, their move is also going to encourage a holistic approach to quality in measurement and throughout the full life cycle of a customer interaction. The new approach will also more than likely go against box ticking as such exercises require a rule staircase to be in place for checking against. The downside is that if you are a compliance manager that is not quite sure whether an action is on that line, best practice or perhaps needs investigation, then you are going to need a point of reference. You need to be able to debate specific structures on the grounds of their ability to meet a relatively unfastened desideratum. Then one must ask how is a breach to be enforced, how is it to be defended and what actually is a breach under such a system.

While the advantages of such regulation are clear I suspect that both the FSA and the industry at large are going to need to improve their analytical and creative abilities. Certainly the FSA will have to ensure resources are available for consultation and it will be interesting to see where they draw the line on offering advice. One does question though whether it is more straightforward a test of compliance or whether such predicaments still remain.