The news that the British Bankers’ Association had launched a judicial review of principle-based regulation and that one of their key arguments was that such regulation is an infringement of their basic human rights made me check the date on the paper. Was it April already?
But no, there it was in black and white. It is February and the BBA are leading a charge against principle-based regulation or, as the FSA’s Hector Sants prefers to call it now, “outcomes-focused” regulation.
The theory behind this approach is that outcomes are regulated rather than processes, thus saving the regulator all the messy business of getting their regulations right and relying instead on the ability to say “ here’s the outcome we want and if you didn’t get it, then you broke the rules”.
The BBA have a number of issues with this approach, one of which is that it infringes the princple of legal certainty, the right to which is guaranteed by article six and article one of the first protocol of the European Convention of Human Rights, which was translated into UK law in the Human Rights Act.
Ignoring the fact that this concept was originally designed to prevent crazed despots from tyranising their powerless citizens, and not to prevent well-heeled city bankers from worrying so much they lose a night’s sleep, the objection has a strong validity.
There is no doubt that the rise of outcome-based regulations has resulted in a number of unexpected results; firstly the regulator has no direct accountability as they have transferred responsibility for the detail of the regulation to the regulated and secondly business has an increased burden as they have to go further in order to ensure that they are not in breach of undefined rules – the classic Rumfeld “unknown unknowns”.
Both of these are bad for society in general and the financial services sector in particular. Unaccountable regulators are bad for businesses and consumers as they end up creating an expensive and uncontrollable bureaucracy which stifles innovation and increases costs. And uncertainty forces businesses to play it safe by over-regulating their own businesses – a costly process the tab for which is only picked up by one person, the end consumer.
As bad as this may be for banks, it is much worse for IFAs, many of which are small businesses and have no opportunity to spread the cost over numerous business functions – forcing them to lay it directly on the consumer.
It’s in the interest of the insurance industry that this challenge suceeds and forces the FSA to return to specific regulation – minimising the overhead to providers and IFA alike and ensuring that some of the responsibility for failures comes back to those who are regulating the industry.