The Financial Services Authority yesterday promised to rip up half the rulebook it uses to police financial services companies, as part of a radical shift in its approach to regulation.
Britain's chief City watchdog said it would completely overhaul its Conduct of Business rules - the blueprint for how the companies it regulates must advertise, sell, administer and manage products and services - for the first time since being given full responsibility for financial services regulation in 2001.
The reforms have partly been forced upon the watchdog, which is required to implement the European Union's Markets in Financial Instruments Directive by 1 November next year. However, the regulator has also been stung by criticism from financial services companies that its staff have been obsessed with the small-print of regulation, rather than concentrating on whether or not customers are being well-served.
"[This] move towards principles-based regulation means focusing on the outcomes that really matter rather than on procedural box-ticking," said Dan Waters, the FSA's director of retail policy. "It also gives firms the flexibility to achieve these outcomes in the context of their particular business model."
The regulator yesterday published a proposed updated version of its Conduct of Business rules, which is roughly half the length of the previous version. The rules include 11 "Principles for Business", which set out financial services companies' fundamental obligations towards clients.
Mr Waters said that in future, the FSA would seek to police companies by asking them to explain how their actions reflected these principles, rather than by exhaustively cross-referencing against a prescriptive rule book.
Publicly, most regulated companies back the reforms, which follow a series of run-ins between financial services firms and the FSA. Last year, for example, the regulator was forced to compensate Legal & General, after an independent tribunal said it had exceeded its powers in action taken against theinsurer for mis-selling.
Stephen Haddrill, the director-general of the Association of British Insurers, said: "Consumers and industry alike need a regulatory regime that ensures fairness without creating unnecessary cost - we hope the FSA's proposals are the start of a vital move towards principles-based regulation in the retail area."
In private, however, some financial services companies are concerned about the way in which the new approach will actually be implemented. One senior compliance executive said: "The big danger with principles-based regulation is that you have no certainty - the FSA finds it very easy to say that a principle should have been interpreted in a completely different way to the view we might have taken."
Ben Gunn, the chief executive of Friends Provident Life and Pensions, added: "Broadly speaking we think this is a positive move, but it's all about implementation - there is a feeling in some parts of the industry that under this system, the FSA will be able to get you if it decides it wants to."
However, the FSA chief executive John Tiner has made it clear in recent months that he is keen to reduce the burden of financial services regulation by giving companies more freedom to work within general principles. Earlier this week, Mr Tiner said the watchdog's new approach to regulation would enable it to reduce its staff numbers by around 10 per cent, or 300 employees, by 2010.