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Law Society critical of principle-based approach

Ramesh Sharma

April 22, 2006

Writing to John Tiner, chief executive at the FSA, Margaret Chamberlain, chairman at the City of London Law Society Regulatory Committee, stated that the Society had apprehensions. It said: ‘Increased reliance on principles rather than rules is leaving firms uncertain how to comply with FSA requirements.’ She added there was a level of ‘unacceptable vagueness for firms as to how to satisfy the FSA.’

Philip Ryley, head of Financial Services Regulation at TLT Solicitors, welcomed the discussions. He said: “Some of these concerns are widely felt throughout the sector and the debate over ‘principles versus prescriptive rules’ needs to be had.”

He added: “There are advantages and disadvantages with either approach. Principles provide flexibility for firms to design and implement systems and controls that meet FSA expectations. It also suits their commercial objectives and provides the regulator with flexibility to evolve its risk-based approach, themes and focus. However, the approach can lack clear definition and certainty as to what is required and can make compliance and enforcement more difficult. Prescriptive rules give firms greater certainty for compliance but less flexibility and can lead to a more labour intensive and costly regime.

“Whatever the outcome of any debate, the FSA needs to ensure that the regime is proportionate and effective and its statutory objectives are met in regulating today’s regulated business.”

Cath Hearnden, director at My Mortgage Direct, said: “We are going back to a principle-based approach that is unclear. A principle approach makes it very difficult to see if you are abiding by the rules and only when the FSA does its checks do you find out if you have been compliant.”

The FSA confirmed it would be responding directly to the Law Society.


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