Posted by Alan Bannister of Vizards Wyeth, a Legal Futures Associate
Those of us with recent experiences of the Financial Services Authority’s (FSA) changing approach to regulating its industry firms, should be forgiven a wry smile on reading SRA board chairman Charles Plant’s article on ‘outcomes-focused regulation’ which appeared in the Law Society Gazette on 11 February 2010. Solicitors’ firms should be careful not to assume they understand automatically some of the buzz words and phrases he uses.
‘Principles’, ‘culture’, ‘outcomes focused’, ‘flexible’ – all of these words have a common theme, namely uncertainty, and the SRA will need to manage their firms concerns most carefully when dropping a rules-based system in favour of one that shifts the burden of interpretation onto individual firms. When the FSA looked at changing its regulatory landscape, it introduced ‘principles based regulation’ (PBR). That didn’t work sufficiently because different firms interpreted the principles in their own way and often missed the point. A famous example was principle 6: ‘A firm must pay due regard to the interests of its customers and treat them fairly.’
What constituted ‘fair’ changed from firm to firm and in most cases did not meet the FSA’s ideas of what ‘fair’ meant. This led to what are known as ‘thematic visits’ to firms, the publication of huge screeds of literature on the subject, including the FSA’s six desired outcomes for ‘Treating Customers Fairly’ (TCF) and a 38-page paper on what ‘culture’ meant. Most unwelcome was the enforcement action taken by the FSA, which has to date levied fines of millions of pounds on firms found wanting in this area.
For the smaller and medium-sized firms, PBR was problematical not only because it removed certainty but also because of the additional time and resources required to get to grips with what the principles meant for them. Larger firms that had effectively run their businesses in line with the requirements of the Combined Code (now the Corporate Governance Code) objected less as the concept was familiar to them.
The result was that the FSA last year moved to outcomes-focused regulation, but without so far publicising much by way of what outcomes they are seeking.
At least the SRA seems to be skipping an unnecessary step in the process to achieve better results for clients. It is to be hoped that it is a lot clearer in its intended outcomes than arguably the FSA has been, and in so doing take the lead in what clearly is becoming a more customer-focused world.