FSA announces consultation on the new rulebook

United Kingdom

In Consultation Paper 8, the FSA has given an early insight into the layout and likely content of its new rulebook. The FSA accepts that drafting the rulebook will be a major project, considering the variety of institutions which it will authorise and the complexity of the rules which apply to them. Nevertheless, the FSA appears to have taken a sensible approach to creating a unified rulebook which will be welcomed by the majority of practitioners.

Objectives of the new rulebook

The FSA has announced a predictable set of objectives in relation to its rulebook. It will be interesting to use these as the benchmark against which to assess the rulebook when it is finally published.

Communication

  • Clear communication requirement
  • Transparency
  • Simplicity, user-friendliness and accessibility
  • Relevance

Consistency

  • Internal coherence/consistency, coupled with appropriate differentiation
  • Harmony with the FSA's overall regulatory approach, which will be geared to the fulfilment of its new statutory objectives

Implementation

  • Enforceability
  • Flexibility

The contents of the rulebook

The FSA considers that there is a balance to be struck between continuity and change in the expression of regulatory requirements. It would appear that, as predicted on page 5 of FS Brief issue 28, unless there is a good reason for change in the interests of consumer protection or simplicity, the main emphasis will be on continuity. Essentially, the rulebooks (especially the Conduct of Business Rules) will remain largely unaltered other than in two situations:


nWhen it is necessary to reflect the new legislative framework (for example, authorisation procedures, complaints etc.)
nWhere there is a significant scope for desirable rationalisation (for example, in creating a single set of standards for wholesale market business out of the separate regimes maintained by the Bank of England and the Securities and Futures Authority)


The legislative framework

It is expected that the Financial Services Reform Act will give the FSA a wide enabling power to make rules. As subordinate legislation, such rules will have the force of law and will be capable of imposing binding obligations upon firms. There will be no separate power to state "Principles" but the FSA is expected to lay down wide ranging requirements very similar to the existing general Principles.

In addition, legislation will give the FSA the power to issue guidance on its rules and regulatory matters, and it is clear from the design of the new rulebook (see below) that this will be a very important power.

The FSA will able to grant waivers on a case by case basis to disapply its rules, subject to an obligation to publish such waivers.

In addition, a right of action for damages for "private persons" will attach the FSA rules, except certain financial resources rules and others to be specified by the FSA. The legislation will also create a presumption that the rules confer no right of action on non-private persons (unless the FSA stipulates otherwise). This is expected to be similar to the current right under section 62 FSAct.

The design of the new rulebook

The FSA has espoused a number of design principles:

  • There should be a succinct authoritative statement of high level principles, stating the fundamental obligations of regulated businesses. These will express fundamental regulatory standards, be applicable to nearly all regulated businesses, and be formulated at a level of generality which will enable them to be durable without amendment.
  • There will be a solid backbone of further rules to set out accurately the exact standards which firms will be expected to meet.
  • There will be a major role for guidance. This guidance will not be legally binding, but may be looked at in the same way that the Highway Code is when considering, in evidential terms, whether rules have been breached.
  • There will be a presumption against rule differentiation between types of firm except on policy grounds.
  • The rulebook will be split into six main sections -High level standards covering principles, fitness and propriety, including (for the first time) senior management responsibilities. The placing of senior management responsibility as a basic principle of the regulator is significant as it is indicative of the importance which the FSA places upon it. Given that the majority of breaches for which regulated firms are reprimanded and fined are of Principles not rules (as they are broadly expressed and therefore more difficult to refute) it must be presumed that the FSA will use the power to discipline firms for abdication of senior management responsibility with some regularity. -Business standards, including a prudential sourcebook, conduct of business sourcebook and market conduct sourcebook. -Regulatory processes governing authorisation, training and competence, supervision and discipline. -Financial consumer protection, covering complaints, compensation and consumer guides. -Specialist sourcebooks in order to enable the FSA to tailor its rules to particular sectors of the industry such as Lloyd's, friendly societies, building societies etc. -Special guides; the FSA has said that these will probably cover small IFAs, and small friendly societies.
  • Changes to the rulebook will be subject to prior public consultation, reasoned consultative proposals, feedback statements and a thorough cost/benefit analysis. Helen Liddell has emphasised the need for the FSA to be cost effective if it is to be successful, and this also suggests that there will be little immediate change to the conduct of business rules as such changes would require widespread prior consultation and analysis.

The new rulebook is likely to emphasise continuity over change, and although Howard Davies admits that while it may "vie in length with War and Peace, even this will amount to a substantial reduction in the immense volume of current material".