The United Kingdom’s top corporate regulator has introduced another important phase of its plan to adopt a more principles-based approach to compliance: a new framework for recognizing guidance produced by third parties.

The framework is an important part of the Financial Services Authority’s move to ditch many of the detailed requirements in its regulatory rulebook and focus on broad principles instead. It will still publish its own guidance on how to meet those principles, but it also wants to encourage trade associations and professional bodies to publish guidance as well—some of which the FSA will formally “confirm.” The framework explains how the FSA will decide whether to confirm guidance, and what status such guidance will have.

A policy paper, “FSA Confirmation of Industry Guidance,” explains how the scheme will work. One central premise is that the FSA will not take action against a company on an issue where the company has complied with relevant recognized guidance. It also states that industry guidance will supplement FSA rules, not replace them; and that while the use of industry guidance is encouraged, nobody is obligated to produce it.

Kent

Rachel Kent, head of the financial services practice at the law firm Lovells and a critic of the FSA’s move to principles, still has concerns about the framework. She worries that the status of industry guidance might still be unclear. She points to a speech earlier this year by Clive Briault, managing director of retail markets at the FSA. Addressing the Association of British Insurers (a leading trade association in the United Kingdom), Briault spoke favorably about its guidance on unit-linked funds, and suggested that the FSA would look for compliance with it in supervision visits. But the guidance on unit-linked funds has never been formally confirmed by the FSA.

“There certainly seems to be at the very least an encouragement to comply with something that isn’t endorsed, which doesn’t seem quite right to me,” says Kent.

Kent is also skeptical about the FSA’s assurance that compliance with industry guidance will not be compulsory. “They say that, but you are going to be a brave person not to comply with it,” she says.

The industry bodies that the FSA expects to produce guidance are not entirely behind the scheme either. David Bennett, chief executive of the Association of Private Client Investment Managers and Stockbrokers, voiced “significant reservations” when the scheme was outlined in draft form last year. Now that the consultation is over, “We don’t feel they’ve paid enough attention to the concerns raised by this association and others,” he says.

One fear Bennett has is whether his organization could be held liable if its guidance is confirmed by the FSA and then used by a company as official documentation. APCIMS has sought legal advice on this in the past and “it remains a grey area,” he says. Bennett also worries that guidance his organization produces for its members will be available for any firm to use, whether it is a member or not. That could undermine APCIMS’s business model. “Those two areas continue to be quite real concerns,” he says.

Doing Whose Job?

Beyond that, Bennett raises a concern voiced by several trade and industry bodies during the consultation process: Is the FSA surrendering a core part of its job—producing guidance—and effectively outsourcing it to third parties free of charge?

As the regulator slims down to a principles-based system, “we will be having to do the work to define the parameters of what the principles are, which is potentially a great deal of work,” Bennett says. For a small body like APCIMS, with only a dozen people on staff, that can be “a considerable burden,” he says.

“Do they dovetail together or are they contradictory in any way, and whose job is it to check that out?”

— David Bennett,

Chief Executive,

APCIMS

While APCIMS is small, it is the kind of body the FSA needs to win over. (Indeed, the FSA often cites a paper APCIMS published last year on stockbrokers’ duties as a prime example of the principles-based guidance the FSA wants to see.) For now, Bennett says the organization has submitted some guidance to the FSA for confirmation, to see how the process works. “We are looking at how they treat it, if they accept it, and how they would seek to use it,” he says.

There is one last concern about the scheme, shared by Bennett, Kent, and others. What happens if several industry bodies produce guidance on a topic? “Do they dovetail together or are they contradictory in any way, and whose job is it to check that out?” asks Bennett.

A spokesman for the FSA says that situation is not likely to arise, because industry bodies produce guidance that relates specifically to their members. The FSA would check for inconsistencies or contradictions before confirming any guidance, the spokesman says. He also downplayed concerns about the legal liabilities of industry bodies and says the regulator was “absolutely not” seeking to outsource its role.

And how many have submitted guidance for approval so far? “We’ve had a lot of inquiries,” the spokesman says.