1. Certificate for Introduction to Securities & Investment (Cert.ISI) Unit 1 Lesson 54:  Principles-based regulation  Treating customers fairly 54cis

2. Principles-based regulation There are two broad approaches to financial regulation…  The “statutory” approach to financial regulation  Specific legal rules are laid down with the aim of covering every eventuality The advocates of a principles-based approach to regulation believe it is impossible to write a rule for every specific situation that a firm might encounter o In the Unites States, the Securities and Exchange Commission (SEC), which regulates the non-banking side of the US financial services industry, adopts this approach  The “principles” approach to financial regulation  This sets out in general terms the standards of behaviour which are expected of firms and individuals o This approach is used in the UK by the Financial Services Authority (FSA)  Principles-based regulation involves laying down broad principles to which firms should adhere  It leaves it up to firms to determine how they should be implemented.

3. The FSA’s principles for Business

4. The SEC’s rule book Under the UK’s principles-based system, there would be no need for the detailed rule FINRA 5240.  These examples of misconduct would have been covered by the FSA’s Principles 1, 5 and 7

5. Why principles? Not every firm is happy with a principles-based approach to regulation. They want to know exactly where they stand in any eventuality Many compliance officers and legal department are more comfortable with a rules-based regime. They tend to seek detailed guidance on how to interpret principles in specific situations.  The FSA believes that by leaving firms to determine how the principles are interpreted:  A “culture of compliance” will be built up within firms  The regulatory system will be flexible enough to adapt to the rapid pace of change in the industry  regulated activities  activities that constitute dealing in investments as principal  ancillary activities in relation to designated investment business, home finance activity, insurance mediation activity and accepting deposits  the communication and approval of financial promotions  the carrying on of unregulated activities  any activity of other members of a group of which the firm is a member  The FSA principles cover:

6. Reliance on outcomes Principles-based regulation can only be deemed a success if it achieves the desired outcome: an honest, fair and reliable financial system  The “Treating Customers Fairly” initiative was a major part of this approach.  The FSA wants an effective and efficient retail market for financial services  The FSA wants a fair deal for consumers The market failures of 2008 called into question the effectiveness of principles-based regulation. The FSA has reacted by announcing more intensive supervision and credible deterrence.  The FSA has said that it wants  Capable and confident consumers  Clear, simple and understandable information provided for, and used by consumers  Soundly managed and well-capitalised firms which treat their customers fairly  Regulation that is: o Proportionate o Risk-based

7. Treating Customers Fairly (TCF) This initiative is based on the FSA’s Principle for Business No. 6: “a firm must pay due regard to the interests of its customers and treat them fairly” TCF is not, therefore, stating anything new. However, the FSA is giving it renewed emphasis to encourage firms to think hard about they can deliver fair treatment to their customers.  As before, the FSA does not define TCF. Firms are required to consider the outcome of the services they provide to their clients.  The FSA has produced a number of guides for different types of firms

8. Treating Customers Fairly (TCF) By getting the firms to work out for themselves what is required, the FSA hopes that TCF will become embedded in a firm’s culture at all levels. The FSA has defined six “consumer outcomes” to explain what firms should be aiming to achieve:  Consumers can be confident that they are dealing with firms where the fair treatment of customers is central to the corporate culture  Products and services marketed and sold in the retail market are designed to meet the needs of identified consumer groups and are targeted accordingly  Where consumers receive advice, the advice is suitable and takes account of their circumstances  Consumers are provided with products that perform as firms have led them to expect and the associated service is both of an acceptable standard and as they have been led to expect  Consumers do not face unreasonable post-sale barriers imposed by firms to change products, switch provider, submit a claim or make a complaint  Consumers are provided with clear information and are kept appropriately informed before, during and after the point of sale

9. Responsibility of managements The FSA will look for evidence that firms have incorporated Treating Customers Fairly throughout their operations and processes  Training The FSA requires that TCF is evident in a firm’s systems and controls and all aspects of its business culture, including Human Resources issues.  Competence  Remuneration  Performance management TCF training

10. Financial Services and Markets Tribunal The FSA is empowered by Parliament to impose decisions or sanctions on firms and individuals, including disciplinary decisions and financial penalties These decisions can be controversial. An appeals process has been established to comply with human rights legislation: this has the power to over-turn FSA decisions and penalties  The tribunal is run by the Ministry of Justice  The tribunal is a judicial body created under the Financial Services and Markets Act 2000  The tribunal comprises eight legally qualified chairmen and 19 lay members  The Financial Services and Markets Tribunal has the power to issue binding directions to the FSA  When an FSA decision is disputed, it can be referred to the Financial Services and Markets Tribunal