The FSA has attracted mixed opinion surrounding its principles-based regulation with providers and advisers disagreeing over whether they need to be on tighter reins. Lucy Quinton explains
Evolution rather than revolution is normally the protection industry's preferred method, so it is remarkable that the FSA has been largely successful in winning the industry over to a revolution in regulation. Its adoption of principles-based regulation is being watched by regulators worldwide as a possible model, an experiment backed more or less by UK financial services.
Roger Edwards, product director at Bright Grey, notes that rigid and prescribed regulation should not be required in a market as long as its participants maintain high standards of professionalism and integrity. However, Edwards points out that financial services could have done better in this respect over the last few decades. He says: "The industry has not always given out the right impression to customers, due to endowment and pensions mis-selling, for example. But, the opportunity that has arisen as a result of principles-based regulation should allow the market the freedom to develop in the customers' best interests."
Industry bodies are also broadly behind the initiative. The Association of British Insurers (ABI) wholeheartedly supports the concept. "It works better for consumers and companies alike rather than a set of rigid and inflexible rules, and we will continue to argue for its greater application across all insurance sectors," comments Nick Kirwan, head of health and protection at the ABI.
However, it is not all roses and there are those in the market that are undecided as to whether or not the benefits of principles-based regulation outweigh the detriments. There are concerns that, while principles-based regulation is considered to be a grown-up form of guidance, it brings a subjective aspect to the sales arena that can be problematic.
Alan Lakey, principal of Highclere Financial Services, says: "Subjectivity, whether in claims assessment, underwriting or mortgage agreement, is double-edged. As we have seen with the Financial Ombudsman Service adjudications, the views and opinions of one person may not be shared by another. If these decisions are based on subjective opinion then we are likely to have miscarriages of justice. Personally, I prefer to know where the boundaries are."
Yet it can be argued that the FSA is correct in its approach, as principles-based regulation should provide the level of protection customers need and demand while allowing for a flexible framework in which product providers can develop propositions responsibly. "Prescribed regulation can be too stifling and can encourage more bending of the rules than principles-based regulation," as Edwards says.
No complaints here
It is fair to say that the financial services industry can happily debate the issue all day but there is a general understanding that this form of regulation is here to stay, at least for the medium term, and everyone involved, including the protection sector, will be working under it. Indeed, Rod McKie, head of individual protection at Aegon Scottish Equitable, says he has yet to meet anyone who has publicly grumbled about principles-based regulation, though some are exhibiting fatigue.
It is understandable that many prefer the comfort brought by defined rules, which is why there may be reluctance to remove the rules. Regardless of this, Steve Elliott, technical manager at Royal Liver, says: "We all have a vested interest in the industry getting better and want to engage fully with this, even though sometimes it feels like a game where you guess the answer and the quizmaster tells you that you are wrong without telling you the right one."
Removing his devil's advocate hat temporarily, Lakey admits to having picked up on another factor to consider - having principles as opposed to rules is certain to make all concerned think harder before selling, marketing or launching. Indicating this could be seen as a positive by advisers, he adds: "It should also sharpen up the claims managers who may feel more inclined to treat the customer fairly by paying knife-edge claims."
It is reasonable to expect that, in the medium-to-long term, principles-based regulation will change the protection market for the better. Intermediaries and their customers can expect to see simpler and clearer propositions emerging while business-to-business processes and communications will become more developed and streamlined.
It is clear from talking to a cross-section of the industry that, regardless of these benefits, there is a clear divide between providers and advisers as to whether principles-based regulation is a good idea. Lakey says: "We all need a kick in the pants from time to time - something that makes us reflect on what we are doing and why we are doing it. However, the kick may be a surprise to some and far heftier than they imagined. On balance, I prefer to know the parameters as it is easier than second-guessing a regulator's latest whim."
Back in the provider camp, Elliott remains optimistic that the introduction of principles-based regulation was a good idea. "Competition and innovation is good for providers, intermediaries and, of course, consumers. Concentrating on 'outcomes' rather than a slavish devotion to processes has certainly encouraged innovative approaches such as tele-underwriting, which has benefited everyone," he adds.
In two minds
Crossing over the provider and adviser divide, Julie Smith, head of protection and structured product research at AWD Chase de Vere agrees with Elliott and says that introducing this type of regulation has been good for the industry because it benefits the client. She notes the change also gives companies a good opportunity to look at the ways they operate and to freshen their approach.
Perhaps the debate would die off if the FSA was to accentuate the advantages of principles-based regulation. This would be done by encouraging those that it regulates to demonstrate how it delivers positive results for consumers and companies. After all, rigid rules-based regulation has led to consumers being overloaded with confusing and often unnecessary information.
Principles-based regulation has already changed the shape of the protection market as there is now clearer communication with customers and the key facts and features documents have helped raise customer understanding. Implementing the treating customers fairly regulation across the whole process means customers are more confident in providers' claims handling and service standards.
In addition, Smith acknowledges there needs to be a happy medium between flexibility and clarity of guidance. In order to do this, she says the FSA could provide more detailed case studies to improve understanding as only minimal direction is being given at present.
While certain sectors complain about the concept of principles-based regulation, the only feasible alternative appears to be none at all and, as Edwards points out, the industry has shown in the past that it needs some sort of guidance or prescribed and rigid rules. However, he does not think strict regulation nurtures good proposition development over time.
Perhaps it is the feeling of being overlooked or disregarded by the FSA that has alienated some advisers. However, regardless of the heartfelt concern and discontent of the advisory sector, principles-based regulation is here to stay. Industry players must learn to adjust if the industry is to progress. Principles-based regulation is considered by most of the industry's converts to be a superior and mature method of regulating. It may be time detractors of the concept moved on and dealt with its reality.
