We recommend that financial services regulators adopt the principles below, recognising that there will be a balance of emphasis between them. Regulators should be clear about the outcomes they are seeking, and against which they should be judged. Regulatory activity is not an end in itself, only final outcomes matter.
We believe these principles are relevant around the world: regulators should cooperate with each other and adopt an outward-looking, international approach which reflects the needs of both local and globally-active customers.
Build well-founded trust and promote an appropriate culture in financial services
The regulators’ approach and processes must build trust and confidence in the financial services sector and its participants, including in regulators themselves. Regulators should recognise the paramount importance of developing and embedding in financial services a culture of strong ethics, focus on the interests of clients and, more generally, determination to ‘do the right thing’.
Ensure stakeholders understand their approach
Stakeholders need to understand regulators’ objectives and requirements:
Objectives: the regulators should have clear and well-communicated scope and objectives that are well-understood by all stakeholders, and against which performance can be measured and reported.
Regulations: regulators should aim to ensure that principles, rules and guidance (‘regulations’) are simple, understandable and clear, and that they establish appropriate standards of competence and behaviour.
Predictability: in virtually all circumstances the application and outcome of the principles and regulations should be predictable. It should not normally be necessary for anyone to resort to expert judgement or the courts in order to resolve how the rules operate.
Regulation should be supported by robust monitoring and supervision. There should be a firm expectation in the marketplace that regulatory requirements will be enforced in both spirit and letter. It should be recognised that a need for enforcement action represents regulatory failure, not success.
Be proportionate and fair
A proportionate and fair approach is essential if regulators are to inspire confidence:
Proportionate approaches: regulatory requirements, oversight and intervention should reflect the nature, scale, sophistication and complexity of the market participants and the problem regulators are addressing.
Limits and costs of regulation: regulators should recognise both the limits to what regulation can achieve, and that regulation is often costly. Accordingly, they should always explore whether non-regulatory approaches – such as appropriate private sector initiatives – could better meet their objectives.
Regulatory powers: regulators must exercise their powers reasonably. Disciplinary decision making should be transparent. There should be clear penalties for non-compliance but there should also be a right of appeal against formal regulatory decisions to an independent body.
Developing regulatory rules: regulators should keep changes to the underlying rules to a minimum. There should be a justifiable economic, industry or social basis for any material change to the regulations and this justification and impact assessment should be made public and the underlying policy rationale made clear. Other than in exceptional circumstances, regulators should allow proper time for review, drafting and consultation on new requirements.
Truly understand financial markets
Deep insight into financial markets is essential for effective regulation:
Market failures: regulators must have a high level of knowledge of financial markets in order to identify market failures which it may be possible to address through regulation, and to minimise the risk of unforeseen consequences. It is vitally important that regulators employ a sufficient number of staff who have significant practical experience of financial markets. In-depth dialogue with stakeholders – including those with professional expertise in this area – is also essential.
Business impact of regulation: regulators should recognise that financial services firms are private sector businesses, and that requirements which make it difficult for such firms to earn a commercial rate of return will undermine their viability over the longer term.
Consumer impact of regulation: in undertaking consumer protection, regulators must delineate what is a reasonable level of responsibility for consumers and providers to take, and which should therefore be left to private decisions. Excessive consumer protection is likely to lead to reduced choice and higher prices for consumers.
Innovation: regulators should ensure that requirements can cope with, and respond to, financial innovation and other major developments, for example in technology.