Understanding the Different Approaches to Regulation

There are two traditional approaches to regulation, rules-based regulation and principle-based regulation. In recent years, a third approach has emerged - outcomes-based regulation. This newer approach is a direct response to the financial crisis of 2007-9.

An overview of the different approaches is provided below, with a focus on outcomes-based regulation.

1. Rules-based regulation

Rules-based regulation is based on detailed rules that set out specific standards and requirements. This type of regulation is highly prescriptive, making clear what can and cannot be done. An example of rules-based regulation is the CASS 5 rule, which requires organisations to carry out a money calculation at least every business 25 days. This is mandatory and not up for debate.

2. Principle-based regulation

The principle-based approach sets out fundamental principles or guidelines, leaving the exact details of implementation to individual firms. This approach therefore relies on firms to interpret the broad principles. For example, the principle might be broadly worded as, ‘where consumers receive advice, the advice is suitable and takes account of their circumstances.’ How this is achieved is left to individual firms.

3. Outcomes-based regulation

We will focus on this area in a little more detail. The principle-based approach can be criticised in the respect that it allows firms to show they have adopted the principle, even if they have not achieved the desired end deliverable for the consumer. Approaches to regulation have therefore evolved to focus increasingly on consumer outcomes.

Outcomes-based regulation has increased the emphasis on senior management to deliver the desired outcomes for consumers, with the additional requirement that managers must be able to measure and demonstrate the outcomes being achieved.

Consider the previous principle-based example: ‘Where consumers receive advice, the advice is suitable and takes account of their circumstances’.

How can this be measured and how can a firm demonstrate that the outcomes are being achieved?  This could be evidenced, for example, by reviewing the percentage of upheld complaints within a firm and through routine file monitoring.

I have been working with firms of all shapes and sizes for the past few years, helping them implement a bespoke outcomes-based framework in line with the FCA’s six TCF consumer outcomes. Please don’t hesitate to get in touch with me if you would like further guidance on this.

About the author

Kirk has been working in the financial services sector for a long time in South Wales, having started out in both the general insurance and mortgage advice arms of HSBC, before becoming the Compliance Officer at Go Compare and Training & Competence Manager at Optimum Credit. 

Kirk looks after RWA clients in Wales and the South West and specialises in designing and implementing T&C schemes for firms of all sizes.

Kirk Ford

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