New investment business rules mark significant move to principles-based regulation

31 May 2007 11:11 AM

The Financial Services Authority (FSA) today published a Policy Statement that will lead to a radical simplification of the rules firms need to follow in carrying out investment business with their customers.

The reform of the Conduct of Business rules is a flagship project for the FSA in the move towards principles-based regulation and away from detailed prescriptive rules. The FSA is removing much of the detail of the old rule book to create a new rule book – COBS – of about half the length. This incorporates the implementation of the relevant provisions of the Markets in Financial Instruments Directive (MiFID).

The Policy Statement confirms the approach set out in CP 06/19 and CP 06/20 published in October 2006 to operate on the basis of principles and high-level rules, except where detailed provisions are either required by European Union directives, or are the only practicable way to achieve a desired consumer protection or other regulatory outcome. In response to points made during the consultation process the FSA has made a number of improvements to the proposals in CP 06/19 and CP 06/20, including better layout and presentation of the Financial Promotions material, which will now be in a single COBS chapter "Communicating with clients, including financial promotions."

FSA Director of Retail Policy Dan Waters said:

"The move toward principles-based regulation means focusing on the outcomes that really matter rather than on procedure or process. It gives firms the flexibility to achieve the needed outcomes in line with their particular business models. The approach also fits with the emphasis we place on senior management responsibility. COBS will be simpler and easier to understand and so easier to comply with, thereby helping firms to deliver better outcomes for their customers."

Article 4, including the IDD and Menu

The Policy Statement also explains the FSA's decisions on the small number of FSA rules that were notified to the European Commission in January under Article 4 of MiFID as potentially going beyond MiFID provisions. Those notified rules included the Initial Disclosure Document (IDD) and the Menu for packaged products. Since publishing CP06/19, the FSA has commissioned research to investigate the benefits of the Menu. This research is being published today alongside the Policy Statement. It found no consistent evidence that the Menu had achieved its objectives through reducing commission levels, or increasing the share of advice paid for by fee and found only limited evidence that the Menu had reduced provider bias in sales.

In the light of this, and following its evidence-based approach to policy-making, the FSA will withdraw the IDD and Menu from the notifications made to the Commission. The FSA's post-depolarisation research continues, which is considering possible measures (including the MiFID minimum requirements) that would achieve the objectives set for the IDD and Menu. Conclusion of that work is not expected until after the MiFID implementation date of 1 November. In the meantime, the FSA will implement the MiFID information requirements on 1 November, temporarily supplemented by the Menu and IDD as guidance to these rules.

Decisions on other requirements notified under Article 4 in January are noted in the Policy Statement. The treatment of the full package of measures under Article 4 will be addressed in a further policy statement planned for July.

Notes for editors

  1. Policy Statement 07/6: 'Reforming Conduct of Business Regulation' is available on the FSA website.
  2. CP 06/19 'Reforming Conduct of Business Regulation' and CP 06/20 'Financial Promotions and Other Communications' are also available on the FSA Website.
  3. The FSA's Conduct of Business rules for investment business have been in operation since the FSA took on its regulatory responsibilities in December 2001. The rules cover, among other things, financial promotions, how firms provide information and advice to clients, non-advised services, and dealing in and managing investments.
  4. Currently firms must give customers the IDD and Menu on first making contact with a view to giving advice on packaged products. The IDD includes information about the services a firm offers whereas the Menu contains information on the firm's remuneration, including details of any fees payable and the maximum commissions that the firm may receive for different products. The research report into the benefits of the Menu 'An Empirical Investigation into the Effects of the Menu' PDF was carried out by CRA International and is published today.
  5. In January 2007 the UK notified to the EU Commission under Article 4 of MiFID's Level 2 implementing directive certain areas where the FSA planned to retain existing COB Handbook material potentially going beyond MiFID provisions. These included existing requirements covering the conditions that advisers have to meet to call themselves 'independent'; the provision of the IDD and the Menu; the provision of a simplified prospectus or 'key facts' product disclosure document; the suitability letter; the disclosure of commission and commission-equivalent in relation to the sale of packaged products; and the use of dealing commission. These notifications were published on our website.
  6. The FSA's eleven Principles for Businesses sit at the head of the FSA Handbook of Rules and Guidance. They are a general statement of the fundamental obligations of firms under the regulation system. Principle 6 states that: "A firm must pay due regard to the interests of its customers and treat them fairly" while Principle 7 states that: "A firm must pay due regard to the information needs of its clients and communicate information to them in a way which is clear, fair and not misleading" – this covers Financial Promotions as well as other communications.
  7. The FSA regulates the financial services industry and has four objectives under FSMA: maintaining market confidence; promoting public understanding of the financial system; securing the appropriate degree of protection for consumers; and fighting financial crime.
  8. The FSA aims to promote efficient, orderly and fair markets, help retail consumers achieve a fair deal and improve its business capability and effectiveness.