Rules vs Principles in London

One of the most compelling parts of the Bloomberg-Schumer report was the way in which it praised London's principles-based approach to financial-sector regulation over New York's rules-based approach: "our regulatory framework is a thicket of complicated rules, rather than a streamlined set of commonly understood principles, as is the case in the United Kingdom and elsewhere", it says.

But London itself, it turns out, is struggling with the same problem, and not only because of EU regulations which threaten to override and generally defeat the purpose of the FSA's principles. Ian Morley, the CEO of Dawnay Day Brokers, writes in the FT today:

The problem is that the FSA approach seems to lack courage and consequently may result in a craving for certainty and a move back to rules. The situation may be compounded by the fact that many people in the trade associations (and compliance departments) that deal with such issues are themselves of a legal background and prefer black and white to grey.
The FSA's proposed approach is not really helpful. For example, in point 2.3 of this paper, it states: "Industry guidance must not claim to limit or affect the rights of third parties." That is an understandable legal point but means anyone who does not like it can drive a truck through it by suing; in effect, of little real value to the industry.

In other words, a principles-based approach is hard, and is likely to be continually threatened by lawyers both within the financial services industry, who want certainty, and within national and international legislatures. Given the degree to which laws and lawyers control the US economy, it could be impossible to develop a principles-based approach here.

Posted by Felix at 9:31 EST