Principles in Practice : An Antidote to Regulatory Prescription

Text of the speech by Andrew Hilton from the Centre for the Study of Financial Innovation, at the BSA Annual Lecture, 18 October 2007, sponsored by ISTC.

When I was asked to speak by the BSA, I was inordinately flattered.  After all, I grew up in Skipton, and I genuinely believed that the two most
important financial institutions in Britain were the Skipton BS and the Yorkshire Penny Bank. An opportunity to show off. We (the CSFI) had
just published a Working Group report entitled “Principles in Practice: an antidote to regulatory prescription”, and it was (I thought) a chance to
steal all the report’s good ideas, claim them as my own, and advance my career as a cutting edge thinker in the arcane field of financial regulation.
Maybe someone would even offer me a contract at the FSA, or ECB, or BIS, or IMF, and I could end my career in a blaze of public sector glory
(with a final salary pension).

The problem is that, when I came to think a bit more about it, I realized I was always a bit lukewarm about the premise of the RWG report – that
principles-based regulation (as we have it in the UK) is a consummation devoutly to be wished. And recent events (notably the Northern Rock
affair, which is obviously close to your own hearts) have reinforced that scepticism. I tended towards an alternative, put forward by one of the
Group members (who, in the end, chose not to append her name to the report): minimum standards, with institutions encouraged to compete
beyond those minima.

It is not (as I hope to make clear) that I am enamoured of narrowly prescriptive rules-based regulation, which is usually postulated as the alternative to principles. It is just that I fear:

• that (as Sir Howard Davies has suggested), in practice, there really isn’t much difference between principles and rules-based systems; and
• that, if a regulator really takes principles seriously – and is prepared to prosecute offenders solely on the basis of them - then those individuals and institutions on the receiving end are going to complain bitterly about natural justice (or the lack thereof).

In other words, even though I commend our report to you (and I am very grateful to MW and all the group’s members), I don’t think we are really
going to get genuine principles-based regulation until the last lawyer is strangled with the guts of the last compliance officer. And, since we
wouldn’t really want it if we had it, we shouldn’t hanker too much after it. There are other sticks with which to beat the FSA.

Plus, the principles themselves (at least the high-level ones the FSA professes) are also not much more than mom and apple pie. (2)
I assume you have all memorized these, and say them on your knees before you go to bed at night. According to Callum McCarthy, there are
only 127 words, which is fewer than “The Charge of the Light Brigade”.   Of course, there are some problems with these – mostly, I would
suggest, to do with adjectives. What is “due”? What is “reasonable”?  What is “adequate”? “Proper”? “Clear”? “Fair”? “Open”?

Read the full speech by downloading the text in PDF format (see link below)