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Regulation and Compliance > State Regulation

GAO: Shift To Principles Might Be A Mixed Bag

By Staff Writer

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Top financial services experts say shifting to a principles-based approach to regulation could cause problems.

Yvonne Jones, a director at the U.S. Government Accountability Office, writes about the experts’ concerns in a report on a financial services regulation forum that the GAO organized in June.

Congress included a provision requiring the GAO to organize the forum in the Financial Services Regulatory Relief Act of 2006.

Participants included a 26 top financial services regulators and industry representatives. The representative for the insurance industry was Roger Ferguson, chairman of Swiss Re America Holding Corp., Armonk, N.Y.

Many U.S. actuaries, insurance regulators and life insurance company executives say the U.S. insurance regulators should adopt the same kind of principles-based approach to financial services regulation that the U.K Financial Services Authority adopted in 1997.

Instead of establishing detailed rules, “the FSA established 11 high-level principles that give firms the responsibility to decide how best to align their business objectives and processes with regulatory outcomes that have been specified,” Jones writes.

At the forum, some participants suggested that, in the United States, “such principles or goals would work best if established for regulators rather than for the industry since rules provide a safe harbor effect that principles for industry behavior would not provide,” Jones writes.

“One participant noted that the litigious business environment in the United States makes specificity in rules essential so that firms know explicitly what behavior is acceptable in the market,” Jones writes.

Because consumers and investors might prefer clear-cut rules, adopting a principles-based approach might be more useful for shaping efforts to keep companies safe and sound than it would be for shaping consumer protection and conduct-of-business regulation, forum participants said.

Most forum participants predicted that shifting to a principles-based approach to regulation would have only a small or moderate effect on lowering regulatory costs, Jones writes.

Forum participants also observed that FSA approach to regulation has not yet been tested by an economic downturn, Jones writes.

A copy of the GAO forum report is available

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