Industry Guidance Will Supplement UK Principles-Based Regulation

In the new era of principles-based financial regulation in the UK, industry guidance will be permitted to supplement the Financial Services Authority regulations, according to a new FSA policy statement. The FSA defines industry guidance to be information that is developed by the industry in an effort to assist firms, their staff and their advisors in understanding how they can meet FSA requirements.

The FSA recently confirmed industry guidance on outsourcing, suitability and appropriateness issues, as well as investment research prepared by MiFID Connect, which is a grouping of trade associations formed to prepare guidance on aspects of the implementation of the Markets in Financial Instruments Directive. Although these industry guidances were issued before the policy statement, said the FSA, they are in substantive compliance with it and will now be confirmed as industry guidance under the new arrangements.

But the FSA cautioned that it would not retrospectively confirm any other existing guidance. The FSA has set up a dedicated industry guidance section on its website which will include all current confirmed guidance.

Since industry guidance is produced for the industry by the industry, the FSA does not intend to monitor its use once it is confirmed, nor does the FSA expect the guidance provider to do so. However, where there is a market solution to a market failure and industry guidance supports this, the FSA may want to monitor or review whether that market solution continues to address the failure.

While some industry groups would prefer to limit the availability of industry guidance they produce to their members, the FSA has determined that industry guidance must be publicly available and free. Industry guidance must also be voluntary. The guidance must help firms meet their regulatory duties, not tell them what they must do.

Moreover, industry guidance must not claim to be an exhaustive or definitive statement of what FSA rules require. That would move the guidance closer to being a safe harbor, which is not what the FSA intends. That said, however, industry guidance can provide examples of how firms could comply, or key points for firms to consider. Since industry guidance augments principles-based regulation, firms must be permitted the flexibility of tailoring it to their own circumstances.

The FSA expects that guidance providers will ensure that the guidance is kept up-to-date and relevant and notify the FSA of any changes. They will also be expected to work with other trade bodies, if required to develop guidance. But the FSA does not expect industry groups to monitor or enforce compliance with the guidance. Similarly, the FSA will not monitor how firms use the guidance.