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03 June 2008
In a recent publication the Financial Supervisory Authority (FSA) takes a first step towards a principles-based approach, which will present new challenges to investment services firms operating in Sweden.
As part of a project initiated in 2007, the FSA, in a memorandum published March 4 2008, proposes the introduction of eight principles which are intended to form the basis of its future regulatory, supervisory and enforcement activities. The principles - similar to the UK Financial Services Authority’s Principles for Businesses - will apply to all businesses, including investment services firms, under FSA supervision.
The principles represent what the FSA considers to be the fundamental obligations of regulated businesses. It points out that the content and spirit of the principles are present in the current regulatory framework, and that the principles in themselves represent nothing new for regulated businesses. What is new is that the principles are distinguished from the regulatory framework, and the FSA clearly communicates its view on them and the importance of compliance for regulated businesses. Well-managed firms conducting business in accordance with the principles will be assured that they run no risk of becoming subject to FSA enforcement.
The FSA proposes no immediate changes to the existing regulatory framework. However, it makes clear that it wishes to move away from the current detailed regulatory framework towards a more principles-based regime. Such a shift will provide both it and the firms under its supervision with a more durable and flexible regulatory framework, which will also benefit consumers. Firms will have greater flexibility in how they meet the regulatory requirements, fostering both innovation and competition.
The memorandum can be characterized as a consultation paper. The FSA is vague as to what effects, if any, firms will experience in the short term from the introduction of the principles. It may be assumed that in the short term, the introduction of the principles will not constitute a radical shift in the FSA’s approach to its regulatory, supervisory and enforcement responsibilities. The FSA acknowledges that a shift towards a more principles-based approach will depend largely on a shift away from the European Commission’s preference for detailed rules and regulations.
However, the FSA states that it intends to depart from the detailed regulatory framework towards a more principles-based approach, and that firms will have greater responsibility in interpreting and complying with the regulatory framework and in delivering the outcomes that the FSA expects. This marks a significant change that will present firms with new challenges.
As investment services firms exploit their increased flexibility to balance business demands and regulatory requirements, they will have to judge what is acceptable and where they should position themselves on the regulatory risk spectrum. This will inevitably mean that compliance decisions will be more complex and will involve more senior levels of management.
To support senior management in the decision-making process, compliance personnel must acquire a greater understanding of the way in which the investment services firm works and of FSA expectations. Translating the principles into practical (internal) rules and applying them to particular situations requires greater experience, judgement and business knowledge than applying detailed rules.
Investment services firms must implement procedures for the internal decision-making process in order to ensure consistent interpretation of the principles over time and throughout the firm. In many situations, especially where there are tensions between business demands and regulatory requirements, it might prove valuable to record how the relevant principles have been taken into account in the decision-making process. Investment services firms may also want to engage in a closer dialogue with the FSA to ensure that they understand its expectations.
A less detailed regulatory framework will push investment services firms to seek guidance from alternative sources. Trade associations will be increasingly involved in giving guidance. Firms must monitor and preferably also influence such guidance to make it fit their business objectives.
The FSA has invited financial industry representatives and other concerned parties to comment on the memorandum by April 14 2008. Consultative roundtable discussions will be held between April and June 2008, and in September 2008 the FSA expects to present the finalized principles and an action plan on how it and the businesses under its supervision will take the first steps towards implementing the suggested principles-based approach.
For further information on this topic please contact Niclas Rockborn or Patrik Danielsson at Gernandt & Danielsson Advokatbyrå by telephone (+46 8 670 66 00) or by fax (+46 8 662 61 01) or by email (email@example.com or firstname.lastname@example.org).
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