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Whether these ideas get much mileage depends on the UK actually leaving the EU and also the result of the December 12 UK general election.   

Recent speeches by Andrew Bailey, the FCA’s CEO and senior staffers such as Christopher Woolard and Nausicaa Delfas, suggest placing more emphasis on regulatory outcomes rather than prescriptive and detailed rules – if left to their own devices. They have even questioned whether the extensive reporting requirements really support the desired outcomes. 

In regulatory terms, ‘outcomes’ is interchangeable with ‘principles’-based supervision, an approach long favoured in the UK due to its flexibility and adaptability.

The limitations

However, this approach does have some limitations as explained by Lisa Quest, partner, public policy and organisational effectiveness at consultancy Oliver Wyman. She says this works well in the conduct space, but requires more interaction between supervisors and regulated firms and would mean the FCA having to spell out the outcomes it is trying to achieve. 

“It is very difficult to supervise purely against outcomes because there are different interpretations. Enforcing against outcomes is also more difficult than enforcing against rules," she says, adding that an outcomes-based approach would not work well for some areas of prudential regulation, for example.

Indeed, EU regulators do not particularly trust the outcomes philosophy, fearing it creates too many grey areas and complicates enforcement. 

Nonetheless, the FCA does have some allies. Heath Tarbert, the chairman and CEO at the US Commodity Futures Trading Commission (CFTC), wrote an op-ed in Fortune Magazine stating that In many circumstances, principles-based regulation can be more effective for overseeing financial services in a technological environment than highly prescriptive rules.

He also lists some important conditions for enabling a principles-based approach to work. These include the right balance of rules and high quality supervision and this requires supervisory resources. 

“You can achieve the same outcomes in a highly credible manner, and you can continue to have a safe financial market with lots of good people and so on, but you don't need to do it the EU's way and they need to accept that. In fact the UK’s method is better, particularly for the services industry,” says Barney Reynolds, global head of the financial services industry group at law firm Shearman & Sterling, who believes that a principles-based approach is more compatible with the UK’s common law reasoning. 

Philosophical rift 

Clearly the anticipation of Brexit is more publicly revealing some philosophical rifts between EU and UK supervisors.   

Post-Brexit could this see a strong push by the Anglo-Saxon contingent for outcomes-based approaches to issues such as ‘substituted compliance/equivalence’ for market access in global forums like the Financial Stability Board and the International Organization of Securities Commissions (IOSCO)? 

Mr Reynolds thinks this could work and believes a US-UK financial services deal is possible. This might even set a strong precedent for others to follow.

But there is caution over whether this could fly. Jonathan Herbst, a partner at Norton Rose Fulbright, thinks basing equivalence decisions between jurisdictions on outcomes could be challenging given the current political mood. 

“Outcomes-based regulation is never going to overcome the nationalistic division in the approach to financial markets, no matter how much it is driven by bodies like IOSCO and the Basel Committee,” says Chris Brennan, partner with global law firm White & Case. “The concept is far too nebulous to be deployed uniformly across national borders. International regulation can only work when you are talking about clearly defined, and largely prescriptive, standards.”

Others say it largely depends on strong trust between regulators and political willingness. 

Whether the FCA gets to refresh its outcomes-based approach also depends on the kind of deal the UK forges with the EU post-Brexit. Noises from the European Commission suggest access will depend on close regulatory alignment between the two jurisdictions – in other words Brussels will dictate the rules, which London will not like. 

How that one pans out is a political negotiation rather than a regulatory one. 

This piece is a series of extracts from articles published in the December issue of Global Risk Regulator: ‘FCA ponders UK rules post-Brexit’ and ‘Could an outcomes-based approach heal regulatory fragmentation?