Conduct regulation tends to be rules-based – back and white. This is to ensure that regardless of the nature, scale or complexity of a financial institution, treatment of customers remains consistent irrespective of whether you buy financial products from a startup or a large multi-national. In the UK, conduct regulation is supervised by the FCA.
Balance sheet regulation, on the other hand, tends to be more principles-based. Capital requirements and governance expectations for different business depend on the nature, scale and complexity of the business. In the UK, prudential regulation is supervised by the PRA (part of Bank of England)..
Rules-based: regulation that applies consistently to all financial institutions. Rules around customer engagement are often delivered in this manner, ensuring a consistent treatment of consumers irrespective of the size of the firm providing those service. The rules-based regulation includes Knowing Your Customer (KYC), Anti-Money Laundering (AML) and marketing practices.
Principles-based: regulation that applies differently to each financial institution depending on the nature, scale and complexity of their operations. This type of regulation is used to ensure financial stability (i.e. requiring appropriate capital buffers to support risk-taking activities). The principles-based regulation includes capital requirements (aka. balance sheet regulation), senior managers’ regime and having an appropriate system and controls environment.
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