Principles based regulation should really work, especially if the ’spirit’ of legislation is clear and precedents follow it. Sadly though, rules are then devised. What I mean is best illustrated by the example of the recent debate around MPs expenses. Nothing to do with financial services, but the point is the there; the rules allowed the home secretary to claim that her home was her second home and not her home and so she was able to maximise benefits under the allowances scheme. Now the principle and the ’spirit’ of the allowances regime are to reimburse the cost of having to spend time at Westminster whilst living in a constituency that is beyond a reasonable commute. To comply with the spirit of the scheme would be to simply claim the extra costs of renting a room and travelling. 

On the other hand, if the ’spirit’ of these regulations is to provide MPs with more income to top up inadequate wages, then the rules have helped to meet these aspirations. 

Rule makers need to be clear on what ‘outcomes’ they want. This is what the FSA (Financial Services Authority) and the RDR (Retail Distribution Review) must consider.