Open-access content
30th November 2015
Desmond Hudson, chair of the Regulation Board, outlines the practical implications of the shift to principles-based regulation
Much is being made of the shift to principles-based regulation rather than a rules-based or more prescriptive system of regulation. Understandably, practitioners are anxious to understand the practical implications of this approach and what it means for day-to-day practice.
Two recent cases (involving two individuals working in different roles within the same firm) heard before the IFoA Disciplinary Tribunal are among the first to consider interpretation of the Technical Actuarial Standards (TASs).
Importantly, they offer useful guidance and an illustration of what is expected of practitioners applying principles-based standards.
It is worth highlighting that there are two fundamental features of the IFoA's regulatory and disciplinary arrangements.
First, IFoA disciplinary cases do not create formal precedents binding on subsequent tribunals, as can be the case in the court system. That said, tribunals always aim to act consistently, while considering each case on its own merits.
Second, the test applied by tribunals - the offence with which members are 'charged' - is misconduct, rather than, say, a 'charge' of breaching a specific TAS obligation. This is a principles-based test as to whether a member has fallen short of the standards of behaviour, integrity, competence or professional judgment that other members or the public might reasonably expect.
The evidence relied upon in support of that charge will typically relate to a breach of the Actuaries' Code, which, in turn, might arise because of one or more breaches of the Actuarial Profession Standards (APSs) or TASs. Because the fundamental test - misconduct - is principles-based, it follows that, depending critically upon the circumstances, a number of minor breaches of the TASs may not collectively amount to misconduct, whereas a single but more serious breach may well of itself amount to misconduct.
The TASs are themselves intended to be principles-based. In these recent cases (bit.ly/1CzGUR0 and bit.ly/1IR1st3), the principal allegation relied upon to satisfy the charge of misconduct was a failure to discharge the 'reliability objective'. That is, the principle that "users for whom a piece of actuarial information was created should be able to place a high degree of reliance on the information's relevance, transparency of assumptions, completeness and comprehensibility, including the communication of any uncertainty inherent in the information".
At the core of the case presented by the IFoA, and adopted by the Disciplinary Tribunal panel, was the principle that a member cannot simply apply a narrow rules-based approach to the TASs, without at least considering and testing such an approach from the perspective of the reliability objective. The purpose of the regulation, in other words, is to provide the user with reliable advice and information, not simply to ensure that specific TAS rules or particular tasks or requirements are complied with.
After hearing argument and evidence from both parties, the panel said: "The purpose of the regime of TASs and the reliability objective is to be principles-based and not prescriptive regulation. One must review from the top down, and not from the bottom up. When judging whether an actuary has met the reliability objective, it will be important to assess his work against the words of the reliability objective. In doing so, compliance with the TASs is likely to assist in concluding that that objective has been met, but it cannot be inevitable that it has been met. If that were so, then there would be no need for the reliability objective at all."
In similar vein, just as a principles-based approach calls for the exercise of professional judgment, members of the IFoA are not expected to apply a tick-box or superficial approach to regulatory compliance. For example, where peer or work review is appropriate under APS X2, there is little point in completing a shallow process devoid of a real and substantive opportunity for appropriate challenge.
Our regulatory approach, and in particular our adoption of a principles-based approach, at the IFoA aims to reduce the burden of excessively rescriptive or detailed rules and to focus on meaningful outcomes achieved through the exercise of judgment by individual professionals and those who employ them.
Ultimately, the Regulation Board believes, in common with most regulators, that a principles-based approach will produce a better outcome, both for the profession and those who rely upon the profession.
Feedback on the IFoA's regulatory approach is always welcome. Please email [email protected]
Two recent cases (involving two individuals working in different roles within the same firm) heard before the IFoA Disciplinary Tribunal are among the first to consider interpretation of the Technical Actuarial Standards (TASs).
Importantly, they offer useful guidance and an illustration of what is expected of practitioners applying principles-based standards.
It is worth highlighting that there are two fundamental features of the IFoA's regulatory and disciplinary arrangements.
First, IFoA disciplinary cases do not create formal precedents binding on subsequent tribunals, as can be the case in the court system. That said, tribunals always aim to act consistently, while considering each case on its own merits.
Second, the test applied by tribunals - the offence with which members are 'charged' - is misconduct, rather than, say, a 'charge' of breaching a specific TAS obligation. This is a principles-based test as to whether a member has fallen short of the standards of behaviour, integrity, competence or professional judgment that other members or the public might reasonably expect.
The evidence relied upon in support of that charge will typically relate to a breach of the Actuaries' Code, which, in turn, might arise because of one or more breaches of the Actuarial Profession Standards (APSs) or TASs. Because the fundamental test - misconduct - is principles-based, it follows that, depending critically upon the circumstances, a number of minor breaches of the TASs may not collectively amount to misconduct, whereas a single but more serious breach may well of itself amount to misconduct.
The TASs are themselves intended to be principles-based. In these recent cases (bit.ly/1CzGUR0 and bit.ly/1IR1st3), the principal allegation relied upon to satisfy the charge of misconduct was a failure to discharge the 'reliability objective'. That is, the principle that "users for whom a piece of actuarial information was created should be able to place a high degree of reliance on the information's relevance, transparency of assumptions, completeness and comprehensibility, including the communication of any uncertainty inherent in the information".
At the core of the case presented by the IFoA, and adopted by the Disciplinary Tribunal panel, was the principle that a member cannot simply apply a narrow rules-based approach to the TASs, without at least considering and testing such an approach from the perspective of the reliability objective. The purpose of the regulation, in other words, is to provide the user with reliable advice and information, not simply to ensure that specific TAS rules or particular tasks or requirements are complied with.
After hearing argument and evidence from both parties, the panel said: "The purpose of the regime of TASs and the reliability objective is to be principles-based and not prescriptive regulation. One must review from the top down, and not from the bottom up. When judging whether an actuary has met the reliability objective, it will be important to assess his work against the words of the reliability objective. In doing so, compliance with the TASs is likely to assist in concluding that that objective has been met, but it cannot be inevitable that it has been met. If that were so, then there would be no need for the reliability objective at all."
In similar vein, just as a principles-based approach calls for the exercise of professional judgment, members of the IFoA are not expected to apply a tick-box or superficial approach to regulatory compliance. For example, where peer or work review is appropriate under APS X2, there is little point in completing a shallow process devoid of a real and substantive opportunity for appropriate challenge.
Our regulatory approach, and in particular our adoption of a principles-based approach, at the IFoA aims to reduce the burden of excessively rescriptive or detailed rules and to focus on meaningful outcomes achieved through the exercise of judgment by individual professionals and those who employ them.
Ultimately, the Regulation Board believes, in common with most regulators, that a principles-based approach will produce a better outcome, both for the profession and those who rely upon the profession.
Feedback on the IFoA's regulatory approach is always welcome. Please email [email protected]
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