Page 90 - CMP3

Diagram 16
KEY CONSIDERATIONS IN ADOPTING A BALANCED APPROACH BETWEEN PRINCIPLES AND RULES-BASED REGULATIONS
Regulatory objectives
Nature of the market
Attributes of market participants
Regulatory readiness
Source: SC.
Principles-based regulations are more suited when driving conduct or culture, or when focusing on outcomes. In contrast, rules-based regulations are more applicable on prudential aspects.
Rules-based regulations are more suited for areas relating to retail investor safeguards and requiring standardisation for comparability e.g. disclosures and reporting obligations.
Principles-based regulations are more suited for innovative and nascent areas, where landscape changes rapidly and risks are relatively unknown.
Higher level of maturity and sophistication of market participants helps in moving towards principles-based regulations.
Presence of industry groups can promote collaboration on the implementation of principles-based regulations.
Principles-based regulations require enhancement of the SC’s supervisory and enforcement approach and capabilities.
Over the next five years, the SC is committed to adopt principles-based regulations more extensively where appropriate. This entails the reviewing of regulations in a holistic manner, making provisions for principles-based regulations and replacing prescriptive rules where possible. In shaping regulations, the SC will take into consideration the following key factors:
Objectives that the regulations intend to achieve;
Nature of the market that will be benefit from principles-based regulations; Sophistication of the market participants and market structure, and
The SC’s regulatory readiness to supervise and enforce principles-based regulations.
As part of the journey forward, the SC will refine how principles-based regulations will be adopted as well as work with market participants to facilitate and provide greater support for compliance. Recognising that market participants vary in maturity and differ in their ability to interpret principles, some will require more guidance as regulations become more principles-based. The SC will focus on enabling regulated entities on multiple fronts – some of which are currently in practice, but are expected to be enhanced to be more efficient in the transition towards principles-based regulations.
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