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IAI Actuarial Core Principles · Business Finance · Corporate governance and the regulation of companies

Which statement best describes a key difference between a principles-based and a rules-based approach to regulating companies?

A principles-based approach sets broad objectives and relies on directors' and firms' judgement, whereas a rules-based approach lays down detailed, specific requirements. The first offers flexibility with less certainty, while the second offers clarity but can encourage box-ticking and technical avoidance.

  1. AA principles-based approach prescribes detailed requirements for every situation, while a rules-based approach relies on judgement
  2. BA principles-based approach sets broad objectives and relies on judgement, while a rules-based approach sets detailed specific requirementsCorrect
  3. CPrinciples-based regulation never applies penalties, while rules-based regulation always does
  4. DRules-based regulation applies only to unlisted companies
  5. The two approaches are identical but use different names

Explanation

Principles-based regulation states broad outcomes and leaves firms to apply judgement, giving flexibility but less certainty. Rules-based regulation sets detailed, specific requirements, giving clarity but risking box-ticking and loopholes. Option 0 reverses the two.

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