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Though for some it may beggar belief, the Financial Services Authority enjoys something of a reputation for being one of the most sophisticated financial regulators in the world. The Northern Rock misadventure has taken some of the sheen off, of course, but the EU and the US are both understood to be looking with interest, if a bit more trepidation, at the FSA - a single regulatory body with a rather unique predilection for general principles over specific rules.

In the US, where regulators and rules abound, things could not be more different. The Securities and Exchange Commission holds sway over securities, while the Commodity Futures Trading Commission handles futures. More than 100 other regulators at the state level look after securities, insurance businesses and various other things for their various jurisdictions. And all of these things they do, according to Ben Goh, secretary of the Compliance Register, by dotting every “i” and crossing every “t” punctiliously.

“The SEC and FSA both recently visited a large hedge fund I know, but the contrast between the two approaches could not have been more obvious,” he says. “The SEC was focused on checking whether what the fund did fit exactly with all their rules, whereas the FSA looked more at what outcome they wanted to achieve. In the end, the hedge fund had to copy all the documents the SEC wanted onto a CD because, if they had printed hard copies, they would have needed a lorry.”

The US is considering a number of changes that might see it align more closely with the UK. One possible change mooted by US Treasury secretary Hank Paulson in his canvassing of the financial services industry would be for the US to follow the UK’s example and create a single regulator for securities and futures.

Meanwhile, US president George Bush and UK prime minister Gordon Brown have agreed to increase transatlantic co-operation on financial markets by setting up a joint working group, made up of regulatory gurus from Washington and London, that will ultimately develop plans to better monitor and regulate banking systems.

In addition, the SEC is mulling over the possibility of letting some foreign exchanges and broker-dealers, particularly those within the EU, to access US investors without registering with the agency first. If realised, these “mutual recognition” plans would represent quite an important change, as they would rely on the SEC’s acceptance of a foreign regulator’s standards and oversight ability.

According to Mr Goh, the US has also been talking about moving toward a more risk-based model like that employed by the FSA. The SEC, instead of poring endlessly over the minutiae of so many rules and regulations, will now begin to focus its attention on relative risk and the impact a given company might have on the greater economy were it to get into trouble.

“In other words, are we talking about an institution like Merrill Lynch, or are we talking about a much smaller outfit on the high street?” Mr Goh says. “That’s where they will now focus their attention rather than on the small guys. Principles-based regulation will eventually come to the US, but exactly when that is will depend on how it pans out in the UK.”

That principles-based regulation will pan out favourably in the UK is by no means a foregone conclusion, even if the Northern Rock debacle is ignored, for the very structure of European regulatory framework creates a conflict.

On the one hand, there is the FSA, designed primarily to protect consumers and, therefore, quite focused on the UK private investor. On the other hand, you have the European Commission, which seeks to harmonise regulation throughout the EU by issuing directives through the Financial Services Action Plan. The idea is to develop a level playing field across all EU countries, where the same rules apply no matter where a company does business.

The problem with this is twofold. First, many directives, such as Mifid or the Capital Requirements Directive, are “directive” only in name and often enormously detailed, which runs counter to principles-based regulation. And second, many national regulators can and do make changes to directives to better suit their constituents, which runs counter to harmonisation.

“You have got France, Germany and the UK, with quite sophisticated and big financial services markets, and you have other states with much smaller financial services industries, and all of them are operating to different standards,” AIC deputy director general Ian Sayers explains. “The EU is trying to free up the cross-border market, but to do that you have got to have harmonised rules, which is difficult because of the complex nature of financial services.”

This, he says, restricts how far the FSA can go with principles-based regulation.

“The EU is talking about moving to principles-based regulation, but they are not there yet,” he says. “If you look at a lot of the EU directives, they are not principles-based at all, but the FSA has no choice but to implement them. So there are limits on the extent to which they can move toward principles-based legislation.”

Even if the EU does embrace principles-based regulation, the formidable problem of translation must be tackled. If you have spent any amount of time on the London Underground, you might have noticed a certain sign informing passengers that dogs must be carried. For any native English speaker, the meaning of this statement should be clear - if you bring a dog onto the Tube, it must be carried.

“But for any non-native speaker, the sign could just as easily be read as an imperative,” says Mr Goh. “Dogs must be carried - not handbags, not mobile phones, not copies of the A to Z - but dogs.”

The image of a tourist scratching his head and casting about for a dog may seem unreal, but it encapsulates a problem for European financial regulators that is very real indeed. The Babel that is the EU currently consists of 27 countries, most of which have their own regulatory agencies similar to the FSA. Even with a legalistic, rules-based structure such as that found in the US, harmonisation would be difficult enough, in light of all the languages spoken in Europe. But the EU is now following the UK’s example by shifting toward a more flexible, innovative and relatively light-touch regime, according to David Wright, the Commission’s deputy director general of internal markets, and this will only make matters more difficult.

A closed-end security, for example, can be listed on the London Stock Exchange and considered perfectly transferable under Ucits III rules by anyone within the UK. And yet that very same security can be, and often is, rejected by regulatory bodies that interpret the spirit of Ucits III differently. Even Mr Sayers, who describes himself as pro principles-based regulation, acknowledges the ambiguities that necessarily come with such a system will only further complicate the harmonisation process.

“With Ucits III, there is a single directive, translated in 25 languages,” Mr Sayers says. “But the translation is never perfect - some of these terms are very difficult to translate - and then, once it is translated, it will still have to be interpreted. One of the biggest criticisms of the Ucits III directive is that you do not need a harmonised directive, what you need is a harmonised interpretation of that directive. Unless you were to have a central European regulator, true harmonisation will be a very difficult thing to achieve.”

While the US and the EU may be flirting to varying degrees with the idea of principles-based regulation as practiced by the FSA, whether they really ought to be doing so begs the question. The FSA was touted by many as having the most sophisticated regulatory system in the world, something the US and the EU aspired to - then Northern Rock happened.

This, Mr Goh says, may cause more rules-based regulators to think twice about shifting toward principles. “Since that implosion, people are much more sceptical about just how good the UK system is,” he says. “Bear Stearns was sorted out over a weekend, whereas Northern Rock dragged on for months. Now Northern Rock is dead. That is a very stark contrast.”

•The FSA enjoys a reputation for being one of the most sophisticated financial regulators in the world

•The US is considering a number of changes that might see its more rules-based regulatory system, overseen by numerous agencies, align more closely with the UK

•The US and UK have agreed to increase transatlantic co-operation on financial markets by setting up a joint working group that will develop plans to better monitor and regulate banking systems

•The SEC is mulling over the possibility of letting some foreign exchanges and broker-dealers, particularly those within the EU, to access US investors without registering with the agency first