Financial Service Market in the UK - Essay Example

FINANCIAL SERVICE MARKET Name: Course: Tutor: University: City and State: Date: Financial Service Market Introduction The British financial sector plays an important role in creating a thousand of jobs for the public and contributing crucial tax revenues to Exchequer. The Financial Service Act which came into force in 2013 contained the government`s reforms of the British financial system which created a new regulatory basis for management and supervision of the country’s financial and banking system. The bodies formed under the act include the Prudential Regulatory Authority (PRA), the Financial Conduct Authority (FCA) and the Financial Policy Committee (FPC).Over the past few years, a research was a conducted that showed that the drawbacks of the Britain financial model of financial regulations were a significant factor in the country`s failure to adequately respond to or predict the financial crisis which started in early 2007. The UK government has been committed in introducing new approaches to financial regulations based on clarity of responsibility and focus and one which placesjudgmentof knowledgeable supervisors at the heart of the regulatory regimes. The government is focused on ensuring that its public receives quality services from the organizations they deal with. By doing so, it has made its financial sector reform to be one of its leading priorities. This paper will discuss the recent changes in the UK financial systems as well as the function of the Financial Conduct Authority in addressing the issues arising from pay day loan companies. Recent changes The recent changes and developments in the government`s approach to regulation will provide an improved market confidence, consumer protection, reduction of financial crime and public awareness as the government is focused on the creation of regulatory bodies to ensure that the financial services of the country are entirely focused on financial stability. The UK government is also committed to the transparency, engagement and accountability of the new regulatory institutions. Reforms of the British governments will create a newly active and aggressive oversight function. The government has created new law enforcement agencies which target on companies and individuals involved in financial fraud more aggressively than it was before. Legal changes of the UK government have been accompanied by a complete shakeup of the law and regulatory enforcement structure(Great Britain National Audit Office, 2007, 67). Following these changes in the government’s approach to regulation, it is very likely that the UK government will provide an improved basis for the confidence of all financial services. The government is committed to implement these reforms as soon as possible to ensure that regulatoryuncertainties for firms are minimized. The government knows that it must work closely with stakeholders to ensure that the policies are well implemented(Great Britain, 2012, 102). The following are the reforms-; A new Financial Policy Committee (FPC)was established to fill the gap of the lack of a single, focused body with the obligation for shielding the solidity of the financial system. The committee role is to ensure that a single body positioned within the Bank of England, has the proficiency to monitor the financial system and detect threats to its stability. The authority of the committee is to also make commendations and offer assistance to financial institutions accountable for daily policy and oversight and the power to intercede to ensure that the suitable action is taken to ensure stability. The committee consists of the Bank of England Court, the Governor as the chair, two deputy governors, four external members, the Chief Executives of the Committee and a treasury representative (non-voting). Their main role is to contribute to the financial stability of the bank by monitoring and identifying systemic challenges and solutions to address them(Latimer, P. 2014, 172). The government has also made changes by reassigning the responsibility for provident regulation to a new focused regulator, the Prudential Regulation Authority (PRA) whose main responsibility is to prudentially regulate insurers, investment firms and banks(Great Britain, 2012, 116). The statutory object of PRA is to promote the soundness and safety of significant investment firms. The body pursues its objectiveness by seeking to avoid adverse impacts on financial stability and seeks to reduce the adversarial effects resulting from interference to the stability of financial services that can result from the way organizations run their businesses (Great Britain National Audit Office, 2007, 71). Also the government succeeded in establishing a new conduct of business regulator to ensure that corporates across financial markets and services are carried out in a way that advances the welfares of all participants and users, The Financial Conduct Authority (FCA). It is focused in enhancing and protecting the confidence of financial markets and services which entails the protection of consumers and promotes competition, protecting and enhancing the reliability of the UK financial system and securing an appropriate degree of consumer protection(Great Britain, 2012, 116). Other reforms are that, the government has ensured that the Independent Commission publishes a concise interim report that contains the preliminary conclusions. The solutions made by the commissions have three elements; that bail-in instead of bail-outs- to ensure that private investors incur the losses if a crisis occurs and not taxpayers, making high-street banking a safer and easier way of sanctioning banks to fail without distracting essential banking services, and the most influential banks to hold additional capital to make them better by absorbing losses(Singh, D. 2007, 7). Ineffectiveness of the regulatoryregime In 2007, the government went through a financial crisis which caused a windfall in the banking systems. The UK government at that time was unable to bar shocks in the financial systems from spilling over the world`s economy. This is today referred to as the worst recession in the history of economics. The crisis was caused by both failures in the regulation of the financial sector and failures in the financial sector(Great Britain, 2012, 121). Financial institutions failed to manage their businesses discreetly and therefore did not comprehend the risks inherent in the operations they were conducting. Supervisors and regulators also failed to provide strong analysis and challenge that financial institutions as well as banks required to ensure that threats building on their balance sheets were controllable at both the individual firms and government firm(Singh, D. 2007, 9). The crisis uncovered the integral flaws in the ‘tripartite’ system of the regulation in Britain. The bank of England had minimal accountability for financial stand but lacked the motive to put that into effect, the treasury lacked skills for dealing with the crisis. All financial regulation responsibilities were at the hands of the single, colossal regulator; the Financial Service Authority(Hubbarb, G. 2013, 185). The too-big to fail financial institutions were a primary source of the crisis. The most prominent development that helped trigger the financial crisis was the outlook of significant damages on the mortgage loans offered by the “too-big-to-fail” institutions to subprime borrowers that became apparent shortly after house prices began to decline(Hubbarb, G. 2013, 189). With the borrowers owing the banks more than $1 trillion in subprime mortgages outstanding, the prospective for losses on these loans was huge in absolute terms. Rather, the financial system's weaknesses, together with gaps in the government's crisis-response ability were the major explanations as to why the crisis was so critical and had such demoralizing effects on the broader economy(Latimer, P. 2014, 194). Another weakness that triggered the crisis was the dependence on unstable short-term funding. Shadow banks are financial units other than controlled depository institutions (credited unions, thrifts, and commercial banks) that function as arbitrators to channel savings into investment. Before the 2007 crisis, the shadow banking system played a significant role in global finance. This banking system had become dependent on various forms of short-term whole-sale funding leading up to the crisis(Great Britain National Audit Office, 2007, 84). The dependence of shadow banks on short-term loans made them subject to runs, much as commercial banks and saving institutions had been open to runs prior to the establishment of deposit insurance. Thus, fears of a run have the prospective to develop at least moderately self-fulfilling, and may distort the discrepancy between a bankrupt and an illiquid firm(International Monetary Fund, 2011, 17). Ways in which current UK financial regulations are being implemented The UK government has introduced the biggest reforms to the banking sector to ensure that banks are more robust to shocks, are easier to solve when problems arise and to decrease the rigorousness of future financial crisis. The regulations are formed to ensure that banks make fewer losses; retail consumers are not excessively affected and tax payer’s money is not used to bail banks out. The Banking Reform Act (BRA) brings into cultural and structural changes to the banks by imposing clear standards of behavior on the banking industry by presenting a criminal consent for irresponsible misconduct that leads to bank failure, presenting a cap on pay day loans granting the government authority to certify that banks are more capable of absorbing losses, and giving investors, protected ,under the Financial Services Compensation Scheme, subjectivity if a bank enters insolvency(International Monetary Fund, 2011, 21). The Financial Conduct Authority Proposals have been made in by the Competition and Markets Authority (CMA) the light of the Financial Conduct Authority to increase price competition between payday lenders and help borrowers to attain a better deal. The deal is intended to protect consumers from excessive charges. The FCA sets out that payday lenders should provide details of their products on creditedprice contrast websites that permits individuals to make swift and precise evaluation between loans(Hubbarb, G. 2013, 192). The FCA policy on payday loan is focused on stimulating greater price competition in a marketplace where many customers rarely visit the market and may find it difficult to access comparable and clear information on the borrowing cost. FCA suggests that the development of an operative price assessment sector would make it easier for new market entrants to become conventional and learn to encounter existing suppliers by giving better deals for borrowers. The FCA is recommends that lead generators should explain their role and how they work much more openly to customers(Powell,R. 2013,91). The Financial conduct Authority has found that many debtors believes that main generators are themselves truly moneylenders rather than simply intercessors. Even where this isput across, there is very little or no transparency about the centerat which lead lenders pass borrowers’ details on to lenders, so that clients are generally uninformed that, rather than correspondingthem with the most appropriateloan on offer, they instead sell borrowers’ particulars to creditors based on the fees they offer to them. FCA therefore ensures that they give customers a clear awareness of the cheapest and the most genuine loans(Singh, D. 2007, 14). The FCA is working closely with CMA by proposing measures designed to enhance effective competition in the market. These measures include; processes to aid borrowers shop around without ruining their credit record, better transparency on late charges and fees, which are not always clear to customers when choosing payday loans, a obligation for lenders to offer borrowers with a summary of the amount they have remunerated on their most currentloan and over the last 12 months, and additional advance of real-time data distribution systems, which will aid new applicants better evaluate credit risks(Powell,R. 2013, 97). Measures taken by the FCA to underpin consumer fortification means closer regulation of creditors over issues such as reducing rollovers, limitations on the use of Continuous Payment Authorities to recuperate debt from a debtor’s bank account, taking into consideration appropriate affordability checks and thoughtful treatment of debt issues. The FCA has also established out its proposals for a price cap(International Monetary Fund, 2011, 26). Conclusion The most remarkable changes brought about by the British government’s changes of the UK financial services regulatory structure conformable to the Act are those associated with the Financial Conduct Authority. Its formation is seen to be a prospect to modify conduct standards of the financial services industry which have been under a limelight since the beginning of the 2007 financial crisis. There seems to be anemphasis on necessitating firms, from the boardroom to the market and beyond, to place the well-being of their consumers at the heart of how they operate their businesses and to promote motivations, attitudes and behavior, about good conduct above anything else. The new powers of the FCA whichinclude,outlawing financial products, publicizing details of ambiguous financial advertisings and releasing information about taking corrective measures, are anticipated to enhance the financial body to step in and act faster , when challenges are recognized that risk harming markers or consumers. Although the visualization and goal of these reforms is precise, it is clear how the new regulations, and especially the FCA with its new implementation powers, will positively affect the growth of theUK’s financial and banking services industry. References Great Britain National Audit Office, 2007. The Financial Services Authority: a review under section 12 of the Financial Services and Markets Act 2000: report. London: Stationer office. Great Britain, 2012. Financial Conduct Authority: twenty-sixth report of session 2010-12 : report, together with formal minutes, oral and written evidence. London, Stationery Office. Great Britain H.M treasury, 2011. A new Approach to financial regulations: building a stronger system. Norwich, TSO Hubbarb, G., 2013, Financial Regulatory Reform: A progress Report. Journal of Federal Reserve Bank of St. Louis Review, 95(3),pp. 181- 97 International Monetary Fund, 2011. United Kingdom financial system stability assessment. Washington, D.C., International Monetary Fund. Latimer, P., 2014. Promoting information in the marketplace for financial services: financial market regulation and international Standards. [Place of publication not identified], Springer. Powell R., 2013, Analysis: Uk regulatory Reform and its impacts on Financial markets. Journal of World Securities law, 12(5),pp.89-98. Singh, D. ,2007. Banking regulation of UK and US financial markets. Aldershot, Ashgate. Read More