Financial Services Regulation in the UK - Essay Example

? Banking and Finance Law By of Introduction Financial services refer to all the products (goods and services) that financial institutions offer to the public (White, 1991). The major players in the financial services industry of any country are insurance firms, savings and loans, mortgage firms, investment firms and banks. The main products that the above firms deal in are pensions, savings, mortgages, loans, insurance and investment options and credit card services (Morley, 1992). It is therefore not surprising that some of the biggest earners in the world are financial institutions, making the sector one of the most lucrative and competitive one in the world economy (Acharya & Richardson, 2009). Because of the high profit margins and the resultant stiff competition, the financial services sector has been marred with a lot of confusions and complex regulatory and operational issues. In the United Kingdom, like in many other developed and developing countries, the financial services sector is quite a sophisticated one, making many a people to develop defensive attitudes towards it. Fortunately, the UK government has established several consumer-oriented policies, strategies, laws and agencies to help in regulating the financial services sector. These regulatory agencies and laws not only provide free and independent complaint services to the public and financial firms but also amicably solve grievances among financial institutions and their consumers (Francis, 2001). It has not been enough to merely enact financial laws; agencies such as the defunct FSA and the Office of Fair Trading (OFT) were established to ensure that consumer-protection laws are adhered to by the financial institutions, more so regarding the protection of consumer savings and investments by authorized organisations (Xydias, 2007). This paper explores the structure and the methods of financial services regulation currently used in the United Kingdom and the extent to which these methods and the structure have been successful in achieving their objectives. Financial Services Regulation in the UK For financial accountability, reliability and the credibility of financial services, countries have established various organisations and implemented a number of methods by which the players in the financial and banking sectors are regulated (Andenas & Chiu, 2011). In the United Kingdom, the financial and banking sectors are regulated by various methods for several reasons. That is, there are certain objectives for which the UK government has established financial regulation structures, organisations and policies. Financial regulations refer to the guidelines and supervisory activities to which financial and banking institutions and individual professionals are subjected in the execution of their operations (Federal Trade Commission, 2007). These regulations give guidelines, restrictions, aims/objectives and integrity or accountability requirements and expectations for financial institutions and professionals as well (Davies & Green, 2008). In many a country, both governmental and non-governmental agencies are involved in the regulation and control of financial and banking sectors. Nonetheless, the objectives of these regulations and the concerned organisations are quite similar. In the UK for instance, financial regulations seek to enforce all the laws applicable to financial operations in a country. Second, financial regulations help in the maintaining of the public’s and investors’ confidence in UK’s financial system besides reducing the financial institutions’ violation of financial laws. The other activities checked by financial regulation mechanisms are market manipulation activities such as insider trading and money laundering (Gonzalo, 2010). Importantly, financial regulation protects clients through processes such as the investigation of customer/public complaints. In addition to the above objectives, financial regulation helps in ensuring that only legal and competent investors are allowed to participate in the provision of financial services in the country (Mullen, 2007). To achieve the above objectives, the United Kingdom government has established various structures and methods by which the banking and financial industry players in the country are regulated. The Structure of UK’s Financial Regulation The current regulatory structure and methods in the United Kingdom have been established on sound principles that focus on the regulation of the conducts of the country’s financial services providers. The financial polices and agendas of the UK financial and banking industry have been set under the title of Consumer Protection and Markets Authority (CPMA), a regulator also referred to as the Financial Conduct Authority. This authority ensures that all the businesses and services in the financial services and market segments of the economy advance not only the interest of businesses or institutions but also the interest of customers and other participants in the sectors (Gonzalo, 2010). Although the Financial Services Authority was the main regulator of financial services in the UK for quite some time, in 2010, the Chancellor outlined a strategy by which the policies and operations regulating the financial services would be reformed beginning early 2011. According to the Chancellor, the Financial Services Authority (FSA) was to be abolished and its regulatory and supervisory roles taken over by the Bank of England (Gonzalo, 2010). In addition, the Chancellor stated that the Financial Policy Committee (FPC) would be established within the Bank of England with the mandate to regulate, monitor and respond to any systemic financial risks in the sector. In addition, the Prudential Regulation Authority (PRA), a macro-prudent regulator would be established. The other body to be established, according to the Chancellor’s speech was, a new Economic Crime Agency, which would combine the work of various Government agencies into an effective force to deal with financial crimes (HM Treasury, 2010). Having realized the weaknesses inherent in the then financial services regulation agencies and methods, the UK government consequently gave the power to regulate financial service to the Bank of England and created the Financial Policy Committee (FPC) to monitor economic and financial risks that would distabilise the country’s financial system. The FPC is thus one of the central organisations in the financial structure of the financial regulation in the UK. Financial Policy Committee (FPC) The Financial Policy Committee (FPC) was subsequently formed in early 2011 to execute among other functions, the regulation of financial risks in the UK and overseeing of the stability of the country’s financial system. To execute its mandate the FPC has been vested with powers to bring under control any risks encountered in the UK’s financial system. Among the methods by which the FPC tames these systematic risks is by repressing loose credit and clamping down on any sections of the country’s financial system that were hitherto unregulated. In addition, the committee has the authority to suppress any overheated sectors of the financial system (Briault, 2006). At the head of the committee, based at the Bank of England is the chairman who is the governor of the Bank of England. The regulatory functions of the FPC should however be distinguished from that of the Monetary Policy Committee (MPC), which makes important decisions on interest rates, basing these decisions on the dynamics of the macroeconomic environment. With the establishment of the FPC, the tri-partite approach to financial regulation, which included the Financial Services Authority, the Treasury and the Bank of England, was been abandoned. In focusing on financial stability, the FPC formulates and imposes expansive policy changes on the Prudential Regulatory Authority, the regulator of individual banks in the UK. The Prudential Regulation Authority (PRA) Though yet to officially start executing its mandate, the Prudential Regulation Authority (PRA) is expected to apply a sound and judgment-based perspective towards the regulation of the UK’s financial system. Experts believe that this approach will go along way in lessening the effects of financial crises on the sector. A central principle upon which the PRA is expected to base its supervisory and regulatory operations is that it would not rely on opinions and judgments of the banks and the other financial institutions to be supervised and regulated. The PRA will therefore carry out their own analyses and develop their own views regarding important aspects of their mandate. Being part of the Bank of England, the PRA will be expected to collaborate with Financial Policy Authority and any other committees assigned to oversee financial markets, financial law enforcements and the protection of consumers from financial malpractices and exploitations (Briault, 2006). Methods of Regulation Although there are many methods by which the FPC regulates the financial services in the UK, the principles behind these methods are quite similar. Regardless of whether they are applied on financial advisers, banks, insurance companies, mortgage companies or insurance brokers, the statutory objectives of the regulatory agencies and personnel remain the same. Market confidence, public awareness, consumer protection and reduction in financial crimes are among the core objectives of the current financial regulation methods used in the UK (Briault, 2006). The principles that promote the achievement of these goals include efficiency of the economy, non-interference with institutions’ management and proportionality in imposing restrictions and punishment for institutions breaking financial laws (Briault, 2006). Among the methods used in regulating financial service providers in the UK are the establishment of minimum requirements, supervisory review and market discipline. Among the requirements that banks and other financial institutions have to meet include the attainment of bank licence from the regulators allowing them to take part in banking businesses (Hellis & Wiltshire, 2011). In addition to issuing licences, the regulators supervise the authorized banks and financial institutions to ensure compliance with the set standards of the sector. For instance, banks are supervised to ascertain that they have maintained the set minimum capital ratios. In case of any breaches of the requirements and standards set for the financial services industry, the regulatory bodies not only impose penalties but also give directions or worse still, could revoke the licences of the guilty institutions (Hellis & Wiltshire, 2011). The UK financial services sector is also regulated by techniques that target market discipline. In this regard, banks and other financial institutions are required to disclose their financial information to the public, depositors and creditors. The aim of this disclosure is to guide the creditors and depositors in the assessment of risks thereby directing them in making sound investment decisions (King, 2010). In addition, the regulators use financial information from banks to assess the institutions’ financial viability. Among the instruments that the regulatory agencies analyse to assess the performance of banks are capital and reserve requirements (HM Treasury, 2010). The other target of financial regulation techniques in the UK is corporate governance, which promotes proper management practices. Financial services regulation in the UK is not only in the form of sanctions and restrictions but through other less strict or less legal methods. In this context, the provision of advice and technical services are the other methods of regulation that the various agencies apply on banks and other financial institution. For example, through advice such as urging of UK banks to raise capital, the FPC has been instrumental in assisting banks to avert crises such as the euro zone crisis. Financial Services Laws By the enactment and establishment of various legislations, the financial services regulators in the UK have been able to ensure that financial institutions operate within the confines of these laws to protect consumers and indulge in fair operations and competition in the financial markets. These laws ensure that financial service providers are updated about the major institutional and operational reforms in the financial services sector, particularly on the regulation front, for instance, the disbanding of FSA (Lloyd’s Insurance, 2011). The financial regulation laws also focus on various issues and crises affecting domestic/international regulations, financial crimes, market abuse, financial marketing, dispute regulation and litigation (Khanna, 2007). Among the Acts by which the financial markets in the UK are regulated include the Capital Allowances Act 2001, the Competition Act 1998, the Income and Corporate Taxes Act 1998 and the Industrial and Provident Societies Act 2002. The others financial Acts are National Insurance Contributions Act 2002, Regulatory Reform Act 2001 and the State Pension Credit Act 2002. The Financial Services and Markets Act 2000 is of particular importance since it covers most of the aspects of financial services that require regulations. Examples of the facets of the financial industry addressed by this Act include prohibited and regulated activities such as financial promotion, offences and enforceability of financial agreements (Legislation.gov.uk, 2000). The Financial Services Act 1986 is the other law that regulates the UK banking services, with its duties related to self-regulation of organisations. There are however certain disadvantages of regulation by the SIB and SRO’s. First, the different SRO’s have many rule books upon which they regulate themselves. Second, the SIB failed in executing its mandate to regulate SRO’s effectively, a situation that resulted in slack regulation. Consequent to the SIB, a lot of conglomerates and complex regulations of financial organisations also led to a wide range of regulators. Among the scandals that arose due to SIB include the Mirror Group Newspapers, Barings Bank plc and the personal pensions mis-selling scandals. The Bank of England Act of 1998 is the other financial regulation laws in the UK. Particularly, the Act deals with the transfer of supervisory functions to the Financial Services Authority. The Financial Services and Markets Act 2000 also led to the Creation of a new super-regulator: the Financial Services Authority with sweeping powers. The Success of UK’s Financial Regulation Whether the regulation of financial services in the UK is a success story is quite a debatable issue. However, the cooperation among stakeholders emphasized in the current financial services regulatory polices in the UK has seen the concerned agencies achieve a considerable level of success. Moreover, the regulation policy holds a lot of potential for success should the emphasis on cooperation be maintained. The creation of new and more effective regulatory agencies such as the FPC has particularly resulted in a genuine and democratic accountability on the part of financial institutions in the UK. Importantly, the financial institutions have agreed to work collaboratively to foster positive changes in the sector (Estelami, 2006). The success in regulating the industry has also stemmed from the fact that the regulators have not abused their powers; instead, they have used the powers to democratically ensure stability in the financial sector, a key government economic policy. Crises and conflicts among financial institutions and policies such as the Government’s housing policy and aspects of the Financial Services Authority’s mortgage market review, which characterised the industry, have also been amicably resolved and reduced (Pratley, 2009). Success has also been realized in the clarification, interpretation and agreements with standards and principles of accountability and fairness ((Roger et al., 2011). Conclusion Financial services, referring to the services offered by institutions such as banks, insurance and mortgage firms plays such important roles in the economy of a country that they need to be effectively regulated. In the UK, the FPC has been mandated to regulate the financial services industry, taking over from the disbanded FSA. Besides imposing sanctions, restrictions and offering technical support and advice, the FPC established financial standards and principles upon which the sector is to operate. Importantly, financial laws have been enacted to regulate the operations of financial institutions not only to promote fair practices and competition but also to protect consumer interests and wealth. References Acharya, V., and Richardson, M. (2009) Restoring financial stability: how to repair a failed system (Wiley finance), first edition. New York University Stern School of Business. Andenas, M, and Chiu, I. H. (2011) The foundations and future of financial regulation: governance for responsibility. Routledge. Briault, C. (2006) Treating Customers Fairly and More Principles-Based Regulation. 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