Important Methods of Regulating a Financial Market - Essay Example

Important Methods of Regulating a Financial Market where Public and Private Companies Raise Finance In the last decades, the financial markets have experienced an evolution especially with regard to capital markets, intermediaries, and financial instruments (Goodhart, 2009).1 Major structural changes have influenced more on the traditional bank operators, insurance firms, and investment firms. Thus, because of these structural changes, these dynamics have drawn international attention with a number of states like the United Kingdom, the United States of America, Japan, and Australia currently modifying their regulatory systems to incorporate the current dynamics shaping up in the financial markets (Crockett, 2001). Either these evolutionary trends are being witness in other European states. For instance, the euro zone area has been put under the supervision of European Central Bank while domestic agencies have been mandated to oversee banks and other financial supervision tasks (Blinder, 1998). Many scholars have argued that, it is imperative to regulate financial markets because of the influence they have on the whole economy. Because of this, different theoretical motivations supporting the need for stringent regulation of financial intermediaries and banks have been advance. (Valdez, 2006) argue that financial market regulation it is imperative in the process of pursuing microeconomic and macroeconomic stability of a nation. Such stability is associated to macro controls, which can translate to securities settlement systems, clearing houses and financial exchanges (Allen and Gale 1998).2 Financial regulation is important in fostering transparency in the financial market and intermediaries hence ensuring investors are protected. Ultimately, financial regulation is important in promoting and safeguarding of competition that is inevitable in the financial markets just like any other market. Why is Regulation Important to Public and Private Companies? There are three major reasons for regulating financial markets in any given economy. These include the following: To promote transparency in the financial market and intermediaries hence ensuring investors are protected; Promoting and safeguarding of competition that is inevitable in the financial markets just like any other market; Controlling and checking solvency of financial intermediaries. Financial markets form an integral part of the sources from which both private and public companies raise their capital to finance their activities. However, the legal framework regulating financial markets and intermediaries stipulate the various procedures and requirements that both the public and private companies should comply with in order to be allowed to raise finance from the financial markets (Frase, 2011). Raising Finance by Public companies There is couple of regulations governing both the private and public companies in the UK when raising finance from the financial markets. These methods of regulation include the following: Companies Act 2006 The major two provisions of this Act regulating public companies relates to the authority of directors in allotting company shares and the pre-emption rights disapplication.3 These key provisions require that shareholders pass an ordinary resolution granting the directors authority to issue and allot shares. Therefore, the Companies Act 2006 stipulates the requirements that companies must satisfy for them to raise finance from the financial markets while adhering to the rules governing the market. Financial services and market Act 2000 The EU prospectus Directive and FSMA Act 2000 regulates public companies when they are issuing shares to raise finance. The Act requires that the listed companies should issue a prospectus disclosing the information related to the issue to help investors make informed decisions and evaluate the prospects and financial position of the issuer.4 However, FSMA provides exemptions to the above provisions regarding the release of information to the public. These include the rules pertaining to financial promotions like in the course of doing business communicate an inducement or invitation of engaging in activities of investment. Raising Finance by Private companies The methods of raising capital that are frequently used by public companies e.g. placing and rights issues are also used in the private companies (Gullifer, and Payne).5 However, the only difference is that the securities traded are not transferable. Private companies receive funds from business angels, EIS, and capital ventures. Thus, because venture capital funds and private equity influence the economy, legislative measures to regulate private companies have been enacted. For instance, on April 2009 a proposal for AIFM was tabled by European Commission to regulate the entire EU alternative investment managers who were not covered by the EU law. Either the FSMA or its exemptions to restrictions to financial promotion apply in the same way to private companies just like the public companies when they are seeking investment or wish to raise finance. Having examined the various objectives of financial market regulation it is important now to focus on the main subject matter of this paper, which is examination of the pertinent techniques of regulating financial markets where both public and private business raise their finance. There are different for methods for regulating financial markets in the UK Gray & Hamilton, 2006). However, there is no unique practical approach or theoretical model for regulating financial markets (Boléat, 1988). In this paper, we are going to examine the prudential Regulatory Authority (PRA), the Financial Conduct Authority (FCA), the Financial Services Compensation Scheme (FSCS) and the Financial Services, & Markets Act 2010 (FSMA). It is imperative to note that under the memorandum of understanding signed between the FCA and PRA, the mandates of both authorities are very different.6 However, from a broad perspective, the authorities can be regarded as the backbone for ensuring integrity in the financial markets; soundness, and safety providers in the insurance and banking industry, providing protection to policyholders and finally the authorities play a key role in providing support to the Financial Policy Committee. We are going to examine the various ways that the authorities together with other regulatory authorities work together to make sure the financial market works efficiently while trying to achieve their ultimate goals for which they were created. The Prudential Regulatory Authority After disintegration of the FSA, the PRA and FCA were formed to regulate the financial markets and financial intermediaries. The PRA was formed under the Financial Services Act 2012 as part of the Bank of England. It is mandated to oversee and regulate banks, credit unions, insurers, key investment firms, and building societies.7 Together with the FCA, PRA is mandated to authorize and supervise individual deposit takers; promote sound and safe dual regulations on firms. It advances these objectives by primarily seeking to minimize any rising negative effects of failure of the UK financial market system by ensuring that companies carry on their transactions in ways that avoid adverse influence on the financial market system. Either the authority is tasked with providing protection to insurance policy holders through its objective of prudential regulation and supervision of insurance firms (Blair, 2009; Blair & Walker, 2009).8 Either as stated in the FSMA a secondary legislation order 2012, the Prudential Regulatory Authority, supervises the writing of rules determining the arrangements for the provision of protection with regard to insurance provision and deposits. In addition, the FCA is also tasked with overseeing the writing of those rules that govern all other kinds of financial activities that are covered by the scheme (FSCS). As a secondary goal, the PRA is required to facilitate competition, which is essential to promoting soundness and safety for the companies that it regulates.9 However, it is imperative to note that this secondary goal demands that the authority takes a more proactive approach when facilitating competition unlike in the previous duty when it was required to minimize the adverse influence of competitions.10 Financial Services Compensation Scheme (FSCS) It was established under the Act of FSMA as a limited company to govern the scheme as it applies to insurance provision and deposits in accordance to the Prudential Regulatory Authority’s rules. The scheme administers arrangements of compensation for the Financial Conduct Authority following the rules established by the authority itself.11 The Financial Services Compensation Scheme is also accountable for the operations of insurance provision and deposits under the PRA. For instance, it seeks to create and maintain a high level of awareness among policyholders and depositors by providing protection to both investors registered under the scheme and those registered with the EEA scheme. The authority also accomplishes such functions of the PRA like: Establishing procedures and implementing them to help the FSCS in delivering its mandate of administering the scheme. Determining levies and collecting them in order to cover management costs and the expenses of guaranteed transfer or payment made to other providers. Using its allocated resources in the most economic an efficient manner Reporting to the Prudential Regulatory Authority how it has accomplished it is assigned responsibilities and functions. In order to ensure accomplish their assigned responsibilities, the PRA and the FSCS share their information pertaining to their roles and responsibilities. For instance, the FSCS is required to update the PRA in relation to matters requiring the determination and eligibility of claims, interpretation of rules, and finally the capacity assessment of firms by the FSCS to enable it to settle payments of claims quickly when they arise and fall due.12 Either, the PRA is required to keep the Financial Services Compensation Scheme informed of any market or regulatory developments, which can influence its operations or planning.13 The Financial Conduct Authority The FCA is regulates and supervises the financial markets and financial firms by ensuring that they function well. The authority also oversees and regulates the financial firms that are not regulated by the Prudential Regulatory Authority like asset managers. The FCA has a major strategic objective in the financial markets; to ensure that the financial markets are functioning well. However, the authority has three major operational objectives that it plays in the financial markets: Securing the right protection measures for consumers including even the wholesale consumers Enhancing and protecting the integrity of the financial system of the UK Promotion of the most effective competition, which however takes into account of the consumer’s interest in the financial market However, under the Financial Services and Market Act 2000, the FCA is mandated to carry out the following activities: Regulate standard of conduct in the wholesale and retail markets; Supervise the trading infrastructure supporting the financial markets Ensure prudential supervision for firms not under the regulation of the PRA Check he functions of UKLA There are other methods governing the financial markets in the UK, which include such bodies as the UKLA and the Bank of England, which includes the aforementioned authorities (FCA and PRA). United Kingdom Listing Authority UKLA lies within the FCA and is responsible for vetting of the prospectus for publicly registered companies that want to raise finance through the financial stocks by selling of shares; listing details and other circulars from shareholders of public companies; the authority also monitors that listed companies comply with the continuous rules of transparency and disclosure. In addition, the authority assesses the qualification of companies that want approval from the FCA for their securities to be listed in the financial market.14 However, the main function that brought it to existence is the maintenance of the official list i.e. a list of all those securities that the authority has approved for trading on the UK stock exchange market (Taylor and Fleming, 1999; Taylor 1997). Maintained together with this is the list of the issuers of those securities. The authority is also involved in the setting of the listing requirements together with rules, procedures and documents required for listing. The other functions that the authority performs include: Consumer protection – this involves to identifying the risk levels involved in relevant types of investments, identifying the expertise and experience that different customers have regarding different kinds of investments. Ensuring market integrity through making sure that regulated information is released promptly to the market. The authority ensures that there is competition in the market through promoting competition in the consumers’ interest. This is aimed at eliminating any chances of existence of monopoly markets. Through FCA, the authority is capable of limiting/ restricting services performed by sponsors, suspending a sponsor’s approval and suspending, fining or limiting a sponsor’s services for a maximum period of one year. This means that currently, the authority has additional powers to supervise sponsors and to discipline those sponsors in case they breach their contractual terms. However, the sponsors have an option of considering to suspend approval granted by the authority or cancelling it (Bamford, 2011; Benjamin 2007). It is imperative to note that, companies that are subjected to the PRA regulation and supervision also are subjected to the FCA rules and regulations and other rules governing the listing, issue and trading of securities listed in the market.15 However, in some cases, some companies will be subjected to the FCA prudential regulations and others to the PRA but all under the consolidated supervision of the PRA. 16 Therefore, because financial markets have experienced an evolution especially with regard to capital markets, intermediaries, and financial instruments there is need to enact relevant legislation and establish independent regulatory bodies to oversee the activities of the financial markets since their influence on the economy cannot be taken for granted (Ferran, 2008; Ferran, 2004). Ultimately, it is also worth noting that regardless of the efficiency of the methods providing solutions to the financial markets, they also have some inefficacies. Either evaluation of the methods suggests that there exist no superior methods of financial regulation (Goodhart, 1999; Goodhart, 1992; Goddhart 1996). In addition, the PRA and FCA should be assigned different mandates and be left to exercise their powers independently without any influence from other bodies like the government. either the authorities should be allocated more resources to enable them carry out their supervisory objectives in an efficient manner (Fisher, 2003). Bibliography Primary Sources Commission Delegated Regulation (EU) No …/..of 21.1.2014 Companies Act 2006 Financial Services Act 2013 Prospectus Directive 2003/71/EC The Financial Services and Markets Act 2000 (Exercise of Powers under Part 4A) (Consultation with Home State Regulators) Regulations 2013 UK Prospectus Regulations 2005 Secondary Sources Allen F. and Gale D., "Innovations in Financial Services, Relationships and Risk Sharing", Journal of Political Economy. 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