Abuse of the UKs Financial Markets - Case Study Example

The Government has given the Financial Services ity new powers to tackle abuse of the UK’s financial markets in order to maintain the UK’s hardearned reputation given. Do you think the powers will be effective to maintain efficient, clean and fair markets? Give reasons to support your view I. Introduction When designing the policy related with the operation of a governmental area, the interest of the public is usually considered as the major priority. In this context, the protection of the people’s rights has been set as the most fundamental principle in every country’s constitution. Specifically in the area of the financial markets the daily operations of the institutions and the individuals activated in this area have to avoid confronting the ‘general good’ as it has been recognized and established through a series of legal rules and other governmental regulations. Current paper examines the structure and the operation of the Financial Services Authority in the British Financial markets regarding the level of protection provided to the investors. Moreover, the role of the above authority regarding the formulation of efficient and fair markets is also examined to the extension that such an activity can be observed through the introduction and the application of an appropriate net of regulations but mostly through the daily operations which are taking place in the specific area (Dolfsma et al., 2005). The above efforts are being analyzed in accordance with the current rules held in this market but also the ethics and other principles that have been generally accepted. The reason for choosing the financial market of the specific country for such a comparative /task can be found to the role of this country (Michie, 1999, 1) to the development of the financial services globally. II. Financial Services Authority – establishment, structure and rules of operation The Financial Services Authority is the main governmental body of the British financial services industry controlling the daily operations held in the area and proceeding to any initiatives that are considered as necessary in order to protect the investors’ rights (Piazza, 2005). The above authority has the ‘legal form of a company limited by guarantee (number 01920623)’. It was primarily incorporated on ‘7 June 1985 under the name of The Securities and Investments Board Ltd at the instigation of the UK chancellor of the exchequer who is the sole member of the company and who delegated certain statutory regulatory powers to it under the then Financial Services Act 1986; it changed its name to FSA on 28 October 1997 and now exercises statutory powers given to it by the Financial Services and Markets Act 2000, which replaced the earlier legislation and came into force on 1 December 2001’[5]. Among its responsibilities are: a) the control of banks and other financial institutions, b) the supervision of professional activities of individuals (financial advisers). In 2004, the FSA gained control over the mortgage providers and at a following level (during the 2005) on the general insurance intermediaries. It should be noticed here that when the Financial Services and Markets Act went into effect in 2001 [2], ‘several other financial services were merged into the FSA and additional responsibilities were granted to the organization (such as the ability to take action to prevent market abuse’. Regarding its activities it could be stated to a general level that Financial Services Authority is in charge of ‘monitoring and regulating all of the financial transactions and stock market exchanges within the UK’. To a more detailed specification of the authority’s duties, these could be summarized to the following ones: a) design and provision to the public of websites that explain analytically ‘how individuals and businesses within the UK can improve their financial capability, as well as upholding the rules of trade in regards to finances and securities when dealing with other countries or political unions, b) monitor the securities exchanges within the UK , and taking steps to actively avoid market fraud and illegal trade’ [2]. As to its structure, FSA is governed by its Board (the FSA Board) which is consisted by the Chairman, the Chief Executive Officer, three Managing Directors, and ten Non-Executive Directors. It should be noticed that the overall policy of the authority is mainly decided upon its Board while the daily operations and the necessary staff management is mainly performed by the CEO. The operation of FSA is characterized from a series of elements which consist the basis for the authority’s daily activities and its strategic management decision. The above elements can be summarized to the following ones [1]: ‘a) single authorization, supervision and enforcement powers; b) a single Compensation Scheme and single Ombudsman Service; c) specific statutory objectives for consumer protection and understanding; d) strong powers to tackle market abuse; e) powers to prosecute financial firms for failure to maintain money laundering controls; f) an independent Lord Chancellors Tribunal which can hear any disputed enforcement case from scratch; g) fining powers for the Listing Authority; h) a focus on how customers are treated after the sale of a financial product’. The above characteristics of the FSA structure and operation show that the authority has a unique power regarding the control and the regulation of the British financial services industry. This power can be observed in all the aspects of its activity ensuring that the daily transactions in the specific area are conducted under high standards of control and security (O’Connor et al., 2001). The above assumption is also supported by the authority’s Annual Report in June 2003 (where the first set of the authority’s standards was set under evaluation). According to this Report, the targets set by the Authority regarding the services provided to the general public were achieved at a percentage of 95%. The table [1] below presents the particular results of this evaluation: Service Standards (as in [10]) Target comments provided on the initial proof of a document submitted for pre-vetting by a new applicant within 10 working days  95% comments provided on the initial proof of a document submitted for pre-vetting by an issuer already listed within 5 working days  95% comments provided on subsequent proofs of documents within 5 working days  95% complaints to receive a substantive reply within 5 working days or acknowledged within 2 days and replied to within 15 days  95% III. Structure of the UK financial market – role and exchange of information and description of market manipulation The financial market is of significant importance for the British economy. Its activities are expanded to a very wide area covering all aspects of daily life. A more specific description of the particular market’s operation can include the following activities: ‘the raising and distribution of funds to government, industry and commerce; trading in stocks and shares, in financial and commodity futures and options; the management of investment portfolios; the management and marketing of investment trusts, unit trusts, and life assurance policies’. The above activities are conducted by a series of financial institutions which can be categorized in accordance with their structure and their area of operations – ‘banks, finance and investment houses, insurance companies, stockbrokers and jobbers, brokers and dealers in futures, insurance intermediaries, investment managers and advisors’ [11]. The main area of financial activities remains however the London Stock Exchange followed by a series of over-the-counter markets as well as the financial and commodity futures markets. In the above mentioned areas of financial activity, the information related to a specific financial decision or transaction is usually exchanged either formally (between the investors and the authorized financial advisers/ institutional representatives) or – mostly – informally (through the news delivered from one to another). It is basically the second of the above methods of information exchange that can lead to a market manipulation through the creation and delivery of news that do not respond in real events and figures but has ‘invented’ in order to protect existed financial interests or to create profits to a specific investor (or teams of investors). This technique of information delivery is rather impossible to be controlled by the FSA which can only intervene in cases where written data support the existence of a financial offence. IV. The security of the UK’s financial market under the FSMA 2000 The main legislative order for the regulation of the British financial market, the Financial Services and Markets Act 2000 was primarily created in order to specify the borders of the financial transactions in order for the latter to be accepted as fair and clean (Chorafas, 2000). Towards this direction, it has been supported [3] that ‘promoting financial stability is a key Government objective while financial stability is a crucial factor for macroeconomic stability, and is also vital to the efficient conduct of monetary policy’. However, although the general rules included in the above legal text can be characterized as an important development towards the effective protection of the British financial markets, it seems that FSMA 2000 did not meet its targets regarding the establishment, the operation and the objectivity of FSA. It’s for this reason that it has been observed [8] that ‘consumer interest does not appear to take priority within the FSA which ought to have a more proactive, statutory objective to improve the quality of markets’. Other problems regarding the content and the application of FSMA 2000 can be located to the ‘protection given to information relating to commercial interests’. As a result, the authorized governmental department faces difficulties when trying to identify certain type of information (e.g. ‘which insurance companies have the most mortgage endowment mis-selling cases’). The above issues prove that although the legislative orders can be extended to a variety of the daily financial activities, in fact [8] ‘there are limits to what regulation can achieve within the current regulatory framework and culture’. V. General legal trend towards the protection of investors in UK’s financial market At a first level, it should be noticed that although the protection of investors is a primary issue when designing a governmental financial strategy it has been proved in practice that the protection of investors ‘cannot eliminate the risk of fraud—the assumption of which is the classic role of the investor; rather, the idea of investor protection is to give the shareholders sufficient and true information and to guarantee a voice in basic corporate decisions’ [9]. In the above context, the method which the investor will follow in order to analyze the information provided belongs to his/ her responsibility and cannot be evaluated as a governmental or institutional action of misleading. Regarding the potential sources of investor protection [13], these could be located to the following ones: a) company, security, bankruptcy, takeover, and competition laws, stock exchange regulations, and accounting standards, b) enforcement by market regulators, courts, and market participants’. Moreover, the investor should be more effectively protected through the provision of one or more of the following rights [13]: a) receive dividends on pro-rata terms, b) vote for directors, c) participate in shareholders’ meetings, d) subscribe to new share issues on same terms as inside, e) sue directors or controlling owners for suspected expropriation, f) call extraordinary shareholders’ meetings’ Regarding specifically the protection of public, there is a Service that has been established in order to assure the safety during the financial transaction, the ‘Financial Ombudsman Services’ [7]. The above service has the right to proceed to a series of decisions and activities regarding the protection of the individual who participates in a transaction with a financial institution (or an individual – financial professional). This service can for this reason handle a wide range of complaints regarding financial matters and its services are provided to the consumers free of charge. The main characteristic of the above service is that it is independent and is being offered to the consumers as an alternative to courts. Furthermore, the consumer is not obligated to accept the decision made by the service but can decide to proceed to a court procedure instead.  It should be mentioned here that the efforts for the UK’s regulatory development in the area of financial services can be mainly located (to a more extensive level) in 1997 when the Bank of England was given ‘operational independence in relation to monetary policy’. In this context, the Financial Services Authority appeared for first time as a ‘statutory body’ which could incorporate all the particular financial regulators. The arrangements regarding the above activities were included in a document titled ‘Financial Stability: Memorandum of Understanding’ which ‘establishes a framework for co-operation between HM Treasury, the Bank of England and the Financial Services Authority (FSA) in the field of financial stability, sets out the role of each institution, and explains how they will work together towards the common objective of financial stability’ [3]. VI. Conclusion The above activities prove that the effort of British government in order to secure the protection of the public participated in financial transactions, has been notable. The establishment of FSA in order to achieve this target has been found to be the appropriate decision under the intensive pressures that are observed in both the international and the local markets (Blake et al., 2001). However, it could be noticed that FSA as a regulatory body has a rather controlling role over the financial activities in general and the intervention in the daily activities is mostly conducted by the Ombudsman Services, an authority that has been offered to the public as an alternative to courts. It should be noticed though that the role of FSA remains very important, as it is this Body that provides the necessary regulation for the evaluation and the control of the daily financial activities. The fact that FSA is mainly responsible for the creation of the legal framework in which the UK’s financial markets have to operate do not reduce its value as the major regulatory Body in the British financial industry (Hoskin, 2004). Moreover, it has to be mentioned that FSA keeps its right to intervene directly in cases that the obligations of the financial institutions (or the professionals) are not followed, i.e. when the above financial services providers proceed to a ‘professional offence’. In these cases, the above authority can directly impose penalties to the offenders (of a ‘professional nature’ though). In this context, the effort of British government for the creation of a fair and efficient market can be considered as successful. References Asset-backed bonds and the Implementation of Article 22(4) of the First Directive Regarding Undertakings for Collective Investment in Transferable Securities. (January 2006). Bank of England, Financial markets Law Committee, issue 55 Blake, A. P., Weale, M. (2001). The UK Economy. National Institute Economic Review: 8-42 Chorafas, D. N. (2000). New Regulation of the Financial Industry. Macmillan, Basingstoke, England Dolfsma, W., Finch, J., Mcmaster, R. (2005). Market and Society: How Do They Relate, and How Do They Contribute to Welfare? Journal of Economic Issues, 39(2): 34-354 Hosking, P. (2004). So Far, the Financial Services Authority Has Few Significant Insider-Dealing Scalps. but Can It Really Be a Coincidence That a Rise in the Share Price Precedes Almost Every Takeover Bid? New Statesman, 133(4695): 33-35 Michie, R. C. (1999). The London Stock Exchange: A History. Oxford University Press, Oxford O’Connor, P., Moorhouse, A., Zammit, L. (2001). Statistics for Financial Stability: a report on a meeting of the Financial Statistics Users’ Group. Monetary and Financial Statistics, November 2001: 1-3 Piazza, P. (2005). Financial Firms Face Infosec Perils. Security Management, 49(2): 39 Stewart, J. (2002). Ethical Finance Guide: Of the More Than 60 Financial-Service Companies in the UK That Offer Ethical Investment Products, 37 Comply with the Guidelines of an Ethical Fund as Defined by EIRIS, the Ethical Investment Research Service. the Shares That Make Up These Funds Comply with Positive or Negative Criteria, Such as Environmental Impact and Human Rights. A Complete List of These Funds Is Available from EIRIS. Geographical, 74(8): 56-58 THE FINANCIAL SERVICES AND MARKETS ACT 2000 (PROMOTION OF COLLECTIVE INVESTMENT SCHEMES) (EXEMPTIONS) ORDER 2001 http://www.vogon-computer-evidence.com/electronic-disclosure/financial_services_authority.htm [1] http://ezinearticles.com/?Defining-the-Financial-Services-Authority&id=131162 [2] http://www.hm-treasury.gov.uk/documents/financial_services/fin_index.cfm [3] http://www.britinfo.net/finance/fsa.htm [4] http://en.wikipedia.org/wiki/Financial_Services_Authority [5] http://www.fsa.gov.uk/ [6] http://www.financial-ombudsman.org.uk/ [7] http://www.which.net/campaigns/personalfinance/regulations/fsa.html [8] http://www.cfoeurope.com/displayStory.cfm/1777506 [9] http://www.hm-treasury.gov.uk/documents/financial_services/fin_list.cfm [10] http://www.bopcris.ac.uk/bopall/ref20835.html [11] http://individual.ml.com/index.asp?id=15261_45491 [12] http://72.14.207.104/search?q=cache:erwqITlYTEkJ:www.sml.hw.ac.uk/somjdb/International%2520M%26A/Investor%2520Protection.ppt+UK+financial+market+and+protection+of+investors&hl=en&ct=clnk&cd=67 [13] http://www.oup.co.uk/isbn/0-19-920291-5?view=lawview [14] http://www.euractiv.com/Article?tcmuri=tcm:29-152179-16&type=LinksDossier [15] http://www.fsa.gov.uk/Pages/Library/Communication/PR/2005/index.shtml [16] http://www.fsa.gov.uk/pages/library/communication/pr/2000/164.shtml [17] http://www.murdoch.edu.au/elaw/issues/v7n1/zhang71_text.html [18] Read More