UK's Regulatory System - Report Example

Introduction It is generally argued that financial markets shall not be left alone at the mercy of market forces and certain degree of regulation is necessary in order to allow them to remain within their limits. Since the inception of modern financial system, the need for having proper regulatory authority to oversee and supervise the financial was considered as important for overall survival of the system itself. The recent credit crunch and collapse of important financial services firms also prompted for new and tougher changes to be made in the system and to increase the role of government in regulating the financial markets. Regulatory system of UK went through a dramatic change in recent past when Financial Services Authority (FSA) was abolished in the wake of current financial crisis. The credit crunch and the resulting economic downturn that both US and UK faced therefore, prompted for radical changes to be made into the financial regulatory system. The proposed changes in US financial system also indicate that there may be more powers to be given to Federal Reserve System (FED) to effectively control the financial services industry. Similarly, UK has given more powers to Bank of England to improve its role as the supervisor of Financial System by abolishing Financial Services Authority. The overall structure of regulatory system of both the countries is therefore going to change in near future and as such new foundations may be laid. This paper therefore, will attempt to discuss the structure and objectives of UK and US’s financial regulatory system and critically analyze as to whether the system has the capability to regulate the financial services industry. Why Regulations are necessary? Before discussing the structure and objectives of regulatory system of UK and US, it is important that a critical discussion is presented to discuss the need to regulate financial markets. Theoretically, it is argued that government intervention in the market is necessary in order to remove or correct the imperfections in the market. Market imperfections can be created due to many reasons however, to correct them; government has to intervene in the form of regulations to restrict certain actions otherwise performed by markets without significant hindrances. It is argued that financial markets tend to work better when investors have all the information and markets are free from manipulative power of few. What is significant however is the fact that failure of one financial institution can cause failure of other institutions thus the contagion effect of the failure can cripple the whole economy of a country. Due to this inherent risk and weakness of financial services industry, it becomes more important that government should have better role in controlling and regulating certain aspects of the market in order to prevent systematic failure of financial institutions. The degree to which regulations are to be implemented is a matter of discussion because it is a general perception that more regulations may lead to inefficiencies as institutions may find it difficult to compete with each other. UK’s Regulatory System Before the abolishment of FSA, UK’s regulatory system was a tripartite system with Treasury, Central Bank i.e. Bank of England and FSA regulated the market. FSA was created by Tony Blair’s Government in order to separate the powers of monetary policy execution as well as the supervision of the financial system. Bank of England was responsible for the formulation and execution of the monetary policy of the country whereas FSA had the mandate of supervising financial services industry. The main objectives of the regulatory system were: 1. to ensure that the system remain on sound footings 2. regulatory infrastructure of the country must ensure and maintain confidence within the markets, to promote and increase the awareness of general public about financial system, 3. protection of the consumers as well as reduce and control the financial crimes With the change in the regulatory environment during recent times, crisis management is also now one of the objectives of the system. This is dues to the fact that during recent times, Central Banks not only regulated the monetary policies but also managed the crisis by bailing out various financial institutions. The current structure of UK therefore is based on Bank of England as the sole authority in the country to regulate financial markets with much broader mandate and powers to manage the system. However, within this set up, Financial Policy Committee as well as the Macro Prudential authority have also been created. (Bank of England). The focus of current regulatory system is not only to exercise prudent monetary policy but also ensure macro prudential regulation of the system as a whole. Financial Regulatory System of US US also enacted new regulations which will result into one of the strongest overhauls of its financial system since the end of depression. The regulatory system of US comprises of Federal Reserve Board (FED) serving as the central bank of the country with regional FED also working to manage at Regional level. Further, Securities and Exchange Commission, Federal Deposit Insurance Corporation, Commodities Future Trading Commission and National Credit Union Administration are other regulatory institutions which oversee the different aspects of financial regulatory system of the country. Office of Comptroller of the Currency is also another institution which oversees the regulatory aspects of financial markets. (Teslik) The major objectives of each of the regulatory bodies are different and according to the mandate given to them. For example, FED is responsible for the management of monetary policy in the country whereas Securities and Exchange Commission has a supervisory role with mandate and objective to supervise the financial institutions along with non-financial institutions. The major aim therefore is not only to protect the system itself but also ensures that consumers are protected from the financial crimes that may be committed by financial institutions. It is also critical to note that the current reforms of the system will result into the creation of Consumer Financial Protection Bureau which will have larger mandate to ensure consumer protection and ensure that the consumers remain well protected from the large scale swings in the financial markets. (Brower). Capability of regulating the industry Though the countries have enforced much tighter regulations to regulate the financial markets however, question also remains regarding the ability of these institutions to properly oversee and regulate the system as a whole. Historically, two approaches were adapted to regulate the financial services industry i.e. multiple institutions overseeing the industry and single institution performing the same job. Both the approaches have their limitations and strengths and historically, it has been observed that countries adapted both these approaches with certain degree of failure and success. (Kushmeider) Currently, the approach is to give the mandate to single institution which can oversee the whole system ignoring the fact that the complexities of the system may not allow a single regulatory body to oversee the whole system. One of the reasons as to why the earlier regulatory structure failed to provide results is the fact that financial sector has became de-regulated and with the improvements in technology, it became easier for funds to flow from one corner of the world to another. This free and unrestricted flow of capital therefore may not allow the current regulatory system to ensure that financial institutions keep their appetite in check and don’t engage into those speculative areas where they can land themselves into trouble again. The need therefore is for having an integrated regulatory system which can ensure that institutions do not cross their limits and engages into healthy competitive practices besides ensuring that the whole economic system as well as the consumers remains protected. Further, it is also important to note that financial system as a whole is procylical in nature and its performance varies with business cycles. During economic downturns, it may not be possible for the regulatory bodies to ensure that the institutions remain intact and do not require support from Central Bank or other institutions. To some extent, therefore the regulatory system of both the countries may not be able to protect the system. Given the complexities of the financial system and products, it is also important to see whether these financial regulatory agencies have the required manpower and skill base to effectively audit these institutions and put a proper check on their appetite and tendency of financial institutions to engage into practices which may be consumer unfriendly. Conclusion There have been drastic changes in the way financial regulatory system of UK and US used to work. Both countries have introduced new changes to their existing regulatory structure to ensure greater consumer protection and stability within the financial system. UK’s regulatory role has been assigned to Bank of England after abolishment of Financial Services Authority therefore BoE now has the final responsibility of not only managing monetary policy of the country but also oversee its financial system as a whole. In US, new Consumer Protection Bureau has been created to ensure consumer protection as well as to make the system more stable and risk averse. Questions however, still remain as to whether these regulatory bodies will be able to fulfill their objectives and may fail to regulate the financial services industry. Bibliography Kate Andersen Brower. "Obama Says Financial Overhaul Bill `Strongest Ever." 21 July 2010. Bloomberge. 30 July 2010 . Bank of England. "Changes to the UK regulatory system." 2010. Bank of England. 30 July 2010 . Kushmeider, Rose M. "The U.S. Federal Financial Regulatory System: Restructuring Federal Bank Regulation." FDIC Banking Review 17.4 (2005): 1-31. Teslik, Lee Hudson. "The U.S. Financial Regulatory System ." 2008. Council on Foreign Relations. 30 July 2010 . Read More