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Unit 5: > 5.2 The Regulators, Who They Are And What They Do > Flashcards

5.2 The Regulators, Who They Are And What They Do Flashcards

1
Q

System of financial regulation

A

This consists of central bank, financial regulators and other negotiations that protect the public.

In many countries (Kenya and New Zealand), there is just one regulatory authority and can have different departments that are responsible for the different types of regulations.

Other countries have distinct regulators for different types of business. Example one each for banks the stock exchange etc

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2
Q

Central banks

A

Central bank for USA - Federal Reserve System (FED)

Several specialists bodies such as the Securities and Exchange Commission.

Countries in the EU Eurozone, the central bank is the European Central Bank (ECB).

The ECB and EU national central banks come together as - European system of central bank (ESCB)

In other countries , the central bank is also their financial regulator example, Rwanda

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3
Q

Central banks main responsibility

A

To achieve:

Monetary stability

Financial stability

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4
Q

Monetary stability

A

= that the countries currency maintains its value overtime

Stable currency allows people to understand what a unit of the currency will buy and you have confidence that the standard of living will be maintained.

The rate of inflation is for goods and services overtime . When the rate of inflation is LOW and STABLE a country has monetary stability.

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5
Q

Financial stability

A

= that the financial system and its institutions are performing the main roles (accepting deposits making loans and supervising payment mechanism)

Financial system is stable. These functions are carried out smoothly.
The economy runs well and people have confidence in it.
Stable financial system does not crash .

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6
Q

Central banks addition functions:

A
  1. Issuing bank notes
  2. Payment and settlement
  3. Other functions
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7
Q

Issuing bank notes

A

Central bank issues banknotes
This is considered legal tender and this means that anything that is recognised by the law of that country as a way of settling a financial obligation.

People must have confident in banknotes and the central bank must ensure that their notes are high-quality and durable.

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8
Q

Payment and settlement

A

Central bank enable financial institutions to make and receive payments from one another.

Payment system support the transfer of funds between individuals and businesses .
Most payment systems are managed by banks
Bank make and receive payments from other banks on behalf of their customers.

Every bank pays the net debt that it owes with every bank each day to an intermediary.
This intermediary = settlement agency

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9
Q

Other functions

A

These include holding the countries official reserves of gold and foreign currencies and being the bank to the government.

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10
Q

The UK regulatory framework
(FPC, FCA, PRA)

A

The Bank of England has Macroprudential responsibility for the oversight of the financial system.

It has day to day MICROprudential supervision of larger financial services firms.

As a result - two of the regulatory bodies are part of the bank of England

Policy committee (FPC) for Macroprudential policy

Prudential regulation authority (PRA) for MICROprudential policy.

The third regulator the FCA is an independent public body

These three bodies work closely together and the UK government finance ministry known as HM treasury
(FCA. PRA, FPC)

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11
Q

The financial policy committee (FPC)

A

Reasonable for the Macroprudential regulation of the UK financial system

Job - identify, monitor and take action to remove or reduce systemic risk
To do this - the FPC ‘ identifies vulnerabilities and acts to build the resilience of the system.

Systemic risk might include unsustainable level of debt or the amount of lending in the economy growing too quickly

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12
Q

Financial policy committee (FPC) has two main powers

A
  1. Power of direction
  2. Power of recommendation
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13
Q

Power of direction

A

Allows the Bank of England to issue compulsory instructions to the other two regulatory bodies (FCA and PRA)

Requires banked and other financial institution to take certain steps such as holding more capital.

This acts as a cushion if a bank starts to fail
This improves the banks ability to repay depositors and other creditors

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14
Q

Power of recommendation

A

Allows the FPC to recommend actions the the PRA and FCA.

This means that if the regulators decide not to implement a comply or explain recommendation, they must explain publicly the reasons.

If I bank does not comply and decides to exceed this proportion and must explain it reasons to the regulator

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15
Q

Prudential regulation authority (PRA)

A

Responsible for the Prudential regulation and supervision of around 1500 of the biggest financial institutions operating in the UK, including building societies, banks, credit, insurers and major investment firms.

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16
Q

The PRA has two primary objectives:

A
  1. Promote the safety and soundness of the firms it regulates
  2. Contribute to securing an appropriate degree of protection for insurance policyholders.

The PRA aims to achieve these objectives through regulations (setting standards with which firms must complain) and supervison (assessing compliance and monitoring risks).

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17
Q

The PRAs approach to regulation and supervision is based on:

A
  • tailored supervision
    Each farm is supervised to its needs and impact it would have on the economy if it failed.
  • being forward looking
    Carries out stress test on the firm it regulates to see how they would respond and how safe they will be if the unexpected happen. This helps firm develop resilient strategies and encourage them to hold adequate capital and liquidity.
  • looking at the bigger picture
    The PRA must be aware of any systemic risk in the financial system
    If a bank does failed, the PRA uses its resolution to manage this in an orderly way.
    To monitor risk of individual banks failing - mircoprudential regulators must be aware of the Macroprudential issues and MICROprudential issues
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18
Q

Financial conduct authority (FCA)

A

Is the conduct regulator for 50,000 businesses in the UK
If it’s regulated also by the PRA is it known as ‘dual regulated firms’.

Also it is the prudential regulator for around 46,000 smaller financial insitutions

19
Q

FCA solo regulated firms

A

It is an independent public body funded by fees paid by the firms it regulates.

FCA operates independently of the government

20
Q

The role of the FCA is to ensure that UK financial markets are honest, competitive and fair

A
  • ensures that firms and individuals are authorised or registered with it can carry out certain activities
    Before receiving FCA approval a firm must demonstrate they meet certain requirements.
  • supervise the firm it regulates to make sure they continue to meet the rules and standards
  • They use their enforcement powers if individual/firms failed to meet at standards
    They can get fines and stop them from trading or secure compensation for consumers.
  • FCA works alongside PRA to ensure UK markets like fairly and well

They work with others, including consumer groups , professional bodies, trade associations and international partners
To test its ideas and assess the effectiveness of its regulatory performance

21
Q

The FCA has three objectives

A
  1. Protecting consumers
  2. Protecting integrity
  3. Promoting competition
22
Q

Protecting consumers

A

FCA protects consumers from bad conduct (inc bad service, fraud, misperception and incompetence)z

In 2023, the FCA introduced a new consumer duty which sets a higher standard of consumer protection.

The FCA also works to help consumers understand risk in financial markets by publishing warnings
Example about firms operating without authorisation
And encouraging consumers to report scams and examples of bad conduct

23
Q

Protecting integrity

A

The FCA aims to ensure that markets work well and for the benefit of us all.

The FCA has regimes to insure that senior managers are held accountable for the capital market activities.

The FCA seeks to ensure that firms must put their clients best interest at the very heart of their business .

Regulators expectations around its regulated business having a positive culture of identifying and managing conflict of interest.

24
Q

Promoting competition

A

The FCA promote effective competition in the interest of consumers.
Competition between fun is good for consumers because it makes fun do their best to customers .

Other firms and banks can sometimes take actions which weakens competition. This includes:

  • planning with other firms to fix prices
  • Taking advantage of the fact that many consumers find financial products complicated to understand

The FCA works to remove such anti-competitive practices, promote healthy competition where consumers can trust firms and allow new and innovative firms enter the market and compete.
The FCA workes alongside the competition and market authority (CMA) .

25
Q

The European Union (EU) financial regulatory framework

A

In the EU, financial regulations fall under the European system or financial supervision which consist of:

  • The European Banking authority (EBA)
  • The European securities and market authority (ESMA)
  • The European insurance and occupational pensions authority (EIOPA)
  • The European systemic risk board (ESRB)
26
Q

The European Banking authority (EBA)

A

Is an independent EU authority.

Works to ensure effective and consistent prudential regulation and supervision across the European Banking sector .
Main task is to contribute to the creation of the European single wheel book in Banking . Its main functions are to:

  • Ensure accountability to European citizens
  • Ensure that supervision is consistent
  • Sanction banks if they do not comply
  • Supervisors the largest banks in participating countries
27
Q

The European securities a market authority (ESMA)

A

EU financial markets are mostly supervised at the National level
But EMA supervises some key entities whose activities are EU wide .

The purpose of EMA is to encourage supervisory authorities to come together across the member states to ensure a level of regulatory and supervisory playing field .

28
Q

The European insurance and occupational pensions authority (EIOPA)

A

Independent Body advising the European commission, European Parliament, and the council of the EU.

Aim to faster financial stability and confidence in the insurance and pension markets .

To protect the public interest by contributing to the stability effectiveness of the financial system

29
Q

The European systemic risk board (ESRB)

A

Responsible for the macroprudential oversight of the EU financial system, and the prevention and mitigation of systemic risk.

It monitors and assesses systemic risk
Issues warnings and recommendations

30
Q

International financial regulations

A

Systemic risk is always present as banks interact and conduct business within a global financial system.

31
Q

Financial stability board (FSB)

A

Is an international body that monitors and makes recommendations about the global financial system, with the aim of promotion international financial stability.

The politicises it develops are implanted by national authorities.

32
Q

Financial stability board main aims

A

Is to access vulnerabilities affecting the global financial system

  • review actions needed to address these
    promote coordination and information exchange among national authorities
33
Q

Financial Action Task Force (FATF)

A

Is the global money laundering and terrorist financing watchdog.

39 member body sets international standards that aim to prevent illegal activities such as cyber fraud and the harm they cause to society.

More than 200 countries have committed into implementing FATFs standards as part of a coordinated global response to preventing organised crime, corruption and terrorism.

34
Q

Non regulatory national organisations includes:

A
  • an ombudsman service to resolve complaints and disputes between banks and the customers
  • A compensation scheme that will pay back depositors some or all of the money if the bank becomes insolvent
  • A competition authority will encourage competition between firms including banks and discourage anti-competitive practices
35
Q

Financial ombudsman

A

To resolve complaints and disputes between banks and their customers.
- Funded by an annual levy paid by all the financial firms that are covered by the Service

  • Do not charge customers
    (FAIS Ombudsman also receive funding from special project such as donor funding)

Consumers must first make their complaint to their bank or financial firm .

If they are not satisfied with their response to take their complaint to the FOS .

36
Q

Financial service compensation scheme (FSCS)

A

Will pay deposit some or all of the money if the bank becomes insolvent.

The purpose is to protect customers of failed financial services firms by paying them compensation up to a stated limit.

The European commission has a deposit guarantee scheme (DGS) which reimburses the depositors of a file bank up to a certain limit.

37
Q

The FSCS provides compensation losses for the following

A
  • £85,000 per person, per bank, building Society or credit union
  • A pension with a failed pension provider
  • Bad mortgage advice or miss selling of a mortgage endowment
  • Cover with a failed insurer
  • Payment protection insurance policy where the information given was misleading or insufficient
38
Q

Competition authorities

A

Encourages competition between firms including banks and discourage anti-competitive practices.

39
Q

The competition and market authority (CMA)

A
  • invites the general public and businesses to report competition and consumer issues that have come to their notice
  • Cannot step in or advise and individual complaints
  • Can contact the businesses concerned, investigate them and take legal action if appropriate
  • can conduct studies or investigations into markets and prosecute people who are involved with the cartels

Cartels = a group of firms that come together to restrict competition between them.
This can be taken in the form of price fixing - artificially raising the cost of a product

Bid rigging - companies with large projects agree on the big price between themselves.

  • The CMA can also report a case to another regulator in the appropriate sector
    A report would be made to the FCA or the payment systems regulator (PSR) if there is a payment system issue
  • investigate mergers between firms as when firms merge and become one firm, competition is reduced in the market and restrict consumer choice
40
Q

Payment systems regulation

A

It is important that they work accurately and efficiently so that individuals and firms are confident that the right amount of money will come out of the correct payers account and be deposited in the correct receiver account.

  • Make them secure and resilient to cybercrime
41
Q

The role of the PSR (payment systems regulator)is to:

A
  • ensure appropriate payment systems are operated
  • Promote effective competition in the markets
  • Promote innovation and pay systems (infrastructure)

The PSR has many regulatory powers and can take action against any breache

42
Q

The pension regulator

A

Regulated in Europe by the European insurance and occupational pension authority.
This is part of the EU financial regulatory framework.

Works together with the FCA to address risk and harm in the pensions and retirement income sector.

Protects the U.K.’s workplace pensions

43
Q

Serious fraud prevention bodies

A

(Serious fraud and money laundering)

  • in Australia, the serious financial crime (SFCT) targets serious financial crime
    Priorities included technology enable tax crime (cybercrime) and off share tax evasion.
  • in the UK, the serious fraud office (SFO) is a specialist prosecuting authority that tack of the top level of serious or complex fraud.

It investigates a small number of large economic crime cases

44
Q

Data protection authorities

A

Data protection regulations are in place to ensure the fair and proper use of information about people.

Having regulations in place helps to ensure that personal data held by banks remain safe .

Globally over 100 countries have some form of data privacy laws .

In the UK, there is the information commissioners office (ICO) add to European data protection board.

Unit 5: (7 decks)

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