Lecture 4- Regulation Flashcards
The players
Financial services Banks Building societies Insurance companies Others Government/regulators Funds Pension funds Professional advisors
U.K. banks
Seriously damaged by the 2008 financial crisis
Mind boggling amounts of tax payer money thrown at the sector to keep it afloat
Questionable attitude to their customers
Frequent, sizeable firms
Questionable attitude to their shareholders
Senior employees seem to pocket a large % of the value added
U.K. Banks example
HSBC 100% private shareholders
Rode out the crisis well
Barclays - not quite so true that they survived it
Lloyds banking group
Rushed into buying HBos
Led to a 42% UK govt shareholding (reducing)
TSB “divested”
EU ruled the HBOs acquisition gave it unreasonable market share
RBS
Grew spectacularly through 2000s
ABN Amro takeover make it briefly the biggest bank in the world
80% govt owned
Williams & Glyns being divested
Another EU decision to make up for the level of government intervention
Building societies
Mostly become banks or purchased by banks
Remaining ones are mutual
Technically owned by their investors/ depositors
E.g nationwide
Traditional focus on savings and mortgages
Credit unions are a more recent form of a similar idea
Credit unions
An old idea
A group with something in common - region, employer/job
They save together and they borrow from each other
Low cost and generally fairly low amounts
Government
Has objectives
Economic growth, Employment
Raising taxes to pay for government expenditure
Changing society? - progressive taxes
Regulatory control
Appoints and changes
Regulatory bodies
Funds
Life assurance companies
Hedge funds
Large sums to invest in
Shares
Corporate debt
Other assets
Everyone
Contribute to funds and therefore invest
Pay taxes
Use banks
Investing
Individuals = 11.5%
Invested on behalf of individuals
- pension funds = 5.1%
- insurance companies = 8.6%
- others 33.6%
Charities, financials, governments, hedge funds, investment funds, investment trusts, company holdings
Professional advice and negligence
The provision on investment products is governed by the Financial Services And Markets Act and amended by the Financial Services Act 2000
Negligence in the provision of such advice can give rise to action being taken in 3 areas:
The regulatory authority can take disciplinary action against both the regulated firm or authorised individual
The client can raise a complaint under the procedures laid down by the regulatory authority
The client can take legal action against the regulated firm and/or the authorised individual
The Financial Services authority
Single uk regulator for financial services
The fsa regulated most financial services markets, exchanges and firms including mortgage and insurance providers
4 statutory objectives
1) maintaining market confidence in the financial system
2) promoting public awareness of the financial system
3) Securing the appropriate degree of financial protection for consumers
4) reducing financial crime
3 and 4 were of the greatest importance with professional advice and negligence
The FSA was split up
The money advice service (2010)
The Financial conduct authority - system
The prudential regulatory authority - firms
The Bank of England picks up the remaining parts - finically policy committee
Consumer protection - principal risks
Prudential risk - the risk that a firm may collapse e.g due to weak management or lack of capital
Bad faith risk - the risk from fraud, deliberate mis-selling, misrepresentation or failure to disclose relevant information on the part of the firms selling or advising on financial products
Complexity/unsuitability risk - risk that consumers contract for a financial product or service that they do not understand or which is unsuitable for their needs and circumstances
Performance risk - the risk that investments do no not deliver hoped for returns
FCA plays a role in identifying and reducing the first three
FSA and FCA - financial crime
Prevent:
Money laundering
Fraud or dishonesty, including financial e-crime
Fraudulent marketing of investments and criminal market misconduct including insider trading
Regulatory tools
Directed towards consumers and the industry in general
Disclosure - providing consumers with information to make better decisions
Consumers education and public awareness building
Improving consumers knowledge of financial systems and their own needs
Also included initiatives targeted at particular risks
Complaints handling mechanisms and ombudsman services
Enables consumers to pursue complaints against firms and secure redress where appropriate
Tools- consumers
Compensation schemes - funded by other regulated firms which provides a safety net against firms collapse
Public statements - designed to alert the public and market participants to specific risks, e,g internet fraud
Product approval - required for collective investment schemes OEICs
A training and competence regime - designed to raise standards and improve and maintain compliance in the industry. All registered individuals are subject to this .
Tools - consumers part two
Rule making - sets regulatory standards for the industry
Market monitoring - monitoring of geographical, industry and product trends and developments to provide information relevant to the risks that the FSA have identified to their objectives
Sector wide projects - e.g recent pensions review
International activities - participation in international working groups and dealings with overseas regulators
Regulation directed towards individual institutions
Authorisation of firms and approval of individuals - setting entry standards for honesty, competence and financial soundness
Perimeter injunctions and prosecutions - the FSAs power to stop unauthorised activity and to prosecute these undertaking it
Supervision of firms - to monitor, identify and deal with firms specific risks. Done through on-site visits and desk-based reviews
Investigation - individual firms can be investigated by the FSA
Tools- individual institutions
Intervention - to be used where the risks are immediate and continuing and the FSA/FCA believes the firm will not take appropriate remedial action on its own
Discipline - private warnings, public censure, financial penalties, withdrawal or suspension of authorisation
Restitution of loss - where compliance failures result in profits to the firm or loss to consumers, the FSA/FCA can apply for a court order of restitution
The FSA has administrative power where a regulated firm has breached a regulatory requirement to require it to compensate consumers for any consequent losses
The decision of the FSA AND FCA is binding on the regulated firm but leaves a consumer free to reject the decision and take their complaint to the courts
Summary
Personal financial advising:
Need to take into consideration knowledge of the client and the regulatory environment
Set out financial plans for investment clients allowing them to work towards their financial objective
The Financial Services authority: given power from December 2001 following financial markets and services act 2000
The fsa’s regulatory tools set out the standards and parameters for professional advice and the remedies for breaching those standards
Replaced with the FCA having the biggest role for personal finance
