Overview of UK Financial Services Regulation

Question 1

The Tripartite Authorities roles

Answer 1

1 December 2001 - 31 March 2013

1) Treasury
Responsible for legal framework within which regulation is conducted

2) Bank of England
Responsible for monetary policy (Monetary Policy Committee) and payment systems

Responsible maintaining stability financial system as whole

3) Financial Services Authority
Responsible for authorisation and day-to day supervision of All regulated firms (Large+small)

Regulating all financial markets

Regulated both prudential + conduct

Question 2

Issues with the Tripartite Arrangement

Answer 2

Issues with FSA regulating large and small firms in same way

Issues with FSA carrying out both prudential and conduct

Relationship was not spelt out to the relevant authorities

Not aware of the boundaries each of the authorities had

Question 3

Further Weaknesses of Tripartite System

Answer 3

Treasury -
No clear responsibility for dealing with a crisis

Bank of England -
Not provided with tools to carry out financial stability role

Lack of micro prudential viewpoint
Lack of power to intervene in banks operations
No power to prudentially regulate banks

FSA -
Expected to deal from safety and soundness of largest global investment banks - smallest high street FA

Limited view of systemic risk

Sheer volume of info = overload - bureaucratic paralysis
Entirely reactive and slow with risks
Focused micro - no macro prudential regulation

Question 4

Changes to FSA following Financial Crisis

Answer 4

End of light touch regulation - larger firms

Introduction of Supervisory Enhancement Programme
- more aggressive supervision of high impact firms and senior managers

Increased focus on risk
Don’t just check the presence of systems and controls (box ticking approach) - CULTURE
Judgements made about the business models, aims and strategies

Question 5

Legislative changes following Financial Crisis (Generally)

Answer 5

Change to labour Government

Banking Act 2009
Special Resolution Regime

Financial Services Act 2010
Introduction of new powers

Question 6

Banking Act 2009 developments after the Financial Crisis

Answer 6

Special Resolution Regime - banks in financial difficulty

Three resolution mechanisms

1) Safe to private sector buyer
2) Transfer to subsidiary of BoE

3) Temporary Nationalisation
(Placing bank public ownership)

PRA in consultation with Bank + Treasury make decision on place bank in SRR

Question 7

Financial Services Act 2010 developments after the Financial Crisis

Answer 7

Intro new powers
- New financial stability objective

• New powers to oversee remuneration of senior managers
• New enforcement powers to require firms improve consumer red dress

Suspension Power - regulator to suspend permissions to any authorised person

Non - approved persons Penalty power - allows regulator financial penalty for performing controlled function without approval

Question 8

Legislative changes of coalition government - FSA 2012

Answer 8

Dismantled failed tripartite system and replaced it with twin peaks approach

Put BoE back at centre of regulation

Question 9

Legislative changes of coalition government - Banking reform 2013

Answer 9

Introduced SMCR
raise accountability and raise standards in banking

Introduced ring fencing
Separating core retail banking services from investment banking services

Question 10

Legislative changes of coalition government - Bank of England & Financial Services Act 2016

Answer 10

Made changes to structure of BoE

gradually extended SMCR to all other authorised firms from Dec 2019

Question 11

Bank of England governance structure

Answer 11

• Court of directors acts as BoE’s board
• Governor, 4 Deputy Governors,9 Non- Exec Directors

Objective for bank to protect and enhance stability of financial services

Oversight committee created
bank provide report HMT by oversight committee
report to chancellor of exchequer

Question 12

Bank of England responsibilities

Answer 12

1) Financial stability objective
2) Financial Stability strategy + FPC

determined by court, reviewed every 3 years
co-ordinates BoE actions with HMT and FPC

3) Regulation of Financial Market infrastructures
E.G. Payment systems, Settlement systems

Question 13

Main Bank of England Role + Additional Committees

Answer 13

Controls macroprudential regulation

PRA- microprudential regulation over systemically important firms
accountable to FPC

Financial Policy Committee -
monitor economy + issues affecting Financial stability
direct FCA/PRA to take action against firm

Prudential Regualtion Comittee-
PRA’s board
important supervisory and policy decisions made for PRA

Question 14

Objectives for FPC

Answer 14

Main objective -
Help Bank to achieve financial stability objective by identify, monitor and take action on systemic risk

Secondary objective -
support economic policy of government

Question 15

Functions of the FPC

Answer 15

1) Monitor stability of financial system to identify systemic risk
2) Directions to FCA/PRA for micro prudential measures
3) Make recommendations to the Bank, Treasury, FCA, PRA or other persons
4) Prepare + publish two financial stability reports per annum

Question 16

General functions of the FCA/PRA

Answer 16

Make rules under FSMA (regulations)

Prepare and issue codes under FSMA

Give general guidance under FSMA (FCA only)

Determine policy and principles with which regulator perform its functions

Question 17

Solo-regulated firms

Answer 17

FCA carries out prudential regulation

FCA carries out conduct regulation

Question 18

Dual-regulated firms

Answer 18

PRA Firms;
Deposit Takers
Insurers
Significant Investment Firms

PRA carries out prudential regulation

FCA carries out conduct regulation

Question 19

FCA Prudential Supervision

Answer 19

P1 Lasting widespread damage

P2 Damage but easier to deal than P1

P3 Unlikely to cause significant harm

Question 20

PRA Objectives

Answer 20

General objective
Promote safety and soundness of PRA Firms

Secondary objective
Facilitate effective competition

Insurance objective of the PRA
Securing appropriate degree of protection for those who are may become policyholders (only insurer firms = sufficient reserves to payout claims)

PRA focuses firms that pose greatest risk stability of financial system

Relying on judgement - safe & soundness of firms + threshold conditions

Question 21

FCA Objectives

Answer 21

Strategic objective
Ensure relevant markets function well

Operational objectives
1) Consumer Protection Objective

2) Integrity Objective
3) Competition Objective
4) Continuity Objective

FCA judgement based supervision - several angles and identifying weaknesses = staff with strong relevant skills

FCA uses Firm Systematic Framework when assessing firms conducts risk

• business model
• governance and others
• product and design

Question 22

Principles of Good Regulation

Answer 22

8 Principles

1) Efficient + effective use of resources
2) Burden of regulation to be proportionate to expected benefit
3) Desirability of sustainable growth in UK economy
4) General principle that consumers should be responsible for their decisions
5) Responsibilities of firms senior management to comply with regulatory framework
6) Regulator recognise differences in nature and object of different businesses
7) Desirability of publishing (or requiring regulated persons to publish) info
8) Regulatory functions to be exercised as transparently as possible

Question 23

Regulator Duties

Answer 23

Annual reports to treasury (FCA+PRA)

Treasury reviews the performance of regulators

Penalty receipts handed to treasury each year