Regulators of the Financial Markets - FPC, PRA & FCA

Question 1

What is the Tripartite system of regulation?

Answer 1

3 regulation organsiations:

• FPC
• FCA
• PRA

Question 2

What is Macroprudential regulation?

Answer 2

Regualtion concerned with the overall state of the banking sector and limiting any potential systemic risks.

Question 3

What is Microprudential regulation?

Answer 3

Regualtion that’s concerned with monitoring banks individually to ensure they’re functioning properly and are each financially stable.

Question 4

What is the FPC and their role?

Answer 4

Financial Policy Committee (FPC) - Macroprudential regualtors:

• Identify, monitor and protect against systemic risk.
• Instruct PRA & FCA in tackling financial stability issues.
• Advice gov’t about systemic risk, macroeconomic shocks and bank bailouts needed to protect against shock.
• FPC have 2 annual stress tests to make sure banks are safe from financial sector shocks.
• Provide liquidity (through liquidity assurance scheme in the bank of England) to protect aginst systemic risk and liquidity crisis.

Question 5

Are the BofE connected to the FPC?

Answer 5

Yes.

Question 6

What is the PRA and their role?

Answer 6

Prudential Regualtion Authority (PRA) - Microprudential regulators:

• Maintain stability of banks.
• Supervise the management of risk (make sure banks aren’t taking on too much risk that may destablise the financial sector).
• Setting industry standards for conduct and management with enforcement to make sure they’re upheld.
• Specifying ratios/requirements (i.e. capital ratio, liquidity ratios, leverage ratios and reverse requirements).

Question 7

Are the PRA linked to the BofE?

Answer 7

Yes.

Question 8

What is the FCA and their role?

Answer 8

Financial Conduct Authority (FCA) - Microprudential regulation:

• Protect consumers & increase confidence in financial institutions and financial products.

Question 9

How do the FCA complete their role?

Answer 9

1. Supervising conduct of firms/workers to ensure legal business activity (no market rigging).
2. Promote competition so consumers get better deals (deregulation - reduce red tape).
3. Banning financial products that are against the interest of consumers (mis-selling products like PPI or life insurance to people who don’t have anyone who can gain from it).
4. Banning or changing misleading advert for financial products (loan sharks) - no assymetric information.

Question 10

Are the FCA linked to the BofE?

Answer 10

No. Report to HM Treasury (ran by gov’t).