Topic 8 - Consumer Protection Flashcards
Organisations that provide consumer protection in UK financial services market
- regulators: financial conduct authority (FCA), prudential regulation authority (PRA)
- financial ombudsman service
- financial services compensation scheme (FSCS)
- competition and markets authority
What is the credit crunch
- global financial crises of 2007
What are the causes of the credit crunch?
- banks lent money to ppl unlikely to repay
- banks used money from their retail businesses to pay losses from their investment operations
- providers: not enough money to repay depositors when retail customers wanted to withdraw money
- UK market dominated by large banking organisations ‘too big to fail’
How is banks lending money to ppl unlikely to repay a cause of the credit crunch?
- in early 2000s, US interest rates low: lenders lent mortgages to sub-prime market
- lenders sold on this debt to other providers
- interest rates inc. + many sub-prime customers couldn’t make mortgage repayments, so banks sold homes dec. house prices
- house prices < mortgage owed to bank: banks stopped lending money to other banks + so many banks made losses + couldn’t access cash
Key recommendations of the independent commission on banking
- improve regulation of providers
- make sure banks are able to absorb losses
- make it easier + less costly to deal w banks in financial trouble
- reduce amount of risk banks take
- separate retail banking from investment banking
What main changes does the financial services bill include?
- UK banks must separate everyday + more risky investment banking activities (ring-fencing)
- depositors covered by FSCS must be repaid as priority if bank fails
- gov. will have powers ensuring banks can absorb losses more easily
What is regulation?
- process of supervising actions + businesses of financial services providers
What is the financial policy committee (FPC)?
- part of Bank of England
- focuses on major risks within financial system as a whole
What is the role of PRA?
- responsible for prudential regulation of banks, building societies, credit unions, insurers + investment
What are the 2 objectives of the PRA?
- promote safety + soundness of providers
- providers better able to cope in a crisis + can support economy (if provider fails)
- secure appropriate degree of protection for insurance policyholders
What are PRAs set standards + requirements providers must meet?
- holding enough cash + having enough capital to absorb certain levels of losses
- having suitable management
- bring fit + proper
- conducting business prudently
Why is PRA forward looking?
- assess level of risk in future
- can take action so providers reduce risk
- require banks to hold more capital
- order providers to change lending criteria
What does the FCA do?
- aims to prevent misconduct by financial services providers
FCA enforcement powers to providers that have broken rules
- imposing fines on providers/individuals
- withdrawing/suspending a provider’s authorisations to operate
- ordering providers to compensate customers
What are the 2 ways FCA manage risk?
- investigates individual or linked providers
- investigates themes or issues in the market
What are the 3 ways the FCA ensure financial markets work well so customers get a fair deal?
- ensure customers are protected
- protect + enhance integrity of UK financial system
- promote effective competition in the interests of customers
Why was the FOS set up?
- to resolve individual complaints from customers
- free to customers
What does the FOS do?
- considers both sides of every complaint
- can order providers to pay compensation to customers up to a specific max. depending on when case was brought to FOS
What is the FSCS?
- repays customers deposits in providers authorised by FCA
- funded by levies on regulated providers
- deposits covered to max. £85,000 per person per provider
What does the competition + markets authority (CMA) do?
- ensures market works well for customers, businesses + the economy
What is the CMA responsible for?
- investigating mergers that could restrict comp
- conducting market studies + investigations: where comp + consumer problems
- bringing criminal proceedings against businesses + individuals taking part in cartels
- enforcing consumer protection legislation to tackle practices + market conditions
- cooperating w gov. + sector regulators + encouraging them to use comp powers
Voluntary codes of conduct
- consumer protection: providers regulate themselves by agreeing to it
- includes financial providers setting up voluntary rules they adhere to
- e.g. Standards of Lending Practice - covers good practice
