The Legal and Regulatory Environment Flashcards
What are the main reasons the Bank of England stated are the reason for Banks failing?
- they make poor investment decisions and not enough profits, so they go bust (just like any company)
- people and companies who have put their money in a bank account take it out quicker than the bank can manage. This is what happens in a ‘bank run’ (Bank of England, 2019).
When banks fail, they can also make it more likely that other banks will too. The 2007-2008 global financial crisis showed that problems can spread from one bank to another, wreaking havoc on the economy
What does regulation do to help Banks?
- Regulation also makes banks hold sufficient financial resources (capital) that act as a cushion, or shock absorber, against unexpected losses, for example, if someone fails to repay a loan.
- Regulation is used to reduce the chances of people taking out their money unexpectedly. Deposit guarantee schemes ensure that, even if a bank fails, all deposits up to a certain limit will be protected. Banks also have to hold cash (or assets that can be sold very quickly) to cover unexpected withdrawals. This should help make bank runs less likely.
- Regulation is also used in large UK banks to ‘ring-fence’ some services from other parts of the bank. The ring-fence protects consumer banking services from shocks to the wider financial system and helps to protect our access to the banking services we all depend on every day.
- Financial crises can cause people to lose their jobs, or face pay cuts, and many more will suffer from a higher cost of living. On their own, banks don’t take this into account when making decisions – regulation helps make sure they do.
- Regulation helps to reduce many of the problems that could get a bank into financial difficulty. Although there is no guarantee that even well-regulated banks will never fail, regulation should mean that there will be fewer bank failures in the future.
What are the three types of regulation environments?
- Regulation
- Monitoring
- Supervision
What is regulation in Banking?
Regulation refers to the setting of specific rules of behaviour that financial institutions in scope (‘firms’) have to abide by. These rules may be set through legislation (laws) or be stipulated by the relevant regulatory agency. Monitoring of these regulations refers to the process whereby the relevant authority assesses financial firms to evaluate whether these rules are being obeyed. Supervision is a broader term used to refer to the general oversight of the behaviour of financial firms. In practice, these terms are often used interchangeably when talking about the regulatory environment.
What are the three main types of regulation?
- Systemic (macro-prudential) regulation
- Prudential (micro-prudential) regulation
- Conduct of business regulation.
What is Systemic (macro-prudential) regulation?
o Systemic regulation is concerned primarily with the safety and soundness of the financial system. It covers all public policy regulation designed to minimise the risk of ‘bank runs’, and which comes under the banner of the ‘financial safety net’
o Macro-prudential supervision is concerned with the aggregate effect of the actions of individual banks. As it aims to generate an overall picture of the functioning of the banking system, macro-prudential supervision is also known as ‘top-down’ supervision.
What is Prudential (micro-prudential) regulation?
o Prudential regulation is mainly about consumer protection. It relates to the monitoring and supervision of financial institutions, with particular attention being paid to asset quality and capital adequacy – a measure of a bank’s or other financial institution’s ability to pay its debts if people or organisations are unable to pay back the money they have borrowed from the bank.
o Micro-prudential supervision checks that individual financial firms are complying with financial regulation. It involves the collection and analysis of information about the risks that firms take, their systems and their people. As micro-prudential supervision uses firm-specific information to generate a picture of risk and how it is being managed, it is also known as ‘bottom-up’ supervision.
What is Prudential (micro-prudential) regulation?
o Prudential regulation is mainly about consumer protection. It relates to the monitoring and supervision of financial institutions, with particular attention being paid to asset quality and capital adequacy – a measure of a bank’s or other financial institution’s ability to pay its debts if people or organisations are unable to pay back the money they have borrowed from the bank.
o Micro-prudential supervision checks that individual financial firms are complying with financial regulation. It involves the collection and analysis of information about the risks that firms take, their systems and their people. As micro-prudential supervision uses firm-specific information to generate a picture of risk and how it is being managed, it is also known as ‘bottom-up’ supervision.
What is Conduct of business regulation?
o Conduct of business regulation focuses on how banks and other financial institutions conduct their business. Its purpose is to protect customers from harm, preserve and enhance the integrity and orderly operation of financial markets, and otherwise serve the public interest.
o Conduct of business regulation is all about disclosure of information, fair business practices, and the honesty, integrity, and competence of financial institutions and their employees. In general, it focuses on establishing rules and guidance to reduce the likelihood of:
consumers receiving bad advice
supplying institutions becoming insolvent before contracts mature
What is a central bank? What are the key functions?
A central bank is a financial institution that is responsible for overseeing the monetary system for a nation, or group of nations, with a view to fostering economic growth without inflation.
Key Functions:
- Control the issue of notes and coins
- Control the amount of credit money created by banks, that is, the money supply
- Have some control over non-bank financial intermediaries that provide credit
- Use monetary policy to control credit expansion, liquidity, and the money supply of an economy
- Oversee the financial sector to prevent crises
- Act as a lender of last resort (LOLR) to protect depositors, prevent widespread panic withdrawals, and otherwise prevent the damage to the economy caused by the collapse
- Act as the government’s banker
- Act as the official agent to the government in dealing with all its gold and foreign exchange matters
What is inflation?
Inflation is the increase in the prices of goods and services over time. As prices rise, our money buys us less. If our cost of living increases, then our standard of living decreases.
What are the four key things the Bank of England does?
- Regulates other banks (PRA)
- Issues banknotes
- Sets monetary policy (by moving the interest rate (Bank Rate) up and down)
- Maintains stability
What is ‘the Act’? What three new bodies were formed under the Act?
The Financial Services Act 2012 (‘the Act’) came into force on 1st April 2013. It contains the UK government’s reforms of the UK financial services regulatory structure, and creates a new regulatory framework for the supervision and management of the UK’s banking and financial services industry.
The Act gives the Bank of England macro-prudential responsibility for oversight of the financial system and day-to-day prudential supervision of financial services firms managing significant balance-sheet risk.
Three new bodies were formed under the Act, the:
- Financial Policy Committee (FPC)
- Prudential Regulatory Authority (PRA)
- Financial Conduct Authority (FCA).
Two of the three new bodies, the FPC and the PRA, are subsidiaries of the Bank of England.
What does the Act amend?
Profoundly changing the UK regulatory structure, the Act amends the:
- Bank of England Act 1998
- Financial Services and Markets Act 2000
- Banking Act 2009.
What are the three main regulators that are resultant of the Financial Services Act (2012)?
- Bank of England (BoE)
- Prudential Regulation Authority (PRA)
- Financial Conduct Authority (FCA).
What is the difference between the BoE, PRA & FCA?
BoE: responsible for macro-prudential regulation of the UK financial system and has powers to make recommendations to the regulators in certain circumstances.
PRA: is the micro-prudential regulator, providing prudential regulation and supervision of deposit takers (banks, building societies and credit unions), insurers and some investment firms.
FCA: conduct regulator. It also provides prudential regulation of regulated firms that are not authorised by the PRA, for example, asset managers, hedge funds.
What is dual-regulation?
As the firms regulated and supervised by the PRA (deposit takers, insurers and major investment firms) are also subject to conduct regulation by the FCA, they are regulated by both the PRA and the FCA, which means that they are ‘dual-regulated’
What is the PRA?
Prudential Regulation Authority (PRA).
Prudential regulation rules require financial firms to hold sufficient capital and have adequate risk controls in place. Close supervision of firms ensures that the Bank of England has a comprehensive overview of their activities so that it can step in if they are not being run in a safe and sound way or, in the case of insurers, if they are not protecting policyholders adequately.
What are the three objectives of the PRA?
- promote the safety and soundness of the firms it regulates
- contribute to securing an appropriate degree of protection for insurance policyholders
- facilitate effective competition between firms.
The PRA is particularly concerned about the harm that firms can cause to financial stability. A stable financial system is one in which firms continue to provide critical services to households and businesses.
What are the key tools the PRA uses?
The PRA uses two key tools to advance its objectives: regulation and supervision. Through regulation, it sets standards or policies that set out what it expects of firms. Through supervision, it assesses whether firms are meeting its expectations, the risks that firms pose to its objectives and, where necessary, it takes action to reduce those risks.
What is the approach to using regulation and supervision at PRA?
Judgement based: The PRA uses its judgement to determine whether financial firms are safe and sound, whether insurers are providing appropriate protection for policyholders, and whether firms continue to meet its minimum requirements (‘threshold conditions’).
Forward looking: The PRA assesses firms not just against current risks, but also against those that could plausibly arise in the future. Where the PRA thinks it is necessary to intervene, it generally aims to do so at an early stage.
Focused: The PRA focuses on the issues and firms that pose the greatest risk to the stability of the UK financial system and policyholders.
The PRA does not aim for zero firm failure, rather it aims to ensure that a financial firm that fails does so in a way that avoids significant disruption to critical financial services (Bank of England, 2019).
What is the FCA?
It is vital that firms and individuals offering financial services run their businesses in the best interests of consumers and uphold the integrity of the financial services industry. The Financial Conduct Authority (FCA) is responsible for authorising, supervising and taking action where needed against firms and individuals who undertake financial services activities.
The Financial Conduct Authority (FCA) is an independent public body funded by the firms it regulates. It is accountable to the Treasury, which is responsible for the UK’s financial system, and to Parliament. Its work and purpose is defined by the Financial Services and Markets Act 2000.
What are the FCA’s responsibilities?
The FCA is responsible for regulating a sector which plays a critical role in the lives of everyone in the UK and without which the modern economy could not function — how well financial markets work has a fundamental impact on us all.
Financial markets need to be honest, fair and effective so that consumers get a fair deal. The FCA aims to make markets work well — for individuals, for businesses, and for the economy as a whole. It does this by regulating the conduct of more than 59,000 businesses. It is also the prudential regulator for more than 18,000 of these businesses - those that are not regulated by the PRA.
What is the FCAs strategic and operational objectives?
Strategic objectives are to: is to ensure that the relevant markets function well.
Operational objectives are to:
• protect consumers — securing an appropriate degree of protection for consumers
• protect financial markets — protecting and enhancing the integrity of the UK financial system to ensure that markets are effective, efficient, and reliable, which benefits firms, individuals, and society as a whole
• promote competition — promoting effective competition in the interests of consumers.
The FCA works with consumer groups, trade associations and professional bodies, domestic regulators, EU legislators and a wide range of other stakeholders. With this extensive remit, it prioritises the areas and firms that pose a higher risk to its objectives.
Who does the FCA work with?
FCA works with consumer groups, trade associations and professional bodies, domestic regulators, EU legislators and a wide range of other stakeholders. With this extensive remit, it prioritises the areas and firms that pose a higher risk to its objectives.
Works with:
• Financial Ombudsman Service: the independent body which settles complaints about financial services firms.
• Financial Services Compensation Scheme: the independent body which handles claims for compensation from consumers when regulated firms become insolvent.
• Payment Systems Regulator: a subsidiary of the FCA and the independent economic regulator for the payment systems industry in the UK
• Pensions Regulator: protects the UK’s workplace pensions, making sure that employers, trustees, pension specialists and business advisers can fulfil their duties to scheme members
• Serious Fraud Office: investigates and prosecutes serious or complex fraud, bribery and corruption
• NCA: a UK national law enforcement agency with responsibility for the intelligence and operational response to serious and organised crime, including money laundering and cyber crime.
• Money Advice Service: provides free, impartial financial information and education.
• Department for Business, Energy and Industrial Strategy: aims to build an economy that works for everyone, so that there are great places in every part of the UK for people to work and for businesses to invest, innovate and grow.
• UK Competition Network: an alliance of UK sector regulators, including the FCA and the Competition and Markets Authority, to promote competition in the interests of consumers
• UK Regulators Network: an initiative among UK regulators, including the FCA, to enhance collaboration on issues of shared relevance, aiming to bring regulators together for the benefit of consumers and the economy.
What does the FCA’s work entail?
A large part of the FCA’s work is to implement, supervise and enforce EU and international standards and regulations in the UK. It regularly engages with a wide range of European and international organisations that have similar remits and functions with a view to:
- enhancing cooperation
- sharing best practice
- discussing issues of common interest
What are the EU engagements for the FCA?
EU and international regulatory policy and standards, and their implementation, supervision and enforcement in the UK, are integral to the work of the FCA. Specific areas of focus are conduct, consumer protection, market integrity, competition, and relevant prudential issues.
Some of the organisations the FCA engages with are:
- European Supervisory Authorities
- European Securities and Markets Authority
- European Banking Authority
- European Systemic Risk Board.
What are the international engagements for the FCA?
From a global perspective, the FCA devotes significant time and resources to international engagement, and to the work of global standard setters and other global bodies. For example, it is a member of the International Financial Consumer Protection Organisation, and contributes to the work of the:
- Financial Stability Board (FSB)
- Financial Action Task Force (FATF)
- Organisation for Economic Co-operation and Development (OECD).
What is Financial Ombudsman Service?
FOS aims to deal with the complaint in 90 days. They are non-profit.
The FOS undertakes to:
• investigate fairly and listen to both sides
• give an answer as quickly as possible
• explain things clearly and let the customer or business know where they stand.
Types of complaints the FOS deals with include:
- bank accounts, payments and cards
- various types of insurance
- loans and other credit, like car finance
- debt collection and repayment problems
- mortgages
- financial advice, investments and pensions
