What was the regulation system originally?
- Financial Services Authority operated a ‘light touch’ then the laws changed because of market failure in 2007/8
What were the objectives of regulation?
- Ensure customers are not disadvantaged
- Banks hold enough capital
Market is competitive enough for consumers and businesses
What are the two regulatory bodies?
- Financial Conduct Authority - financial conduct
- Prudential Regulation Authority - capitalisation of banks
What has driven funders out of the market?
Consumer credit regime as it is for soletraders as well as other businesses BUT FLA says it should be more of a proportionate system to ensure small businesses are protected with appropriate rules
Who originally dealt with regulatory responsibility?
- In June 1998 FSA (Financial Services Authority) - new act wide ranging - Financial Services and Markets Act 2000
- FSA set up broader framework called tripartite system - Bank of England, FSA and the Treasury
What did the tripartite system set up?
- A memorandum of understanding was signed between them for working towards financial stability and Tripartite standing Committee set up on financial stability
What was the issue with this tripartite system?
- Heavily criticised for dealing with the financial crisis slowly
- 3 authorities were unsure which entity should take ultimate responsibility and decide what to do
- Failure meant a change in 1st April 2013 - when they introduced Financial Services Act 2012 and amended the Financial Services and Markets Act 2000
Twin peaks model what is it?
- It divides responsibilities easily between 2 regulatory bodies?
1) PRA - Prudential Regulation Authority - responsible for the prudential regulation of larger prudentially significant firms such as deposit takers, insurance companies and some investment firms
2) Financial conduct authority - responsible for the conduct of firms on the way they develop, market, sell and service finance products - less prudentially significant firms such as financial advisors, investment broker managers, etc
What is dual regulation?
When they are part of both PRA and FCA regulations and some businesses different departments are responsible for different ones.
What is the Financial Policy Committee?
- Has a key role from a macroprudential supervision and sustain financial stability by preventing risks that will affect the system as a whole
- Looks at structural factors
What is the PRA & their main focus?
- Is part of the Bank of England as of 1 March 2017
For those whose failure would have a significant impact on the financial system - Looks at whether businesses are vulnerable in relation to their business models, capital and liquidity
- looks at the financial solvency and soundness of financial institutions
What replaced the PRA board?
It has been replaced by PRC - Prudential Regulation Committee
What are the PRAs 3 objectives?
1) Promote the safety and soundness of the firms it regulates
2) Specific to insurance firms: to continue to contribute to the securing of an appropriate degree of protection for those who are or may become insurance policy holders
3) To facilitate effective competition
What does the Financial Services Act 2012 require the PRA to do?
- Ensure that PRA authorised firms act in a way that does not affect the entire system
- Minimise the adverse effect on the stability of the financial system if there is failure
What is the minimum base line for PRA firms?
- Ensure the firms are compliant with prudential standards
- Liquidity, value of assets provisioning and reserves
- An annual assessment of the risks posed by the firm to the PRA’s objectives
- Assessment of the firms contingency plans for recovery and potential exit from the market - called ‘recovery and resolution plans’
As the level of potential risk decides supervision, what must firms identify?
- The leasership focussing on risk management - evidencing documents and decision making
- Stress testing different scenarios
- Ensuring management has solid understanding of capital and liquidity
- Evidencing firms govvernance arragements are effective and appropriate
- Keep using detailed MI to identify risk exposure
- Ensure clarity where risk responsibility lies within the business
