Financial Regulatory Architecture - Overview

financial regulatory

In the United Kingdom, the Bank of England, HM Treasury, the FCA and the PRA all share responsibility for financial regulation. This new approach replaced the old tripartite system and was brought into being following changes that were made to the Financial Services and Markets Act 2000 (sometimes known as the FSMA 2000).

The Bank of England and Financial Policy Committee

As the central bank of the UK, the Bank of England has two primary purposes. Firstly, it is responsible for ensuring monetary stability in order to maintain stable pricing and confidence in the UK's currency. Secondly it plays a key role in reducing any threat to the financial system.

The FPC is part of the BoE and holds responsibility for macro-prudential regulation and the stability of the UK's financial sector. Its primary objectives are to deal with risks and weaknesses throughout the system and to address imbalances to enhance stability. The FPC's principal functions include the monitoring of the UK's financial system's stability to identify any risk, to direct the PRA and FCA regarding any macro-prudential measures, to make recommendations about financial stability strategies, to prepare reports regarding financial stability and to discharge specific Bank of England functions.

HM Treasury, the PRA and the FCA

The Treasury retains responsibility overall for economic and financial policy with a focus on financial regulation's institutional structure. The Prudential Regulatory Authority is the prudential regulator in the UK for insurers, investment firms and deposit takers. Its objectives are to promote safety within firms and to secure appropriate protection for policy holders. The Financial Conduct Authority supervises the conduct of all UK regulated firms across the entire financial service sector, including insurance brokers, mortgage providers and asset managers. The FCA's implements, supervises and enforces EU and other international standards within the UK and co-operates on a global scale with international stakeholders.

The EU Banking Union

This body comprises the SSM (Single Supervisory Mechanism) and the SRM (Single Resolution Mechanism) both of which are dependant on the Single Rulebook which represents a set of prudential homogenised rules that must be followed by all EU financial institutions. Its primary objective is to secure consistent applications of regulatory banking frameworks throughout the EU.

The European Parliament, European Commission and Council of the European Union

These three bodies make up the EU's legislative function. The European Parliamentary members are elected by EU member state citizens while the CEU is representative of each member states' executive body. EC commissioners operate as the EU's cabinet government, with every member state being represented by a commissioner who represents the EU interests overall.

The European System of Financial Supervision

The ESFS was established by the EU in 2010 as a response to the financial crisis at that time. The ESFS is made up of the EBA (European Banking Union), The EIOPA (The European Insurance and Occupational Pensions Authority), the ESMA (European Securities and Markets Authority) and the ESRB (European Systemic Risk Board). Together, they hold the responsibility for all micro-prudential supervision across the EU and work in conjunction with the supervisory authorities in each nation to achieve this goal. The ESAs are accountable to the CEU and EP and most protect the interest of the public by contributing to the long, medium and short term effectiveness and stability of the EU's economy and overall financial systems. Each ESA contributes to the establishment of supervisory and regulatory practices and standards in the ESFS including the development of draft regulatory technical standards and the implementation of technical standards. The ESRB was also formed as a response to the 2010 financial crises and provides macro-prudential oversight across the EU's financial system. Its chair also serves as the ECB's president and all of its committee members are a mix of independent experts and national authority representatives. Following the 2008 financial crisis, stabilising the financial markets became a key priority and to that end, immediate reform to the regulation of financial services across the EU was seen as an essential step towards a greater stability.

The CMU – Capital Markets Union

The Capital Markets Union has three primary objectives. These including helping businesses to obtain access into diverse forms of capital from across the EU, improving access to finance for investment projects and businesses in the EU and improving market efficiency through the removal of barriers to cross border capital flow. The CMU is delivered through numerous steps including the advancement of proposals that stimulate securitisation and free bank balance sheets for lending, a re-examination of the Prospectus Directive, improvement to the availability of SME credit information, collaboration with the industry with a view to setting up pan European private placement regimes for the encouragement of direct investment into small businesses and supporting European Long Term Investment Fund developments in order to channel and harbour investment infrastructure.