The UK’s regulatory framework for financial companies is a complex and ever-evolving set of rules, regulations and laws that govern the financial services industry in the United Kingdom and ensure legal and ethical operation. It is designed to protect consumers from harm, ensure fair competition between firms, promote market integrity and maintain financial stability. The framework has been developed over many years by successive governments in response to changes in the global economy, technological advances and consumer demand.
History of Development
The framework began with the passing of the Financial Services Act 1986 (FSA). This act established a single regulator, known as the Securities and Investment Board (SIB), which was responsible for regulating all aspects of investment business within Great Britain. In 1997 this responsibility was transferred to two new regulators, the Financial Services Authority (FSA) which regulated investment firms, and the Prudential Regulation Authority (PRA), which regulated banks, building societies and insurance companies.
In 2013, these two organisations were replaced by three new bodies the Prudential Regulation Authority (PRA), the Financial Conduct Authority (FCA), and His Majesty’s Treasury (HM Treasury) who are responsible for setting overall policy direction on financial regulation. These three organisations work together to create an effective regulatory environment that protects consumers while promoting competition among firms operating within it.
Jurisdiction
The UK’s regulatory framework applies to all businesses providing or selling products or services related to:
- Investments such as stocks, bonds or derivatives
- banking services such as current accounts or mortgages
- insurance products such as life assurance policies
- pensions advice
- credit cards
It also covers activities such as money laundering prevention measures taken by banks and other institutions offering payment services like e-money issuers or payment processors, etc.
All these activities must be conducted according to specific rules laid down by either the Prudential Regulation Authority (PRA), the Financial Conduct Authority (FCA) or the HM Treasury, depending on their nature i.e., whether they relate more closely with investments, banking, insurance, and so on. The specific features and objectives of each of these three bodies are as follows:
The Prudential Regulation Authority (PRA) is a regulatory body of the Bank of England responsible for the prudential regulation and supervision of banks, building societies, credit unions, insurers and major investment firms in the United Kingdom. The PRA’s primary objective is to promote safety and soundness within these sectors by ensuring that firms meet their obligations under applicable laws and regulations.
The PRA has specific roles in relation to:
- Ensuring that firms have adequate capital resources.
- Monitoring liquidity risk.
- Managing operational risk.
- Enforcing conduct standards.
- Supervising financial conglomerates.
- Promoting competition in financial services markets.
The PRA also has jurisdiction over all aspects of prudential regulation including setting minimum capital requirements, approving internal models used for calculating capital requirements, assessing liquidity risks posed by individual institutions as well as across the sector as a whole, monitoring compliance with relevant rules and regulations on conduct of business matters such as customer protection measures or anti-money laundering procedures. It also works closely with other regulators such as the FCA to ensure effective oversight across different areas.
The Financial Conduct Authority (FCA) is the UK’s financial regulator. It regulates the conduct of over 58,000 firms and financial markets in the UK. The FCA has a wide range of powers to protect consumers, ensure that markets are fair and transparent, promote competition and reduce financial crime.
The FCA’s specific role is to:
- Protect consumers by ensuring that firms provide appropriate products and services.
- Promote effective competition between firms.
- Ensure that markets are fair, transparent and orderly.
- Reduce financial crime.
- Enforce relevant laws and regulations.
- Monitor developments in the industry to identify potential risks or opportunities for improvement.
The FCA has jurisdiction over all regulated activities within its remit including banking, insurance, investments, consumer credit activities as well as other areas such as payment services. It also has powers to investigate any suspected misconduct or breaches of law by authorised persons or market participants.
His Majesty’s Treasury is the government department responsible for setting overall policy direction on financial regulation in the UK. It works closely with other government departments, regulators and industry to ensure that the UK’s financial services sector remains competitive and resilient.
The HM Treasury has a number of specific roles when it comes to setting overall policy direction on financial regulation:
- Develops legislation which sets out how firms must comply with regulations, as well as any changes or amendments to existing regulations.
- Sets out regulatory objectives which are designed to protect consumers from harm caused by poor practices within the financial services sector.
- Monitors compliance with its own rules and those of other regulators such as the Financial Conduct Authority (FCA) or Prudential Regulation Authority (PRA).
- Reviews performance across different sectors of the economy in order to improve outcomes for consumers or businesses.
- Engages stakeholders including consumer groups, industry representatives and academics when formulating policies related to financial regulation.
Effectiveness
The effectiveness of any regulatory system depends upon its ability to achieve its objectives without creating unnecessary burdens on those it regulates. This can only be achieved through careful design based upon sound principles including proportionality, clarity and consistency across different sectors and jurisdictions, where applicable. In this regard, the UK’s Regulatory Framework appears well placed, having been subject to both internal review processes and external scrutiny from international bodies like the Organisation for Economic Co-operation and Development (OECD), The International Monetary Fund (IMF) and the World Bank. Furthermore, recent developments have seen increased focus being placed upon areas like anti-money laundering compliance, cyber security risk management and customer protection initiatives. As a result there has been greater emphasis placed upon ensuring adequate resources are available so that firms can meet their obligations under law whilst still remaining competitive in today’s markets. The main criticisms of the UK’s regulatory framework are that it is overly complex, lacks clarity and transparency, and fails to adequately protect consumers.
Post-Brexit, a review of the UK’s financial services sector aims to tailor the rules to best suit UK markets.
The outcomes of the Future Regulatory Framework (FRF) Review (2022) will ensure the UK’s regulatory framework for financial services continues to be coherent, agile and internationally respected. It will:
- Add to its objectives and regulatory principles.
- Build on its existing accountability arrangements, enhance scrutiny of our activities, and strengthen stakeholder engagement.
- Give powers to the Treasury and the financial services regulators to create a framework where the expert and independent regulators have greater responsibility for setting regulatory requirements that apply to firms.