UK financial regulation has evolved from fragmented
oversight, through a single mega-regulator (the FSA), to
today’s “objective/function-based” multi-agency structure
(BoE, FPC, PRA, FCA, etc.), aimed at managing systemic risk,
firm soundness and consumer protection more effectively.
Globalisation, FDI flows, cross-border capital markets and
large multinational banks mean financial risks can transmit
rapidly across countries, which underpins the need for
international standards (for example, the Basel Committee
and Basel Accords) and the EU Banking Union.
Why we need to regulate financial services:
Financial services perform core functions such as
intermediation of funds, risk transfer and allocation of savings;
when these fail, the real economy and households are hit
hard.
Because financial products are intangible, complex, long-term,
and subject to serious information asymmetry and behavioural
biases (for example, hyperbolic discounting, overconfidence),
mis-selling, adverse selection and moral hazard easily occur,
so markets alone cannot adequately protect consumers and
investors.
The failure of an individual financial institution creates
negative externalities and systemic risk (domino and
contagion effects, “too big to fail”), which requires
macro-prudential tools and lender-of-last-resort functions to
safeguard system-wide stability.
Key conclusions on globalisation and international regulatory
frameworks:
Trade and capital-account liberalisation, rapid FDI growth and
the expansion of cross-border bank balance sheets have
tightly linked risks across the global financial network,
increasing the demand for “global financial stability”
regulation.
The 2007–08 crisis exposed gaps in oversight of leverage,
liquidity mismatches, shadow banking, securitisation and
remuneration incentives, triggering reforms such as Basel III,
stress testing and recovery and resolution planning (living
wills).
, The Basel Committee on Banking Supervision has become the
main global standard-setter for prudential bank regulation,
using capital ratios, leverage ratios and liquidity metrics to
establish minimum consistent standards and reduce
regulatory arbitrage between jurisdictions.
Europe and UK regulation: pre- and post-crisis, and post-Brexit:
Before the crisis, Europe suffered from divergent definitions of
“core capital”, inconsistent reporting, an excessive focus on
individual institutions over macro-prudential issues, and weak
coordination among national supervisors, all of which
undermined effective oversight of cross-border banking
groups.
After the crisis, the three pillars of the Banking Union—Single
Supervisory Mechanism (SSM), Single Resolution Mechanism
(SRM) and Deposit Guarantee Schemes (DGS)—were created
to unify euro-area bank supervision and resolution, limiting
regulatory arbitrage and reducing run risk.
Post-Brexit, the UK maintains cooperation with the EU via a
2023 MoU and a joint regulatory forum, while using the
Financial Services and Markets Act 2023 to “de-Europeanise”
selected rules and give domestic regulators more flexibility to
simplify and reshape the UK rulebook.
UK regulatory structure (BoE, FPC, PRA, FCA) – key takeaways:
The Financial Policy Committee (FPC) is the macro-prudential
authority, monitoring systemic risks such as leverage, credit
growth and asset-price bubbles, and can direct the PRA and
FCA (for example, capital buffers, mortgage loan-to-income
limits) to strengthen resilience while supporting government
economic policy.
The Prudential Regulation Authority (PRA) focuses on “safety
and soundness”, supervising banks, insurers and major
investment firms using a risk-based approach to capital,
liquidity and governance, with primary objectives of financial
stability and policyholder protection.
The Financial Conduct Authority (FCA) has the strategic goal
that “relevant markets function well” and three main
operational objectives—consumer protection, market integrity
and competition—plus a newer secondary objective to
facilitate international competitiveness and economic growth;
UK financial regulation has evolved from fragmented
oversight, through a single mega-regulator (the FSA), to
today’s “objective/function-based” multi-agency structure
(BoE, FPC, PRA, FCA, etc.), aimed at managing systemic risk,
firm soundness and consumer protection more effectively.
Globalisation, FDI flows, cross-border capital markets and
large multinational banks mean financial risks can transmit
rapidly across countries, which underpins the need for
international standards (for example, the Basel Committee
and Basel Accords) and the EU Banking Union.
Why we need to regulate financial services:
Financial services perform core functions such as
intermediation of funds, risk transfer and allocation of savings;
when these fail, the real economy and households are hit
hard.
Because financial products are intangible, complex, long-term,
and subject to serious information asymmetry and behavioural
biases (for example, hyperbolic discounting, overconfidence),
mis-selling, adverse selection and moral hazard easily occur,
so markets alone cannot adequately protect consumers and
investors.
The failure of an individual financial institution creates
negative externalities and systemic risk (domino and
contagion effects, “too big to fail”), which requires
macro-prudential tools and lender-of-last-resort functions to
safeguard system-wide stability.
Key conclusions on globalisation and international regulatory
frameworks:
Trade and capital-account liberalisation, rapid FDI growth and
the expansion of cross-border bank balance sheets have
tightly linked risks across the global financial network,
increasing the demand for “global financial stability”
regulation.
The 2007–08 crisis exposed gaps in oversight of leverage,
liquidity mismatches, shadow banking, securitisation and
remuneration incentives, triggering reforms such as Basel III,
stress testing and recovery and resolution planning (living
wills).
, The Basel Committee on Banking Supervision has become the
main global standard-setter for prudential bank regulation,
using capital ratios, leverage ratios and liquidity metrics to
establish minimum consistent standards and reduce
regulatory arbitrage between jurisdictions.
Europe and UK regulation: pre- and post-crisis, and post-Brexit:
Before the crisis, Europe suffered from divergent definitions of
“core capital”, inconsistent reporting, an excessive focus on
individual institutions over macro-prudential issues, and weak
coordination among national supervisors, all of which
undermined effective oversight of cross-border banking
groups.
After the crisis, the three pillars of the Banking Union—Single
Supervisory Mechanism (SSM), Single Resolution Mechanism
(SRM) and Deposit Guarantee Schemes (DGS)—were created
to unify euro-area bank supervision and resolution, limiting
regulatory arbitrage and reducing run risk.
Post-Brexit, the UK maintains cooperation with the EU via a
2023 MoU and a joint regulatory forum, while using the
Financial Services and Markets Act 2023 to “de-Europeanise”
selected rules and give domestic regulators more flexibility to
simplify and reshape the UK rulebook.
UK regulatory structure (BoE, FPC, PRA, FCA) – key takeaways:
The Financial Policy Committee (FPC) is the macro-prudential
authority, monitoring systemic risks such as leverage, credit
growth and asset-price bubbles, and can direct the PRA and
FCA (for example, capital buffers, mortgage loan-to-income
limits) to strengthen resilience while supporting government
economic policy.
The Prudential Regulation Authority (PRA) focuses on “safety
and soundness”, supervising banks, insurers and major
investment firms using a risk-based approach to capital,
liquidity and governance, with primary objectives of financial
stability and policyholder protection.
The Financial Conduct Authority (FCA) has the strategic goal
that “relevant markets function well” and three main
operational objectives—consumer protection, market integrity
and competition—plus a newer secondary objective to
facilitate international competitiveness and economic growth;
