Financial Regulation In The Uk And Ireland There has been considerable changes in the regulation of financial markets in the UK and other countries. Why is this? Financial markets tend to be more highly regulated than other markets. Explain why. In May 1997, the British Chancellor of the Exchequer made the decision to move the responsibility of supervision of financial institutions into the hands of a new regulatory authority, the Financial Services Authority (FSA). This new authority replaced the Securities and Investments Board and took over responsibility for the supervision of banks, listed money market institutions and clearing houses from the Bank of England. (Blake, 1999). Overall responsibility for regulation of financial markets lies with HM Treasury and is then divided up between the Bank of England and the FSA. Now, the Bank of England’s remit is the operation of monetary policy and ensuring the stability of the financial system. The FSA has five primary functions: Authorisation of market participants; Prudential supervision of banks, insurance companies, securities firms and fund managers, and regulation of their conduct of business; Investigation, enforcement and discipline; Regulation of investment exchanges and clearing houses; Regulation of collective investment schemes.
The change has been a move away from largely self-regulation to a combination of self-regulation and government interventionist regulation. Before 1997 the UK relied ‘primarily on private regulation (by the stock exchange and, to an increasing extent, by the institutes of chartered accountants).’ (Benston, 1985). The regulation of the financial system in the UK however is not as explicit as the system in the US where the Securities and Exchange Commission holds some of the most extensive regulations, which are viewed by some as being excessive. The more complex and formal US rules and procedures do not permit as much flexibility and speed (Benston, 1995). So the UK’s new system is a compromise between the best of self regulation and statutory regulation to ensure the financial markets work in an efficient and orderly manner.
The FSA reinforces the orderly operation of the UK markets. For example, when a firm wishes to list on the London Stock Exchange (LSE), they must satisfy requirements of the previously self-regulatory LSE as well as the United Kingdom Listing Authority (UKLA), which is a body of the FSA. Both authorities work closely together and have powers of instituting disclosure requirements, compliance of provisions and enforcement of standards. (LSE, 2000). The regulation of financial markets is changing continually all over the world.
In Europe, membership of the EU has changed the priorities of Governments when facing the problems of changing or implementing regulation of the financial system, One of the main issues confronting the regulation of markets and financial institutions is cooperation from other jurisdictions Quinn’s 1992 article asserts that the harmonisation of banking rules in the EU, the co-ordination of countries own regulatory standards and centralisation of an EU integrated financial market are needed to enable swift reaction to any future market failure. (Quinn, 1992). Standards differ greatly across countries. Ireland’s Central Bank is the primary regulator of financial markets. In the UK, the newly established FSA has taken over the reins from the Bank of England and in Denmark, a separate regulatory authority also exists, (Stewart, 1995).
The differences are not solely institutional, there are also huge variations in the powers of these differing institutions. In Ireland the system is viewed as: far too fragmentary to be effective ( Stewart, 1995). Any powers of investigation and enforcement are unclear and appear ineffective. In Germany, a financial regulator also exists. The effectiveness of their regulation has recently been questioned. The Neuer Markt, the three year old market for growth stocks had just announced new rules which aim to improve the flow of company information to investors.
It is hoped that these new rules will restore investors’ confidence in a market damaged by profit warnings, insider dealing investigations and insolvencies. The article argues that the rules are long overdue. They still do not afford investors the transparency found in the UK, with its more established equity culture, (Financial Times, 2001). Stewart’s suggestion of ‘an umbrella grouping, under an appropriate directive, at EU level which will collate information and provide expertise on legislative detail in different countries (Stewart, 1995), seems a desperately needed measure to bring the differences across the EU a little closer together. While Europe struggles with coordination difficulties, the question of whether statutory government regulation is beneficial to financial markets is constantly debated.
The frequently stated case for government regulation is based on the fact that failures in the market do occur and the interests of the public, therefore must be protected. Protection of Public interest is fundamental due to inherent difficulties within the financial services industry such as informational asymmetries which result in market failures. Due attention needs to be paid to banks when evaluating regulation of financial markets as they form such an important part of the financial services sector. Bank failures around the world in recent years have been common, large and expensive (Goodhart et al., 1998). Banks provide three primary services. The ‘efficient payments system and the management of asset portfolios’ ((Fama), Quinn, 1992) and also ‘risk sharing and the monitoring and screening of borrowers’ ((Balkensperger & Dermine) Quinn, 1992).
The primary source of market failure comes from the monitoring and risk sharing. A bank has two types of risk sharing functions. They should have a well-diversified portfolio of assets which would provide fixed returns over a time period to a depositor’s investment. They should also maintain an element of liquidity, so that if depositor wishes to liquidate his assets it can be done so on demand. The existence of these two functions means that a mismatch of assets and liabilities exists within the bank.
It is widely documented that risk sharing contracts make banks very susceptible to ‘runs’. the solvency of one bank may be affected by the failure of another bank because of los …