5 Financial Regulators and their roles explained
Financial regulators were put in place to protect consumers. These regulators came about due the lack of transparency and honesty in the financial services sector, which we could see during the financial crisis of 2007-08, where financial services providers such as Lehman Brothers were mis selling PPI (Payment protection insurance) giving mortgages to individuals that couldn’t afford ie. subprime mortgages.
As a direct result of this Sir John Vickers set up an independent Commission on banking to avoid such circumstances from occurring in the future. The aim of this was to reach greater stability in the financial services sector which would also help support a sustainable UK economy. The key recommendations of the commission include the following:
- Reduce the amount of risk that banks take
- Improve the regulation of financial services providers
- Make it easier and cheaper to deal with banks experiencing trouble
- Make a distinction between retail and investment banking
- Make sure banks have a cushion which they could fall back on if they experience losses
The regulators include the following: PRA, FCA, FOS, FSCS, CMA
The PRA:
The PRA which stands for Prudential Regulation Authority, is a part of the Bank of England and reports to the Parliament. It is responsible for the regulation of financial institutions such as, banks, credit unions, building societies, insurers and investment firms. Its objectives include securing protection for insurance policyholders and assuring the safety and soundness of providers. It sets out certain requirements which providers must adhere to, to manage risks. These requirements include having enough cash reserves to fall back on if losses are made, managing risks well, having good management.
The FCA
The Financial Conduct Authority reports to the Treasury however, it is an independent body. It makes sure that consumers are treated fairly. Its objectives include promoting competition, improve integrity in the financial system and provide protection for consumers. It has certain powers which allow it to take action if providers break rules, thus it can impose fines, suspend an authorisation from operating and have providers compensate customers.
The FOS
The Financial Ombudsman Service was set up by the Parliament but it is an independent body. It was set up by the Parliament to sort out individual complaints that consumers and businesses aren’t able to resolve themselves. They look at both sides of an argument and look at each problem with an open mind, avoiding biases. It provides compensation to a set maximum. If a consumer has a complaint they should first talk to or contact the provider, if the provider doesn’t respond within 8 weeks the customer should than contact the FOS which can resolve the issue, but if the consumer and provider disagree on a plan they can than take matters to court.
The FSCS
The Financial Services Compensation Scheme repays consumers deposits if a provider fails. They cover deposits up to £85 000 per person per provider and investments and mortgages are also covered up to £50 000 per person per provider. They cover deposits at banks, credit unions and building societies.
The CMA
The Competition and Markets Authority is independent, promoting competition between providers. Their responsibilities include the following (source):
- investigate mergers between organisations, to make sure they don’t reduce competition
- investigate entire markets if they think there are competition or consumer problems
- take action against businesses and individuals that take part in cartels or anti-competitive behaviour
- protect consumers from unfair trading practices
- encourage government and other regulators to use competition effectively on behalf of consumers
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