FINANCIAL SERVICES REGULATION

Financial Services Regulation

Financial Services Regulation

Introduction

Regulation may be considered a necessary evil, a positive influence or a positive hindrance to the effectiveness of the financial services industry. However, in the past 20 years the 'compliance function' in financial services has become increasingly prominent.

It would be unlikely that any market could work without some basic framework of rules concerning such issues as conduct within the market, the roles of market participants, and transfer of goods or ownership, solution of disputes and so on.

In most cases, these rules originate in the market itself; that is, 'self-regulation' (Benston 1998, p 135). In the UK, the regulatory organisations established by the 1986 Act were, at least initially, run by industry representatives themselves, making their own rules under the legislative authority of the 1986 Act.

In thinking about regulation, therefore, it is unhelpful simply to take the view that all rules are bad for markets. Indeed it is clear that markets require to be regulated if they are to work at all. However, some might suggest that markets work most efficiently if they operate on the basis of their own private rules, underpinned by general legal requirements relating to property, contract and the like. Externally imposed rules, it could be argued, result in a highly prescriptive regime, where 'one size fits all' rules inhibit innovation and competition; where firms focus on complying with rules rather than achieving the outcomes consumers want, and regulators tick boxes rather than look at outcomes; and where a 'regulation industry' is created that becomes self-perpetuating - driven by its own concerns, as opposed to those of the market/consumer.

Discussion

The financial services sector is a significant contributor to UK income and employment. Over a million people in Britain are employed in financial services. Financial services are also one of the largest export industries in the UK.

The financial crisis that began in the summer of 2007 has, however, highlighted the need for a more resilient and sustainable financial services industry to support the broader economy (Benston 2000, p 277-301). In addition to being an important part of the economy in its own right, the financial services sector provides essential credit and financial services to businesses and households.

The Government is working hard to ensure that the UK has a reformed, fair and competitive financial services industry. In this, the UK must also continue to engage with European and international partners to ensure the international financial reform agenda stays focused, proportionate and consistent across the world's major markets (Benston 1998, p 135). The financial system is critical to the health of the economy because it performs the essential function in an economy of channelling funds from savings to those individuals or firms that have productive investment opportunities. If the financial system does not perform this role well, then the economy cannot operate efficiently, and economic growth will be severely hampered.

Financial Regulations

On 26 July 2010 the Government launched a consultation, 'A new approach to financial regulation: judgement, focus and stability', to gather views on ...