UK Financial Regulation Reflecting Back Essay

Excerpt from Essay :

6% holding in Lloyds following huge losses at both during the credit crisis" (Gupta. S. March 16, 2011) point to the need for stronger regulation of the financial sector. The UK banking system which is one of the most successful and innovative in the world must continue to have autonomy in its operations. Over regulation will only stifle an industry which is a key to the return of a strong economy, particularly in light of the austerity measures of the coalition government which will slow government expenditures to buttress an economic recovery. A greater emphasis on firm specific activities which will encompass leverage, capital ratios, balance sheet assets and liabilities is not over regulation but rather smarter regulation.

In contemplating reform the FCA will ensure that the focus of the financial sector is on the individuals who utilize their products not the shareholders who reap the gains from profits. The FCA will make the important determinations on which financial instruments are for the benefit of the greater population while still allowing the banking firms to generate a profitable return. The FCA may be the single most important aspect of financial reform in its protection of the consumer and its limits on financial product excess.

Framing the Debate

Financial regulatory reform is not about taking action simply because something must be done; rather it is an acknowledgement that "there were real and significant failings in the UK regulatory framework. This meant that regulators failed in recognizing and responding to the problems that were emerging in the financial system" (HM Treasury. July 2010. P.7.). Lord Turner describes this problem as 'underlap', "a phenomenon whereby macro-prudential risk analysis and mitigation fell between the gaps in the UK regulatory system" (HM Treasury. July 2010. P.8.). The solution presented is to fill these gaps with the aforementioned regulatory agencies FPC, PRA, and the FCA. Additionally, these agencies will be given the tools by which to effectively manage the systemic and individual firm risks that arise. These policy levers were not at the disposal of the Bank of England, Treasury or the FSA and as such the necessary actions to prevent the crisis before it erupted were not initiated.

The obverse to this framing of the regulatory overhaul is that the 'underlap' was in fact a regulatory scheme that simply had too many moving pieces, which not only did not work in concert but may have engendered an environment in which resources were misallocated and leverage and excess were inflated. Given the considerable weight of global policy makers' view on risk and leverage and the need for more government regulation, a UK proposal without a regulatory scheme designed to solve 'underlap is not palatable.

Conclusion and Findings

The government response to the financial crisis is a complete overhaul of the existing tripartite framework. The new structure is designed to identify systemic risk and manage it through three new agencies: FPC, PRA, and FCA all of which have individual focus on key areas ensuring financial stability. The result will be a regulatory correction to 'underlap' and its deleterious effects on the UK financial system. In developing this new strategic framework policy makers focused on several key themes, two of which are critical for the long-term success of the legislation. First "the need for the regulatory authorities' core statutory objectives to be balanced and supplemented with other factors; and second the importance of effective coordination between the new regulatory authorities (HM Treasury. February 2011. P.10.). It will remain to be seen if once implemented the reform package will satisfy these themes however, the construct presented does move the UK financial sector toward a more intelligent and responsive regulatory structure; which will benefit customers, taxpayers, and firms during periods of robust economic growth and during the travails of recession and financial upheaval which will invariably occur again.


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HM Treasury. (July 2010). A new approach to financial regulation: judgment, focus and stability. HM Treasury. PP. 1-76. Retrieved March 24, 2011

HM Treasury. (November 2010). A new approach to financial regulation: summary of Consultation responses. HM Treasury. PP. 1-29. Retrieved March 24, 2011

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