Financial Services in Great Britain
The financial services industry in Great Britain has three main functions: to match savers, borrowers and investment through the investment chain, risk management and pooling, and facilitate payments to enable efficient and effective deals in the local and international economy and decrease costs of doing business (“The UK”). The financial services sector performs its functions at three levels: national, regional, and global, to demonstrate its key role in the global financial market (“The UK”). At the national level, the financial service sector helps the national economy and society to meet their needs.
At the regional level, the financial services sector has the capability to allow improvements in the economy of Europe and to help Europe achieve its goal to compete globally. On the other hand, the sector fulfills its function at the global level by securing the benefits that integrated markets provide. The global trends that the financial services sector must address in order to continue playing its role in helping the economy and society include growth in emerging economies, increased global competition, rewards from technological innovations, and demographic change (“The UK”).
Root (1999) mentions that the main types of company in the financial services sector in Great Britain include stock brockers, trade finance houses, companies offering other forms of financial advice or service, and fund management companies. Powers, Roles and Responsibilities of the UK Financial Services Authority The Financial Services Authority is the primary financial regulator in Great Britain.
Its key aims are to promote efficient, orderly and fair financial markets, to assist retail consumers attain a fair transaction and to enhance its business effectiveness and capability (“The roles”). The four statutory objectives provided by the Financial Services and Markets Act 2000 (FMSA) to the Financial Services Authority are to keep market confidence in the financial system in the country, to promote public knowledge of the financial system, to ensure the necessary degree of protection for consumers, and to help decrease financial crime (“The roles”).
The Financial Services Authority is responsible to Parliament for the effective fulfillment of its functions. It is also responsible for the authorization and prudential supervision of financial services, including investment firms, building societies banks, insurance companies and brokers, and credit unions. Furthermore, the regulator also implements conduct of business regulation for the insurance, mortgage and investment mediation actions of financial services firms (“The roles”).
. According to Mwenda (2006), the FMSA provides new powers to the Financial Services Authority to sanction anyone who participates in the market abuse, such as misuse of information, market manipulation and misleading practices that are related to investments traded on the regulated British markets. The sanction is also imposed to anyone who encourages or requires other people to participate in dealings that would lead to market abuse.
Mwenda (2006) mentions that the FMSA also gives the Financial Services Authority the powers to penalize participants in the unregulated markets that fail to conform to acceptable standards but do not reach the level of a criminal offence. The Financial Services Authority holds the powers to oversee banks, related clearing houses, and listed money market institutions (Mwenda, 2006). The Financial Services Authority has also assumed new roles that were not handled by the former regulatory regimes.
These roles include mutual Societies Registration, Unfair Terms in Consumer Contracts, Lloyd’s Insurance Market, the Code of Market Conduct, and Recognized Overseas Investment Exchanges (Mwenda, 2006) Powers, Roles and Responsibilities of the Bank of England The legal proof of the powers of the Bank of England to supervise financial services was indicated not only in the Banking Act 1987 but also in the Building Societies Act 1986 Section 101(4) and in the Banking Coordination Regulations 1992 (Second Council Directive) (Mwenda, 2006).
The main responsibilities of the Bank of England involve the supervision and surveillance of monetary stability, monetary operations, monetary analysis, financial stability, and banking activities (Mwenda, 2006). The monetary stability and financial stability are connected because serious disruption in the financial system would affect the implementation and effectiveness of monetary policy, while the macroeconomic stability helps reduce risks to financial stability (“Bank of,” 2008).
According to Buiter (2008), the Bank of England has four specific objectives. These include making sure that the overnight market interest rates are in line with the Bank’s official rate so that there will be a flat money yield curve that is consistent with the official policy rate, ensuring an efficient, safe and flexible framework for banking system liquidity management, having a straightforward and transparent operational framework, and making sure that there will be competitive and fair sterling money markets.
The responsibility of the Bank of England for maintaining the stability of the financial system as a whole comes from its responsibility for establishing and executing monetary policy, its role in supervising payment systems in Great Britain and its operational role as banker to the banking system (“Bank of,” 2008). It also aims to share its special knowledge in analyzing the economy and its experience to assess and lessen the risks to the financial system as well as to help manage and address financial crises.
Moreover, the Bank of England collaborates with domestic and international authorities on issues regarding the stability of the financial system in Great Britain (“Bank of,” 2008). The Roles of the Bank of England and the Financial Services Authority in the Northern Rock Crisis in 2008 According to Shin (2008), Northern Rock was a mutually-owned savings and mortgage firm until its decision to go public and float its shares on the stock market in 1997. It was also considered the eighth largest bank and fifth largest mortgage lender in Great Britain. Its assets reached ? 113. 5 billion at the end of June 2008, with mortgages covering ?
87. 9 billion. Moreover, about ? 30. 1 billion of liabilities comprised customer deposits and the total shareholder equity reached ? 1. 95 billion (Hall, 2008). The Northern Rock depended much on wholesale markets to support its funding because its retail customer base was small. Its business model was to expand by using securitization and other types of secured borrowing (Hall, 2008). Shin (2008) adds that Northern Rock’s reliance on securitization was not a big factor that contributed to its failure but its high leverage as well as dependence on institutional investors for short-term funding.
The officials of Northern Rock had reported the funding problems to its regulators, the Financial Services Authority on August 13, 2008 and the Bank of England on August 14, 2008. The two regulators tried to resolve the funding problems secretly by arranging a takeover by another bank in Great Britain. The Bank of England was obliged to make Lender-of-Last-Resort (LOLR) actions involving a huge proportion of Northern Rock’s book and several billions of pounds.
Mervyn King, the Governor of the Bank of England, had even kept in secrecy the LOLR actions in the hope of avoiding the potential negative effect of the Northern Rock crisis on the perceptions of retail depositors regarding the safety of their money and to allow Northern Rock to continue operating (Goodhart, 2008). King explained that the Bank of England was in a difficult situation in balancing the needs of short run financial stability against the fear that a broader provision of liquidity would affect the efficient pricing of risk and long-run stability (Hall, 2008).
Hall (2008) explains that under the open-ended facility, Northern Rock is charged with a penal rate and is able to utilize mortgages and mortgage-backed securities and other assets as collateral to access the loan. Furthermore, Hall (2008) stresses that the Bank of England initially declined to provide additional liquidity to the market other than by the standing facility in which banks are allowed to borrow, without limit, over their target reserve balance.
The Bank of England was blamed for not exerting more effort to address the market’s liquidity crunch, particularly when it decided not to cut interest rates by preferring to wait until the likely impact of the credit crunch on the real economy and hence future inflation, becomes clearer (Hall, 2008). The involvement of the Bank of England in the Northern Rock crisis is important because of its continuing function as a lender-of-last-resort and its key responsibility for maintaining the overall stability of the financial system.
On the other hand, the presence of the Financial Services Authority is necessary because of its main regulatory/supervisory power and the first port of call for financial company which experiences financial problems (Hall, 2008). The role of the Federal Services Authority was to know whether or not the Bank of England was solvent, after an appeal for financial assistance from Northern Rock. However, the Bank of England and the Financial Services Authority had to find out whether Northern Rock’s failure posed an economic threat (Hall, 2008).
Bank of England (2008). Financial Stability Report. Retrieved May 7, 2009, from Buiter, W. (2008). How do the Bank of England and the Monetary Policy Committee manage liquidity? Operational and constitutional issues. Financial Times. Retrieved May 7, 2009, from http://blogs.ft.com/maverecon/2008/03/.