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CEMAP 1 – Unit 2 Introduction

Unit Two: UK Regulations   Introduction Unit 1 explored how individuals require access to financial products on a daily basis. The deficit sector has access to funds by borrowing and product providers make profits. Financial products also gives individuals the ability to protect their income and dependants as well as making gains. We now know the importance of financial firms and the reason why financial intermediaries like the banks, companies and investment organisations should be thoroughly regulated since the system needs to be maintained and consumers need to be protected. Each of the financial organisations offers different kinds of products and services for the consumers. The need for regulation is very important for consumers but the financial firms should still make profits. This is known as the twin objectives. UK financial regulation is achieved by supervising firms and setting rules for the firms and their employees. There has been concerns that financial institutions are losing touch with consumers and solely focusing on making profits. This has led to the government introducing sponsored schemes such as the Competition Commission, Money Advice Service and Which. Although governments try to foresee problems and to introduce legislation as a means of ‘prevention rather than cure’, it remains true that most regulatory legislation in the past has been reactive rather than proactive, in other words it has been passed in response to problems, rather being designed to foresee and prevent problems. Legislation has often resulted from:
  • particular scandals or crises, many of which have arisen over the years, most recently for example the events surrounding the collapse of Barings Bank in the 1990s and the continuing troubles of Equitable Life. These have shown up the need for prudential control and for protection against mismanagement and fraud;
  • an increase in consumers’ financial awareness and a demand for a more customer-focused business approach: for instance, demands for a ‘one- stop-shop’ approach to financial services sales was instrumental in the move to deregulation of banks and building societies in the past 20 years or so;
  • the need to respond to changes in lifestyle: for instance, more relaxed attitudes to marriage and divorce in recent years have led to a strengthening of the rights of divorcees to share in former spouses’ pension benefits;
  • developments in business methods: technological advance in particular has fuelled many changes in the last years of the 20th century and the early part of the twenty-first; this is particularly true for banks and building societies, whose customers now can and do carry out many of their transactions electronically;
  • innovation in product design: rapid expansion has been seen in the ranges of certain products, particularly in mortgage business. This has made it more important than ever that a consumer should be provided with sufficient clear information about the features and benefits of the products they are buying;
  • the increase in the number and complexity of financial products: this has made it more necessary to provide customers with information and advice.
Now, however, there is a strong move towards a culture of recognising and preventing problems before they arise, where possible, rather than simply picking up the pieces afterwards and allocating blame and punishment (although the ability to do the latter has not been discarded)     We now have the twin peaks model of regulation through the Financial Services Act 2012. The present regulatory system involves the Financial Policy Committee (FPC) as well as recently formed regulators – Prudential Regulation Authority (PRA) and the Financial Conducts Authority (FCA). They now control the Financial Services Compensation Scheme (FSCS). The FCA also took responsibility of the FOS along with the Money Advice Service.     Financial-services Act 2012 The Financial-services Act 2012 came into effect as a result of prudential regulation failure when the credit crisis hit (the failing of Northern Rock) and the recent issues of unethical behaviour after mis-selling scandals. The confidence in financial firms was damaged with the mis-selling of PPI, endowments and pension transfers, including the LIBOR scandal. All of this generated unwillingness on the part of consumer to do business within the financial firms. It’s essential to protect consumers as this will make them confident in dealing with financial institutions which will in turn help the flow of money around the economy. Financial advice is given by qualified financial advisors who should use their skills, expertise and provide full product disclosures to their clients. The regulations covers 2 main areas where consumers may be vulnerable when dealing with financial firms, this is Prudential Risk and Conduct of Business Risk.
  • Prudential regulation rules require financial firms to hold sufficient capital and have adequate risk controls in place. Close supervision of firms ensures that regulators have a comprehensive overview of their activities so that they can step in if firms are not being run in a safe and sound way or, in the case of insurers, if they are not protecting policyholders adequately. The Prudential Regulation Authority (PRA) at the Bank of England is responsible for this prudential regulation and supervision of around 1,500 banks, building societies, credit unions, insurers and major investment firms
  • The Conduct of Business Regulation monitors how a firm conducts their business in terms of their sales and marketing of financial products and services for it’s customers.
As a result of the changes caused by lifestyle good quality advice is essential. Consumers tend to be borrowing more and saving less. Financial products are becoming more complex and laws are changing. There are now more rights for people getting a divorce which in turn could affect assets. There is also a shift towards online sales and financial products purchased online, due to this good advise and information is essential.
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