The financial market

In the late 1970’s self-regulation was judged by the amount of scandals and insider dealings which were reported by the media, of which there had been many. There was a debate on whether or how the financial services market would be regulated when dominated by the dark shadow of scandals and abuses. 3 The FSA 1986 introduced a substantial degree of statutory regulation into the financial market for the first time in the UK’s financial history. The Financial Services Act 1986 allowed the Securities and Investment Board (SIB) to have more power than any other financial institution had done to that day.

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The SIB were to be the supervisor of the financial market, however, the Self-Regulating Organisations (SRO’s) would be the institutions to regulate the majority of the financial sector. The FSA 1986 had an emphasis of ensuring that self-regulation stayed intact which was greatly wanted by many financial business organisations. Self-regulation to that point had generally succeeded. A good example would be the Panel of Take-overs and Mergers (PTM), which was widely acclaimed to be efficient, ensured integrity and was professional.

However, on the downside there were also huge failures such as the Council for the Securities Industry (CSI). An academic, Clarke described the failure: ” … CSI never proved competent or efficient, lacked the characteristic needed to resolve problems and tensions. Their mandate was unclear, they lacked leadership, had an inappropriate composition and never had enough resources. “4 There seemed to be a fairly good structure that would allow self-regulation, however, the institutions that regulated the different sectors of the financial market were not good enough to handle their responsibilities.

Not only this but there were still some sectors without its own SRO and some with more than one. The FSA 1986 tried to bring in a statutory instrument to ensure that these SRO’s were able to do their job efficiently just like the PTM. In short it was to be a statutory framework based on self-regulation, avoiding the same form as existed in the US. Professor Gower described this structure as: ” Statutory regulation monitored by SRO’s recognised and under the surveillance of a self standing commission.

“The self standing commission referred to was obviously the SIB which was the first institution to have delegated powers from the Secretary of State for Trade and Industry, until this function was given to the HM Treasury under the Transfer of Function (Financial Services) Order 1992. However, if the SIB did not fulfil its role efficiently, the HM Treasury could retake these delegated powers. The SIB was to be assessed by the Financial Services Tribunal who would report to the HM Treasury.

The sector boundaries were to be eroded between insurance and investment including using the same regulatory status to be given to the London Stock Exchange which was previously regulated under the Prevention of Fraud (Investments) Act 1958. Another change made by the FSA 1986 was the de-regulation of building societies under the Building Societies Act 1986, which allowed the societies to directly compete within the primary banking industry. In relation to financial crime, the SIB issued a Code of Conduct to be followed by the SRO’s and financial organisations, authorisation was received from the SIB to conduct financial service trade.

An objective of the SIB was to establish a satisfactory monitoring and enforcement system to promote and maintain high standards of practice that would hopefully ensure that business organisations were aware of money laundering and would report and suspicious transactions. However Bank of England seemed to be struggling with its statutory responsibilities as noted by Sir Thomas Bingham with the report of the Bank of Credit and Commerce International (BCCI) scandal 1991: “… [The Bank of England], on occasion seemed reluctant to use it’s powers to the full. “6

This was closely followed by the collapse of the Barings Bank in 1995, which spread criticism on whether the Bank of England was the right institution to supervise the banking sector. Further problems came into light with the continuing merger of the financial sectors creating a very fragile and competitive financial market. The many different bodies were all trying to regulate the same businesses, the SIB would be powerless to stop the confusion as its only role was to ensure public interest. The SIB’s tasks had been failed. The collapse of the Bearings Bank was to highlight the failure of the system as a whole.

Bearings Bank offered many different financial services to the public. However, the securities section of the business came into difficulties and the rest of the bank suffered. Either bad regulation or an insufficient system was causing the slow downfall of many large financial market business organisations. The new economic reality of a super financial business organisation made a new system of regulation as necessity to stop the UK’s financial market plummeting into chaos. There were two reports into the state of financial affairs in the UK, the first was by Michael Taylor7, and the second by the Australian Commission of Inquiry.

8 Both of these reports highlighted the fact that if regulation was to be effective then it required regulatory convergence. The reports had quite an influence as on May 20th 1997 the Chancellor of the Exchequer made a statement saying: “It is clear that the distinctions between different types of financial institution – banks, securities firms and insurance companies – are becoming increasingly blurred. Many of today’s financial institutions are regulated by a plethora of different supervisors. This increases the cost and reduces the effectiveness of supervision.

” This statement showed that the Labour Government recognised that the financial market needed a regulatory overhaul to reflect the new economic realities. The obvious, although radical, move was to create one regulatory institution that would oversee the whole financial market. As expected, although controversial, the Financial Services and Markets Act 2000 (FSMA) created an independent governmental institution which is now the super financial regulator known as the Financial Service Authority (FSA).

This organisation was formally known as the Securities and Investments Board (SIB) and was merged with the power of banking supervision previously bestowed upon the Bank of England. Other powers were also brought to the FSA including those previously honoured upon the Building Societies Commission (BSC) regulating the secondary banking sector, the Friendly Societies Commission (FSC), the Investment Management Regulatory Organisation (IMRO) which obviously dealt with the investment sector. There was also the Personal Investment Authority (PIA), the Register of Friendly Societies (RFS) and the Securities and Futures Authority (SFA).

The FSA was also given powers to legislate upon the mortgage sector. Obviously the FSMA went much further than just creating the FSA, it has more powers of supervision, regulation, litigation, authorisation and execution within the UK’s financial market than any known before. However, the FSA must report to HM Treasury, which appoints the Board of the FSA, consisting of a Chairman, a Chief Executive Officer, two Managing Directors, and 11 non-executive directors. The Board creates the FSA’s policies although the day to day organisation is left to the Executive.

The FSA works closely with the Department of Trade and Industry (DTI) in relation to litigation and insolvency. There is also co-operation with the Department for Work and Pensions (DWP) and the Occupations Pensions Regulatory Authority (OPRA) in relation to working pension policies. There is also the Office of Fair Trading to help with consumer protection and the Serious Fraud Office (SFO) to investigate and prosecute for serious fraud which within itself requires co-operation with national intelligence services.

The FSA must also work with the Bank of England, which itself, has a statutory objective of ensuring economic stability in the UK. The FSMA directed the FSA in the form of four statutory objectives. These are public awareness, consumer protection, market confidence and the reduction of financial crime. Needless to say these four objectives are all linked in one way or another. For example, money laundering is a financial crime, covered by the fourth objective, if strife within the UK’s financial market, many investors may take their money elsewhere where it is believed to be safer, objective three.

This means that the consumers suffer due to poor international investment in the UK market, which has economic side effects, objective two. The first objective of public awareness includes making the public aware of money laundering and the provisions being taken against it such as electronic credit card chips. However, the FSA are limited by costs, the balance of responsibility and power, especially in relation or competition and authorisation all of which define the characteristic of the UK’s financial market.

However, there were to be more considerations apart from the FSA; the Bank of England would be awarded independence from governmental fiscal policy, self regulation was to be ended as the fiasco of the Barings Bank and BCCI was to show its failure in an ever developing economic market. There was also an urge to try to respond to these scandals as best as the government could manage making the public confident in the UK’s financial market.