Financial Regulation in Britain - Essay Example

FINANCIAL REGULATION IN BRITAIN Author Course Tutor Institution City/State Date FINANCIAL REGULATION IN BRITAIN Introduction In the nineteenth century, the United Kingdom and the neighbouring country Ireland possessed the biggest economies in the globe. Britain was an epitome of an industrial revolution, new democracy, financial, and investment markets. It gave birth to capitalist financial systems. British Empire gradually increased and almost covered one fifth of the world. It established many companies throughout the world, for example, East India Company that generated massive profits for them. With the most appealing security systems, the country provided capital and transportation for many countries during the first and the second world wars. However, the end of the world war saw the British Empire falling apart leaving Great Britain as an independent part of the United Kingdom. With this economy, there was a need for supervision through the formation of financial institutions. This paper will discuss the British financial regulatory scheme which was witnessed in the Bank of England during the Baring shambles and the financial crises in 2007/2008. The second part will talk about the Financial Conduct Authority in addressing the issues of the payday loan. The Bank of England as a Financial Regulator The past two centuries has seen British being the epitome of global finance. However, there was a relative drop in the economic growth but it still took place in the global market. This consistency was because the country was centrally located in Europe making it easily accessible for business services. Also, it had solid financial systems that implemented strong financial regulations. The government had brilliant policy makers the Bank’s aim was to achieve liberal relations with foreign organizations. At the start of 1950 the Bank of England robustly promoted the country as a place for banking keeping in mind the liberal approach system. This encouraged foreign investment and increment in financial regulating within different international institutions in the country. In 1960 by the help of the government, the Bank of England motivated the establishment of burgeoning Eurodollar market with a lenient regulatory setting. In a recent occasion, the bank supported the construction of imitative barter at LIFFE (Kynaston, 1997). The twentieth century saw the government permit the Bank monitor the finances in domestic institutions (Moran, 1991; Hancher and Moran, 1989). The dynamic alteration of the global financial institutions in the 1960s prompted for new financial regulations. Globally, the financial market cohesively incorporated and accompanied by successive product innovation. The conventional systems of banking had given leeway to the rise of modern financial products with the aim of building transparency and circumvent regulation. Major financial products came up in the years 1972 towards 1995. Britain acted as a home to many foreign financial organizations thereby increasing financial competitiveness. Regulation policies were formalised and coded in legislative progress. The mid-1990s saw Britain’s financial system heading towards international orientation. Regulations and policies drafted by the legislation effectively worked. Policymakers faced the challenging task of adjusting their regulations to match the current financial markets. Transparency and integrity were the key obligations for these financial institutions. However, in 1995, the British regulatory system collapsed because of the spin off trading in Singapore. This debacle led to the fall of Baring Bank, which started from England. The government had entrusted the Bank to regulate the country’s finance. The major challenge experienced by the bank in this type of agreement was the competition from other banks (Gowland, 1990). The American government had come up with new financial regulations putting pressure on the British government to fight for its position in the international market. Besides, some of the British banks situated overseas felt disadvantaged by this regulation. The advancement of scientific technology also posed a challenge to the bank during this specific period. The government introduced the Banking Act to avoid future crises of the secondary banks. This law formalised existing comprehensions on lowest capitals, directors, and consumers’ protection. Even though these methods solidified financial regulation, adjustment in the legislation by Johnson Matthey went undetected by then the Bank of England (Norton 1991). This period also saw other countries extending their financial corporation by building companies in foreign countries. The downfall of Baring Bank under the regulation of the Bank was a major historical event of the British financial regulations (Bank of England, 1995, p.187). It clearly indicated that the bank with the jurisdiction of the government was unable to control finances independently. The fall of the other secondary banks forced the Bank to save them. The Baring crisis uncovered the informal regulatory systems that were with the Bank. It is important to note that the fall of Baring Bank in Singapore were due to unofficial regulation policies. Financial crisis of 2007/2008 in Britain The financial blow in 2007/2008 is the second event in the history of financial services that has influenced the British economy. This crisis started in the 1970s in the process of deregulation, but it went unnoticed. The United States, Britain, and other European countries partly lost their financial regulation policies. Merchant banks and insurance companies during the nineteenth century operated independently. Banks had strict regulations on cash and capital interests. However, the government modified these controls and allowed secondary banks to trade with other countries. This resulted in a rapid fluctuation of business financing. Markets expanded, and this became very profitable to the banks. The nature of the thriving business made some banks to give loans higher than the face value of the properties acquired. More often, the interest rates were higher than the borrower’s income The involved businesses acquired massive profits at the expense of burdening the borrowers. However, they did not realize that these types of regulations had serious repercussions. In 2007, fuel prices rapidly increased causing global qualms of a possible trade recession. Banks became reluctant to give out high-quality mortgages, as they feared the value of the mortgage security. Therefore, small banks and insurance companies retained their money as they waited for the fuel prices to go down. In the meantime, the dilemmas of confidence between banks led to massive liquidity. This is where banks and other financial institutions were unable to fulfill the short-term responsibilities of repaying short-term loans. The crises intensified when oil prices went high up to one hundred and forty-seven dollars per barrel. This prompted the government to nationalise some of the small business enterprises. The Bank of England had to help secondary banks such as the Northern Rock Building Society to stop cash withdrawals by the depositors. The biggest mortgage lender in Britain, Halifax Bank of Scotland had to buy shares with the Lloyds TSB group to have a unified business. Moreover, the British government partly nationalised the falling Royal Bank of Scotland Group obtaining fifty-eight percent stakes holding and finally raising the percentage to eighty-four percent. The steps the British government took during the crises were effective. This is because, after the trade recession, many banks started to spring up with the help of the Bank of England. The current decision of the British government to allow the Bank of England to exercise full jurisdiction over any financial regulations and policies is a brilliant idea. The bank comprises of financial policy committee with authorities to regulate and attend to any financial risks. All these actions came about when the government established the Financial Services Act in 2013. Moreover, the Prudential Regulation Authority working with the Bank of England supervises all financial institutions for any possible financial crises in future. Finally, the government’s introduction of Financial Conduct Authority serves as a protection consumers and business owners to ensure mutual satisfaction. In my opinion, these recent changes and developments in the government’s approach to regulating finances in Britain will provide an improved basis for that confidence which the British public need. Financial Conduct Authority in addressing Payday Loans It is obvious that the financial crises in 2007/2008 greatly affected United Kingdom’s economy. The main lesson learnt from this experience by the major stakeholders was to establish a sound and well-regulated financial policy. This made the government come up with Financial Services Act that comprised of other policies. The main policy discussed in this part is the Financial Conduct Authority as it addresses payday loans. Payday loans have been in existence for the past twelve years. It is an industry that has risen from £100 million to a $2.4 billion profit. This initiative dates back to 1980s in the United States during the deregulation of financial policies. There was intense pressure from the consumers and the banks to satisfy their needs. People had to borrow money from financial institutions at higher interest rates. On the other hand, banks experienced a shortage of capital to deliver to their consumers due to the economic recession. Therefore, the banks gave out short-term loans but with higher interest rates. As a result, borrowers had limited time to repay the high amount. The difference between the payday loans and short-term loans is that it is accessible to those struggling to meet banks terms and conditions. This is especially affordable for those with salaries that cannot allow them to receive loans. In the United Kingdom, payday loan business has rapidly expanded especially in the streets and small towns. This is due to the high rental rates in the big cities where major banks are likely to be. The payday loans interests vary across nations. In contrast with the action policy in Britain, the American act is the Federal Truth in Lending Act. This body ensure that only legitimate lenders run the business. Britain came up with the Financial Conduct Authority to be in charge of the payday loan lenders. Since the business took a major course in the country, the government established this action to ensure maximum honesty in business. Anyone who wanted to run such a business was to be highly scrutinized to ensure eligibility. Moreover, the Financial Conduct Authority act like the rules and regulations of payday loans institutions. This means that they have the jurisdiction to restrict lenders who misuse the borrowing rates to exploit consumers. This body ensures that both the customer and the owner are mutually satisfied at the end of a business deal. One issue that affect the payday loan disbursement is the recession in the economy. When the economy of a country is depreciating, lenders take the advantage of the opportunity. Since they know many consumers will come for their services, they place unfair rates on the loans. However, the Financial Conduct Authority has handled this by making referrals to Consumer Finance Association. In 2014, the Financial Conduct Authority in the United Kingdom decided to sign the bill of price cap rules. This was a chief landmark in the growth of the business and the strengthening of the lender-borrower relationship. The cap stated that borrowers will enjoy the decline in interest rates and will not pay twice what they had borrowed. FCA’s chief executive Martin Wheatley stated that the new regulation would bring a balance between the firms and consumers. The new rule ensured that there was consistency in the market trends and those borrowers experienced enough protection. Besides, the cap encouraged borrowers to repay their debts on time as this gave one ample protection and security. Since the cap involves many stakeholders, The Financial Conduct Authority consulted with various financial institutions and consumer groups. Further research indicated that by February 2015, around eleven percent of the current borrowers would not have access to the loans. After the first five months of the cap effectiveness through the analysis of the consumer credit, research showed that consumer rate of borrowing and loan repayment dropped by thirty-five percent. The FCA believes that the current cap on the payday loan is effective and needs reviewing in 2017. The cap will consist of three categories, initial cost cap, default interests, and complete cost cap. The first category will be at 0.8% each day on all the interests charged on loans. However, the act allowed firms to employ a suitable charge depending on which service the customer is receiving. Secondly, the default charges cap is set at fifteen Euros. Firms are at liberty to increase their interest rates, but they should not exceed the initial cost cap. Finally, the total cost cap is set at one hundred percent of the whole amount borrowed by the consumer. It is critical to recognize that the proportion operates for the interests, fees, and expenses. The cap applies to both the short-term and long-term credits. Firms are to engage in real data sharing to track loans for convenience. In conclusion, all the financial actions established by the British government have to work together to achieve a successful financial regulation. In this case, the Financial Policy Committee, the Prudential Regulation Authority, and Financial Conduct Authority link to ensure Britain’s economy flourishes and evade recession. The government also involves itself in financial regulation by giving direct control to the Bank of England. References Bank of England. 1995. “Statistical information about derivatives markets” Bank of England Quarterly Bulletin 35 185-191 FCA., 2014. Retrieved on 1 December 2015 from https://www.fca.org.uk/news/fca-confirms-price-cap-rules-for-payday-lenders Gowland, D. 1990. The regulation of financial markets in the 1990s .Edward Elgar, Aldershot Jessop, B. 1990 .State theory: putting capitalist states in their place .Polity, Cambridge Kynaston, D., 1997. LIFFE: a market and its makers. Granta, London Moran, M., 1991. The politics of the financial services revolution .MacMillan, Basingstoke Read More