Money and Banking Regulation: 9.9 Financial Regulation

Although the Bank of England gained an extra role in 1997 (see 4 Macroeconomic Policy) by being given full responsibility for carrying out monetary policy, it subsequently lost one of its long-standing duties.

Traditionally, the Bank had been responsible for the supervision of individual banks but this role was transferred to the Financial Services Authority (which was known as the Securities and Investment Board until October 1997) by the Bank of England Act.

The Act which became law on 1 June 1998, also provided statutory backing for the Monetary Policy Committee, changed the way the Bank is governed and, for the first time, provided legal backing for the Bank’s collection of monetary statistics.

The Bank retained its responsibility for the stability of the financial system as a whole and has set up a Financial Stability Committee to carry out this task.

The Bank publishes a twice-yearly Financial Stability Review which monitors developments in the financial system and discusses the means by which stability may be maintained and promoted.

A Memorandum of Understanding between the Bank of England, the Financial Services Authority and HM Treasury had been published earlier (October 1997).

The Memorandum notes that a Standing Committee with representatives from each of the above organisations will normally meet once a month, though each organisation can call a special meeting should circumstances warrant it.

The Committee’s role is to ‘discuss individual cases of significance and other developments relevant to financial stability'. The Memorandum lists each institution’s responsibilities as follows:

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Bank of England’s responsibilities
  • stability of the monetary system;
  • looking after the financial system infrastructure especially payments systems at home and abroad;
  • broad overview of the whole system;
  • provision of official financial operations to prevent problems with individual institutions spreading more widely; and
  • improving the efficiency and effectiveness of the financial sector, especially in terms of its international competitiveness.

Financial Services Authority’s responsibilities
  • the authorisation and supervision of a wide range of financial institutions including, banks, building societies, investment companies, insurance companies and friendly societies (see Financial Services and Markets Act below);
  • supervision of financial markets and clearing and settlement systems;
  • dealing with problems which arise in its area of responsibility; and
  • regulatory policy.

HM Treasury’s responsibilities
  • the overall structure of regulation and the legislation covering it.

The Financial Services and Markets Act

This Act received Royal Assent in June 2000 and was implemented at the end of 2001.

The Act provided the statutory authority for the transfer to the Financial Services Authority of the responsibilities of a number of other organisations. These were:

  • the Building Society Commission,
  • the Friendly Societies Commission,
  • the Investment Management Regulatory Organisation,
  • the Personal Investment Authority,
  • the Register of Friendly Societies,
  • the Securities and Futures Authority.

The Bank of England Act 1998 had already transferred responsibility for bank supervision.

When the Act was finally implemented, therefore, the Financial Services Authority (FSA) became the sole regulator of the UK’s financial services sector.

The FSA’s statutory objectives are:

  • maintaining confidence in the financial system;
  • promoting public understanding of the financial system;
  • securing the appropriate degree of protection for consumers; and
  • reducing the potential for financial firms to be used for financial crime.