History of the regulations of the financial system:

Banks’ managers and owners understand the risks associated with the banking system better than
outsiders. However, as businesses try to make a profit, they may sometimes not act as safely as
depositors or investors would want them to. When banks want to be profitable, they might take too
many risks assuming the result will be favourable for them. For instance, when trying to make money,
banks sometimes sell products such as PPI (payment protection insurance) that aren't suitable for their
customers. This, for example, resulted in the Global Financial Crisis during 2007 and 2008.
Before 2001, the Bank of England largely controlled the financial regulation in the UK. In 1985, a
self-regulatory board - Securities and Investments Board- was created to regulate all financial matters
in the UK. After a series of scandals with the Barings Bank in the 1990s, this self-regulatory organ
was dissolved.
In 1997, this same board was changed to the Financial Services Authority (FSA), which acted as an
external regulator with a range of regulatory powers. This was established in the 1998 Bank of
England Act, which radically changed the role of the Central Bank, thereby transferring all
responsibility and supervisory authority to the FSA.
However, the FSA did not exercise this power until 2001. That’s when the Bank of England was
instructed to concentrate on the banking responsibilities while the FSA’s task was to focus
on the financial system regulations.
During the Global Financial Crisis, multiple regulatory failures forced the Treasury to abolish the
FSA. This governing body was mostly criticised for failing to spot the lending boom before 2007,
which subsequently resulted in the bust and collapse of the Northern Rock bank and the Royal Bank
of Scotland.
From 1 April 2013, the FSA was divided into three new committees: the Financial Policy Committee
(FPC), the Prudential Regulation Authority (PRA) within the Bank of England, and the Financial
Conduct Authority (FCA) as an external agency.
Through the FPC, the Bank of England regained its responsibility for maintaining financial
stability. The FPC is primarily responsible for macroprudential regulations, whereas the other two
agencies handle microprudential regulations.
The UK’s financial regulators:
Let’s study these financial regulating committees in more detail.
The Financial Policy Committee (FPC):
The independent FPC was formally established on 1 April 2013. Systemic risks could trigger the
collapse of the whole or a significant part of the financial system (like in 2007–08, the collapse of one
bank could affect other banks as well and have devastating consequences). That is why the FPC’ws
main role is to identify the risks and take appropriate action to make the system more resilient to
shocks.
Its secondary objective is to support the economic policy of the government.
The Prudential Regulation Authority (PRA):
The Prudential Regulation Authority’s (PRA) main function is to oversee different types of financial
institutions such as banks, credit unions, etc. It does so by assessing the risks and ensuring that they
are managed according to the regulations set in place. This enables the PRA to build and maintain a
stable financial system in the UK.
Although the PRA limits the number of liabilities a financial institution has, it doesn’t aim for ‘zero-
failure’. In case a firm experiences bankruptcy, the PRA quickly addresses it to prevent it from
impacting the rest of the financial system.
The Financial Conduct Authority (FCA):
The FCA aims to protect consumers by promoting competition between providers of financial
services. This regulatory body makes rules, enforces them, and investigates financial service
providers.
Types of financial system regulations:
Since the financial crisis, the UK has taken steps to isolate the risk-taking side of financial
markets from the everyday provision of financial services, as well as to enhance banking
regulation. In April 2013, a new regulatory framework governing the provision of financial services in
the United Kingdom went into force.
 The microprudential regulation of UK financial services is the regulation and oversight of
individual financial institutions to ensure that they remain solvent and act in the best interests
of their customers. In essence, this implies ensuring that each bank’s balance sheet is resilient
to economic and financial shocks.
 Macroprudential regulation, on the other hand, is concerned with the entire financial
system. The ultimate goal of macroprudential regulation, according to the IMF, is to prevent
long-term wealth losses by minimising the accumulation of system-wide financial risk.