Role and Significance of Regulatory Supervision in Financial Markets

This essay discusses the role and significance of regulatory supervision in financial markets, with a focus on the UK. It covers the different types of financial markets, the impact of regulatory supervision on the economy, and the measures that can be taken to tackle financial crises. The essay also highlights the negative impacts of regulatory supervision and the importance of complying with environmental protocols. The subject is relevant to finance and economics courses in universities and colleges.

The role and
significance of
effective regulatory
supervision in a
nations financial
market

Table of Contents
INTRODUCTION...........................................................................................................................3
MAIN BODY...................................................................................................................................3
1. Describing the role and significance of adequate regulatory supervision in the financial
market of the UK....................................................................................................................3
CONCLUSION................................................................................................................................9
REFERENCES..............................................................................................................................10

INTRODUCTION
A financial market is where buying and selling of securities occur. These markets help
various households invest their savings at a particular place to get higher returns. It plays a vital
role in the optimum utilization of resources. Every economy needs funds to maintain liquidity,
contributing to economic growth (Dong and Liu, 2020). This essay contains a detailed analysis
of the financial market of the UK. Regulatory supervision is necessary for monitoring the effects
of economic cycles on a nation's growth. A financial crisis is when the value of the assets gets
undervalued than the actual market price. It can impact every sector, such as banking, industries,
and the stock market. There are several reasons behind crises occurring in an economy that are
not under control. But practical steps can be taken against monitoring financial markets.
MAIN BODY
1. Describing the role and significance of adequate regulatory supervision in the financial market
of the UK
Financial markets are those places where securities trading takes place. Securities traded
in the financial market are bonds, derivatives, treasury bills, and other commodities. It engages
savings into practical use. In determining price level, the financial market assists in knowing the
same. It works flexible approach because securities can be easily converted into liquid form.
Every market participant is treated impartially and gets every benefit regardless of caste, gender,
and culture. The number of parties involved in the financial market is hedgers, brokers, and
arbitrageurs (Jackson et al., 2020). Financial markets are divided into the money market, capital
market, stock market, and bond market. The money market is a market in which securities are
traded for one year. Instruments are called money, notice money, and commercial paper. Capital
market instruments are long-term and further divided into primary and secondary markets.
Primary markets are those in which securities are traded for the first time, known as initial public
offerings and secondary market deals with trading of securities that are already listed on the
stock exchange of the UK. Hence, investing enhances the return of the savers and creates a base
for regular income. Investing parties gain ownership in the respective organisation in which it
ploughs funds.
Financial conduct authority was founded in 2013, and it supervises the activities of the
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financial market in the UK. Regulatory supervision plays a crucial role in achieving a nation's
objectives which can be described as follows-
Regulatory supervision monitors the market in the UK and promotes innovations and adaptation
to the continuously changing environment. It aids in predicting risk related to market failure,
which includes plummeting prices of securities. Minimizing risk can be done through forecasting
the market scenario and its ongoing factors. The financial crisis of 2007 in the UK hugely
impacted the money market's credit instruments and people involved in defaults of payments.
But regulatory authorities handled the situation effectively and took several steps for producing
an equilibrium point in the markets. Regulatory supervision includes fiscal and monetary policies
(Jiang and Kim, 2020). Government liberalization in the trading policies and reducing import &
export barriers boost economic growth, positively impacting the financial market. Financial
conduct authority is responsible for protecting the interest of the consumers and making sure that
accurate and fair practices are followed in trading the derivatives. It also encourages healthy
competition among various competitors of the market. The prudential regulation authority of the
bank of England works for the awaking public. It builds the conceptual clarity regarding norms
of the financial market through which secure trading can be done. It lowers financial crime and
contributes to the nation's capital formation. Free trading allows investors to plough funds in a
particular organization by which foreign currency can be welcomed in a specific country and
results in financial stability in the money and capital markets. There are many negative impacts
on financial markets due to regulatory supervision. Some are discussed below:
In the long run, it has been observed that there are negative results recorded in the case of
the financial market, which resulted in more wastage of scarce resources. Some authorities have
carried out uncontrollable rules and regulations in the UK, which have affected the growth and
sustainability of companies dealing in the finance sector. It has affected their growth and
expansion and their present position in the market. It has led to a depressing situation in a
pandemic where every country has been coping. There were no support hands available for any
companies and markets. Government and authorities having power and possession in their hands
made it difficult for every organization to sustain itself in the market and maintain the position
they have created over the years (Lassoued, Atti, and Sassi, 2018).
Regulatory supervision is counted as a base for formulating future ideas setting up goals
and objectives for future courses. It has imposed trade barriers in the UK, which led to a decline
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in imports and export. It further formed a chain leading to decreased profit margin and
production. Regulatory supervision is such authorities that can generate and improve profit
margin or make it difficult for financial markets even to run. It did not allow financial markets to
implement innovative ideas and think of something different. It led to situations that have been
unpredictable and hard to overcome. Tax rates imposed in the UK by regulatory supervisions are
higher and directly affect business working. It leads to inefficiency in work, and fewer surplus
funds are available with finance companies to invest in something else to expand the scale of
their operations (Liu et al., 2020).
Authorities also affect managing expenses and sale charges. It also includes taxes and
charges implemented in the trade cycle, which helps to expand the business over the globe. If
there is no tax relaxation and subsidies provided to financial markets, it will lead to deflation.
Also, it can lead to a debt situation in case of non-recovery of loans which might lead to the
closure of companies in the long run and adverse conditions to cope. Such negative impacts must
be found a solution for better-operating companies in the market.
Financial crisis: It is a situation in which an organization's assets or economy lose their
value or price decrease due to several economic and non-economic factors. In this situation, an
organization cannot pay its debts and faces problems operating daily activities due to liquidity
issues. Stock market crash, credit crunch, and currency crisis are examples of the financial crisis.
When the investment is additional, it results in a financial bubble; in 2007, the stock
market crash severely affected the UK. Before the global financial crisis, inflation was lower,
and the economy's growth was rising. These factors signify the positive outlook through which
many investors were ploughing the funds in the financial market. Lehman brothers purchased a
significant share in the stocks, and at the time of selling, the stock market was disturbed
completely (Ortiz et al., 2018).
The problem of liquidity crisis also occurred because the non-performing assets of banks
were increasing rapidly, and financial institutions were not in a position to lend money to the
public. The purchasing power of the economy reduces, and economic growth steeps down.
In the recent era, various changes happened that hampered the nation's growth and
declined economic growth. The rise in digital technologies also introduces digital assets. For
instance, cryptocurrency is an innovation. These assets save time by using online methods for
trading in securities. Floatation costs can be reduced by using digital assets. The transaction
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speed is breakneck secure and assists in tapping new market opportunities. However, it also
involves massive costs in managing the system of digital assets (Pak and Iwata, 2020).
The UK regulator was created to offer a regulatory framework for all financial
organisations, including UK cryptocurrency and digital asset registration, ranging from
rulemaking and investigative processes to enforcement authorities and ensuring that statutory
criteria are followed. Exchanges, financial businesses, and financial services marketplaces are all
regulated by the FCA. As long as a company is registered with the Financial Conduct Authority,
it can offer bitcoin and digital asset services (Ouyang, Li, and Du, 2020). Any individual or legal
organisation that engages in regulated activity in the United Kingdom is subject to FCA
regulation. The Financial Services and Markets Act 2000 (FSMA) provides the legislative
foundation for establishing rules and regulations for the licencing of financial services firms in
the United Kingdom. Before registering a crypto-currency service, an Electronic Money
Institution licence (EMI) must be applied for and obtained from the FCA. It's worth noting that
the FCA classifies an E-Money Institution as a "Moderately Complex" authorisation, which
means that continuing compliance restrictions are "stringent."
Failure in payment increases the credit risk, and many firms' credit ratings have
plummeted. Industries could not acquire funds at a reasonable price, and optimum utilization was
not achieved. It can be analysed that focusing on framing policies which reduces the impact of
macro-economic factors. However, it cannot be completed eliminated but minimised up to a
certain level.
Everything is working with innovations in today's world, but its negative impact cannot
be ignored. An increase in temperature and climate change are the current issues that degrade the
environment. Achieving a zero-carbon emission target is a crucial challenge for every industry.
Many hazardous chemicals are discharging into the surroundings in production concern,
impacting the air quality index. Every organization is trying hard to comply with the protocols
and conventions made by distinct departments. Conducting the operations by complying with
environmental protocols increases the industry's cost. The firm must incur more expenses in
achieving environmental targets (Rizvi et.al., 2020).
Industries can manage finance and corporate social responsibility effectively. The
companies capable of reducing their carbon footprints easily earn good profits, revenue, and
brand value. For instance, Nestle and Unilever also achieved increased profits and customer
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satisfaction.
Financial turmoil impacts the corporate bond market. The minimalist model on pandemic
based on macroeconomic factors are helpful for understanding and tackling the issues of a global
pandemic. In this model, the first critical factor was productivity. It states that lockdown
increases unemployment and lays off many employees who are stuck in danger levels. Another
crucial factor was credit market imperfection. As the name suggests, creditors were not confident
about their debtors because default risk was increased due to blockage in the flow of funds.
Creditors increase the collateral margin, and the collateral value decreases borrowing capacity.
This model is beneficial for understanding the market scenario. Productivity level and credit risk
can be attained at the correct level by applying this model. Financial times stock exchanges were
severely impacted by the epidemic running on a global basis. Prices of shares declined, and
investors were dealing with the fear of a low rate of return on securities. It can be interpreted
that directly dealing in the stock market can create issues. An amateur investor must gain the
financial information about the respective company’s annual report in which it is putting their
wealth.
There are numerous ways to deal with the problem of the financial crisis. Good
regulatory supervision aids in dealing with the financial crisis in various ways. some of the
methods to tackle crisis are as follows-
Every country's government frames fiscal policies that help tackle the recession situation.
Mainly there are two types of fiscal policies: expansionary fiscal policy and contradiction fiscal
policy. For effective functioning of the economy and achieving equilibrium, the government of
the UK implements expansionary budgetary policy through which tax rates are decreased, which
results in increased purchasing power of the people of the nation. Elevating the economic growth
of the government can result in capital formation. In a market where fluctuations of demand and
supply occur, the fiscal policy of the respective country assists in gaining price stability in the
nation. The strength of price increases consumer confidence, and the rise in the living standard
can be identified by using policies framed by the government. Through taxation policies, the
government can earn revenue for the smooth conduct of the country's operation. The fiscal policy
reduces the partial distribution of income among various sectors of the economy. Regulation of
government and its policies maintain the public's trust to invest their savings in the financial
market of the particular country. Besides, customers' trust boosts the country's employment level
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by mobilizing savings into productive uses (Qi et al., 2019).
Another important remedial measure the government can take to improve the stability in
the financial market and minimize the impact of economic crisis is the creation of budgets.
Budgets are documents that contain information regarding revenue and expenses and are
prepared on a particular date. In the UK, the name Budget is the Budget of majesty's
government, and it can be declared by the House of Commons and prepared by the chancellor of
the Exchequer. Budgeting is done for several purposes, and it signifies the total amount allocated
for a specific activity. Revenue and expenditure show all gains and expenses (Qin, Harrison, and
Chen 2019). However, it may not match because of surplus or deficit. A surplus budget is a
positive sign for the economy when revenue exceeds its expenses. In this case, the government
can invest in several infrastructure projects and focus on each industry's financial structure (Rizvi
et al., 2020.). Excess funds can be disbursed to the trim level enterprises, and economic problems
can be resolved by giving more credit facilities to the entrepreneurs.
Maximizing liquid proportion in the economy helps deal with the working capital
required by each industry. Ploughing funds in the money market are safer than the capital market
(Simonian and Fabozzi, 2019). An amateur investor must begin with investing in the money
market. In this market, the funds are readily convertible into liquid assets. The cost of investment
is lower in this type of market. Examples of money market instruments are commercial bills,
commercial paper, and treasury bills. Investing in the capital market is riskier because the
amount of investment is high and uncertainty of return is also involved. Therefore, safeguarding
the financial market consists of investing with taking proper advice from the brokers and creating
more awareness about the stock market and its related issues.
Regulatory supervisors should track the progress of the nations and focus on stabilizing
the market conditions by using a dynamic approach and framing plans related to adapting to the
current and future scenarios of the market. Global changes such as elections in the other country
or change of government, attitude, sentiments, and expectations of the investors also impact the
financial markets. The stock market shows either excess bullish or bearish trends, which
decreases the public's trust. From the above description, it can be analysed that effective
supervision in financial markets assists in stabilizing the price level and growth in the economy.
However, it requires efforts and authentic theories to apply effective plans.
Government and FCA must start several awareness programs to promote investment
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activities while inculcating safe habits of doing transactions. The certificate courses in the UK
aid the investors in gaining knowledge about the money market and capital market. By studying
the essential aspects of the market, investors can easily make decisions that result in higher
returns. However, a particular situation cannot be avoided and needs proper treatment. For that
government and authorities are framing fiscal and monetary policy to tackle the financial crisis
problems (Wang and Chou, 2018).
CONCLUSION
From the above essay, it can be concluded that each household sector is investing in
several sectors. However, investing in the financial market increases the capital of the nation.
Government and other regulatory authorities such as the financial conduct authority supervise the
structure of the economic and operational plans of the financial institutions. In the above-stated
essay, the financial crisis in the UK was an actual tragic situation across the globe. Trading
activities were stopped, investors lost their confidence in financial securities and the market.
Lehman Brothers, responsible for the economic bubble, negatively impacted the stock market,
and a sudden hike in the general price level resulted in inflation. Regulatory supervisors take
various actions against recession and modify fiscal policies to adapt to the changing situations of
the market. At the time of the global pandemic, various scholars proposed a macroeconomic
model for handling the problems of a worldwide health crisis. This pandemic hit every economic
sector, and significant fluctuations were observed in the financial market. The economy
experiences negative cash flows where outflows of funds are more critical than the inflows of the
funds. Higher authorities of the UK take various measures to protect the financial market and
ensure healthy securities trading.
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causes/
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