Financial Sector Regulation: Global Economy Analysis

This report delves into the complexities of financial sector regulation, examining the regulation of international capital markets and offshore banking. The analysis includes a discussion of the theoretical frameworks underpinning these regulations and an evaluation of global efforts to improve them. The report explores the benefits of such regulations for the global economy, while also addressing the challenges inherent in regulating offshore banks. Empirical evidence from the UK, US, and EU is incorporated to provide a comprehensive understanding of the subject. The report aims to provide a detailed overview of financial sector regulations and their impact on the global economy, drawing from the context of the assignment brief provided.

Running head: FINANCIAL SECTOR REGULATIONS
Financial Sector Regulations
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1FINANCIAL SECTOR REGULATIONS
Table of Contents
1.0 Introduction................................................................................................................................3
2.0 The objective of Regulatory......................................................................................................3
2.1 Overview of the banking regulator and critical regulation........................................................4
2.3 Finance Conduct Authority........................................................................................................7
2.5 The instruction prevailing banks’ interactions with their customers.........................................9
2.6 Requirements of Anti-money legalizing..................................................................................10
2.7 Conclusion...............................................................................................................................11
References......................................................................................................................................12

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1.0 Introduction.
The sector of Finance and banking in a given state play a significant role in the economic
development of that state. For instance, in the development of economy in United Kingdom
(‘UK’). London, is the best city having a significant business place in the continent of Europe
and worldwide. As an outcome, there was structural renovation in the financial regulatory system
of the UK. The transformation program included dismantling the major financial regulator of
United Kingdom, where “twin peaks” system replaced the Financial Service Authority (FSA)
comparing a prudential regulation and a financial conduct Authority (FCA).
2.0 The objective of Regulatory
Alexander and Lastra (2018) stated that financial sector policies are broadly classified into
several categories like prudential policies for ensuring safety as well as soundness of the
financial system. Regulatory and supervisory policies along with depositor and consumer
protection policies have an important role for financial sector (Baumeister et al. 2018). In
addition, financial inclusion policies to ensure an enough supply of credit to the significant
sectors like SMEs and infrastructure are required to fulfil in the sector. Prudential policies
comprise micro-prudential as well as macro- prudential policies. The objective of the policies
identification as well as prevention of vulnerabilities in the financial system. In addition, micro-
prudential policies are concentrated on ensuring safety as well as soundness of the individual
financial institutions. However, stability in financial sector is considered as essential condition
in order to achieve other objectives of the sector and development of macroeconomic stability.
However, it is not an adequate condition in order to attain the objectives.

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2.1 Overview of the banking regulator and critical regulation.
The bank regulations in the UK has responsibility which is divided between Prudential
Regulation authority, (PRA) and the Finance Conduct Authority, which is abbreviated as (FCA).
Also, there is a third body called the Finance Policy Committee that sits in the bank of England.
(Davies, et al., 2007 ).The primary objective of this body is to monitor, identify take action to
reduce or remove systemic risks, with the aim of taking care and improving the ability of finance
system to adapt itself to the consequences a a catastrophic failure in the UK.
The Finance conduct Authority, (FCA) and PRA both derive their potential from the primacy of
rule that governs the finance service in the UK; as amended the finance Service and Markets Act,
(FSMA) 2000. The Finance Service and markets Act marks it an illegal offense towards
participating in the activities that is regulated by business way in the United Kingdom unless
authorized (Beck and Levine 2018). The subordinate rule that was created under finance Service
and markets Act creates the list of events that are regulated in the United Kingdom. The
established list is amended also updated every there and now to give room for new events, for
example; the benchmarks administration, which is the activity that was regulated in 2015. The
generated list was to consider the application of the EU markets in financial instrument
Directives, (MiFID) back in 3rd January 2018. Specifically, the latest activity or an organized
trading facility was included.
For banks, the activities that are regulated can be defined by accepting deposits.
Accepting deposits can be considered an event that is controlled only when credits are loaned to
individuals, “third parties” or also applicable to a company commotion is financed out interest
on, or out of the service of (Hassani et al. 2018). This takes control of banks and helps to build
humanities in the United Kingdom, here it must be given power from Prudential Regulation

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authority. Both PRA and FCA normal partake management together in in areas such as
providing authority, whereby the PRA have to obtain permission from Finance conduct
Authority before yielding any further authorization.
However, most banks embark on various events that are regulated beside taking the
deposit, for instance, administering and safeguarding investments, engaging in savings as basic,
organizing various residential mortgage activities of lending (Cammack 2018). Besides, the
government of UK controls most events providing this events are approved on. A list of where
bonds, options, debentures, prospects, contracts are approved in tributary law indorsed by the
FSMA 2000.
Like the list comprising the activity that is regulated, the list of specified investments is
updated regularly. For instance, with the carrying out of I markets in financial instrument
Directives and certain results linking to second agreements, currencies, and emission allowances
were included in the list. Besides, there where that was regulated such as advising on
investments, dealing in investments as an agent, managing finances and arranging deals in
investments have been applied in relation to structured deposits ( Beck and Levine, 2018).
Moreover, the prudential regulator Authority, PRA plays significant roles in the UK; it
acts as s insurance companies as well as deposit-taking institutions. PRA-regulated re, therefore
"dual regulated" since the FCA also regulates the firms in respect of business conduct matters.
In addition, the finance Service and Markets Act, (FSMA), gives the PRA some the main aims:
an overall aim is to indorse the care and reliability of the businesses it controls, aiming on the
adversative effects over the steadiness of the financial system in the United Kingdom; companies
for insurance enhance and ensure that individual who holds policy are protected properly (Hu et

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al. 2018). Also, PRA had a secondary objective since 2014. It acts such that, it enables operative
competition in the marketplace for facilities given business partnerships authorized by PRA.
Hu (2018) mentioned that prudential Regulation authority proactively takes action to
accomplish its objectives; thus it is judgment-based and a forward-looking prudential regulator.
For instance, it conducts time to time testing for stress in Business partnership .it controls and
has acquired governing measure for instance; the administration of high-ranking managers. The
Prudential Regulation authority has various aims to the finance Service and Markets Act, FCA,
although both organizations poses teamwork.
In addition, finance Service and Markets Act and Prudential Regulation authority, PRA
has a common influence to implement guidelines and regulations in business partnership that it
controls out correlated direction concerning such business partnership. As a reminder from
organization, originally, PRA accepted specific guidelines about practical administration that
initial originate in the FSA's Handbook of regulations.
Consequently, the PRA has supplanted the FSA’s Handbook with a more competent
Rulebook; thus there is a basis that its supervisory rules are widely accepted internationally or at
the level of EU. The relevant directives of the EU are applied in the UK through required
guidelines of PRA (Lu 2018). The applicable regulations of EU, for instance, binding technical
standards of EU, that apply directly to the business partnership in the UK , which are considered
in the Rulebook but are part of Prudential Regulation authority necessities of business
partnership. Furthermore, European Supervisory Authorities provide the business that is
regulated in Prudential Regulation authority.
UK, US and EU financial regulations

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The decision made by European Commission in 2012 for developing response to the financial as
well as sovereign debt crisis was considered as transformational event for Europe. It can cross
the Rubicon of pooling fiscal resources of the member states joining EBU. In addition, it has
raised regulatory significant issues for the members of the European Union like the UK, select to
remain outside of EBU. On the other hand, Denmark and the UK are considered as EU members
that are not bound in order to join the Eurozone legally.
Figure 1: EU banking system impact
(Source: Lucey et al. 2018)
On the contrary, the financial regulation in the USA is fragmented compared with G10 countries.
The financial regulations are regulated by the federal as well as state level depending on the
specific type of charter that a banking organization has on the regulation structure. US banking
regulation can address privacy as well as disclosure, prevention of fraud and anti-terrorism along
with promotion of lending to lower income populations (Lucey et al. 2018).

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The Prudential Regulation authority has also lowered the level of direction available to
Business partnership and therefore separate supervisory statements dominate because material
were moved from the Rulebook. Thus, The Prudential Regulation authority authorized the
business partnership participate right away with material of EU and supervisory comments,
policy material, including its rules recalling the predominant value of soundness or safety, in
order opt achieve the capabilities of Prudential Regulation authority (Lucey et al. 2018). The
Prudential Regulation authority has proven a tactic document that that enables it administers
international groups and domestic banks desiring to function in the United Kingdom.
2.3 Finance Conduct Authority
Finance Conduct Authority, (FCA) is the financial services regulator in the UK that deals
with the guideline of behaviour in trade wholesale or commercial markets. Furthermore FCA
has a large area controlling transaction organization that supplements a business partnership that
is not authorized by the Prudential Regulation authority
The FCA has a strategy that aims to ensure that markets perform well. To fulfil this, it has three
operational aims:
i) Protect and enhance integrity of the financial system in the UK.
ii) To secure suitable protection mechanism for consumers.
iii) To promote operative rivalry in the consumer's comforts in the markets for the service that is
regulated.
Concerning financial services on 1 April 2015, the Finance conduct Authority developed a
competition manager together with the Markets Authority or Competition basing on competition
rule in United Kingdom (Samarasekera et al. 2013). This was evident from the three aims

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discussed above. The Finance conduct Authority aims of opposition are therefore entrenched in
its method of regulatory, involves analysing the effect of new measures on the game. Finding out
whether improving competition would improve outcomes of the consumer. Consequently, the
FCA carry out the market statistic that seek to evaluate whether there are competition concerns,
if there is any competition concerned, they take quickly to address features that hinder effective
competition.
Theories of regulation
The development of regulations are fulfilled by the regulations. Positive theories of regulation
analyses the importance of regulation (Sheridan et al. 2012). The theories consist of market
power, interest group theories, which explain interests of the stakeholders in regulation along
with the theories of the government opportunism that explains the reason of restrictions on
discretion of the government.
On the other hand, normative theories of regulation consists of regulation that the regulators
encourage complete where it is feasible and reduce the costs of information asymmetric through
gaining information as well as providing operators with the incentives in order to enhance
performance.
Gravity model of trade
The model is used in financial sector in order to estimate the amount of interaction between two
cities. It is generally based on the universal laws of gravitation that is measured the attraction of
the two objects based of mass as well as distance.

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Figure 2: Gravity model of trade
(Source: Sheridan et al. 2012, p.152)
Moreover, the Finance conduct Authority has extensive diversity of supervisory powers
and guidelines-making, for example, rules relating to prosecution enforcement, or sanction, this
enables it to accomplish its aims. However, the FCA is progressively willing to apply regulations
to need of organization to extract or correct an ambiguous commercial elevation. In March 2014,
the endowment of customer acknowledgement from the Office of Fair Exchange was taken over
by FCA (Sheridan et al. 2012). Different consumer credit activities, for example, broking,
became the activities that were regulated under FSMA requiring prior authorization.
Significantly, the contracts that are enclosed by the Finance conduct Authority customer credit
administration are theme to comprehensive instructions. The guidelines is applicable in
enrolling of the covenant information. If one does not want Failure to observe these rules can
make it difficult with courts in the UK having authorities to pen again credit covenants consider
a bad association among the creditor and debtor.

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Furthermore, on 1 April 2015, Payments Systems Regulator (“PSR”) was generated by the FCA
effective. The PSR helps to controls payment systems when buying goods and services. During
preceding of crisis, financial sector regulation in the developed countries are characterised
through progressive deregulation of several aspects of functioning of the organizations assuming
market efficiency. The dimensions of deregulations consisted of the removal of the overall policy
limitations of the ability of bank in order to perform core functions. It encourages universal
banking and permitting the non-bank financial organizations (Sheridan et al. 2012). A significant
feature of financial regulation in the countries was characterised through progressive
deregulation of several aspects of the functioning of the financial firms under assuming the
market efficiency. In addition, the dimension of regulation of several procedures.
International capital markets and offshore banking
International capital market is the system where people, organizations as well as the government
with additional funds transfer funds to people. In addition, the organizations and governments
have a shortage of funds. This type of transfer mechanism gives an efficient way of the
companies wishing to borrow and invest money (Lucey et al. 2018). For instance, every time, if
people takes out loan in order to buy a car, they access the capital markets. The international
capital markets carry out desirable economic function of directing capital for productive uses.
On the other hand, an offshore bank is regulated under international banking license that
generally prohibits the bank from developing business activities in the development of
jurisdiction. Due to the less regulation as well as transparency, the accounts with offshore banks
often used to hide undeclared income.

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2.5 The instruction prevailing banks’ interactions with their customers.
Finance Conduct Authority and Prudential Regulation authority both partake broad
guidelines that help to realize the characteristic between bank and their customers. For example;
promotion guidelines of financial and customers. Therefore the Recent refrains of reminder, and
the most important to bank include; Requirement of anti-money laundering and management of
conflicts.
Basing on the FCA Business Plan 2017/2018, the requirements of Finance Conduct Authority,
have been restructured as part of its application of markets in financial instrument Directives,
Basing on the administration of interest conflicts (Lucey et al. 2018). However, markets in
financial instrument Directives, arrays an outstanding block a transition in business partnership
beginning captivating stages towards preventing, identifying interest conflicts to taking
necessary paces. Occurrence of this in business partnership should more active in analysing the
conditions in which any change from their progress will be of great importance to prevent
interest conflict to rise up.
Significant feature of financial regulation in the developed nations was a practically selective
concentrated on establishment explicit guideline and practically total nonappearance of macro
prudential guideline notwithstanding the expansion in the size and unpredictability of exercises
of huge banks, banks' presentation to daintily directed or unregulated exercises, and developing
influence and interconnectedness of banks and other money related substances. The Geithner
Report noticed that in the United States no controller saw its activity as securing the economy
and money related framework in general. Existing ways to deal with bank holding organization
guideline concentrated on ensuring the backup bank, not on thorough guideline of the entire firm.
Venture banks were allowed to pick an alternate routine under an alternate controller, and in

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doing as such gotten away sufficient requirements on influence. Different firms, for example,
AIG, claimed insured safes yet got away from the strictures of genuine holding organization
guideline in light of the fact that the safes that they possessed were in fact not "banks" under
applicable law. Every one of these tax regulations brought about lacking and remiss guidelines
which added to the emergency.
FCA is progressively willing to apply regulations to need of organization to extract or correct an
ambiguous commercial elevation. In March 2014, the endowment of customer acknowledgement
from the Office of Fair Exchange was taken over by FCA (Lucey et al. 2018). Different
consumer credit activities, for example, broking, became the activities that were regulated under
FSMA requiring prior authorization. Significantly, the contracts that are enclosed by the Finance
conduct Authority customer credit administration are theme to comprehensive instructions. The
guidelines is applicable in enrolling of the covenant information. If one does not want Failure to
observe these rules can make it difficult with courts in the UK having authorities to pen again
credit covenants consider a bad association among the creditor and debtor.
2.6 Requirements of Anti-money legalizing
In 2007, the management that deals with anti-money laundering in the UK experienced
serious significant change. The Information on the Payer, express that The Terrorist Financing,
Money Laundering, and Transfer of Funds in 2017. The latest Guidelines substituted the
regulation of money Laundering. However, a body comprise of leading trade associations in the
industry of financial services in the United Kingdom, also updated its anti-money laundering to
accommodate these pieces of Legislation in EU guidance (Samarasekera et al. 2013).
Furthermore, business partnership filed the return of financial crime data which has never been

13FINANCIAL SECTOR REGULATIONS
done before. The FCA issued finalized regulation concerning the treatment of politically exposed
persons during the summer of 2017.
2.7 Conclusion
Thus, from above discussion, finance Service and Markets Act and Prudential Regulation
authority, PRA has a common influence to implement guidelines and regulations that may apply
in the business partnership which controls and to give out similar direction concerning related
business partnership. As a reminder, originally accepted specific guidelines about practical
administration that initial originate in the FSA's Handbook of regulations. Consequently, the
PRA has supplanted the FSA’s Handbook with a more competent Rulebook; thus there is a basis
that its supervisory rules are widely accepted internationally or at the level of EU. The relevant
directives of the EU are applied in the UK through required guidelines of PRA. The applicable
regulations of EU, for instance, binding technical standards of EU, that apply directly to the
business partnership in the UK , which are considered in the Rulebook but are part of Prudential
Regulation authority necessities of business partnership. Furthermore, European Supervisory
Authorities provide the business that is regulated in Prudential Regulation authority.

14FINANCIAL SECTOR REGULATIONS
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