The regulatory architecture of the UK banking system
It is universally accepted nowadays that the regulation of financial markets should strive to achieve transparency, fairness, equal access, effective competition and financial soundness. Currently, a very strong case, substantiated by, inter alia, the 2007-2009 global financial crisis (GFC), can be made for asserting that the financial industry had underestimated the value and importance of consumer protection. For instance, in bank collapses such as Northern Rock and Halifax Bank of Scotland, consumers were exposed to a continuous lack of transparency and information asymmetries, which reflect a fundamental imbalance between market participants. Consequently, it can be argued that investors find it difficult to choose the right business transaction because there is no appropriate system of disclosure and they lack proper financial knowledge; this gap is made worse by the absence of co-operation between the parties to financial contracts (i.e. managers and investors, bankers and customers) and a lack of adequate rules on internal controls. On this view, regulators realised the need to establish more robust prudential supervision to prevent the spread of systemic risk into the financial sector in order to avoid the use of taxpayers’ money for resolving failing credit institutions.
This chapter provides a brief historical account of the evolution of bank supervision and regulation over the last half century. Then, the discussion focuses on the main regulatory techniques prevalent at the time the 2007-2009 financial crisis happened, namely, principles-based regulation. The rest of the chapter tracks the transformation of UK regulatory architecture since the onset of the GFC focusing particularly on the Banking Act 2009; the Financial Services Act 2012, which abolished the Financial Services Authority (FSA) and introduced the Prudential Regulation Authority (PRA) and Financial Conduct Authority (FCA); and the post-crisis approaches to financial regulation and supervision.