6% holding in Lloyds following huge losses at both during the credit crisis" (Gupta. S. March 16, 2011) point to the need for stronger regulation of the financial sector. The UK banking system which is one of the most successful and innovative in the world must continue to have autonomy in its operations. Over regulation will only stifle an industry which is a key to the return of a strong economy, particularly in light of the austerity measures of the coalition government which will slow government expenditures to buttress an economic recovery. A greater emphasis on firm specific activities which will encompass leverage, capital ratios, balance sheet assets and liabilities is not over regulation but rather smarter regulation.
In contemplating reform the FCA will ensure that the focus of the financial sector is on the individuals who utilize their products not the shareholders who reap the gains from profits. The FCA will make the important determinations on which financial instruments are for the benefit of the greater population while still allowing the banking firms to generate a profitable return. The FCA may be the single most important aspect of financial reform in its protection of the consumer and its limits on financial product excess.
Framing the Debate
Financial regulatory reform is not about taking action simply because something must be done; rather it is an acknowledgement that "there were real and significant failings in the UK regulatory framework. This meant that regulators failed in recognizing and responding to the problems that were emerging in the financial system" (HM Treasury. July 2010. P.7.). Lord Turner describes this problem as 'underlap', "a phenomenon whereby macro-prudential risk analysis and mitigation fell between the gaps in the UK regulatory system" (HM Treasury. July 2010. P.8.). The solution presented is to fill these gaps with the aforementioned regulatory agencies FPC, PRA, and the FCA. Additionally, these agencies will be given the tools by which to effectively manage the systemic and individual firm risks that arise. These policy levers were not at the disposal of the Bank of England, Treasury or the FSA and as such the necessary actions to prevent the crisis before it erupted were not initiated.
The obverse to this framing of the regulatory overhaul is that the 'underlap' was in fact a regulatory scheme that simply had too many moving pieces, which not only did not work in concert...
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