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Increased Regulation of Financial Services Providers for Increased Customer Protection

United Kingdom Financial InstitutionsMoney makes the world go round and a great deal of money goes around the world. The development of the concept of money ended the era of trade by barter; and now, money is a perfect exchange for goods and services. Interestingly, the development of money also birthed some firms that provide core and ancillary financial services.

For instance, some firms offer banking services to help you to keep your money safely. Other firms serve as intermediaries in facilitating the transfer of money between individuals and corporate entities in order to facilitate trade. Other firms provide loans, credit cards, insurance, wealth management, and investment services among financial services. Interestingly, the advent of traditional financial services companies and the modern FinTech industry creates an environment where people hand over their money to third party firms.

However, some unscrupulous firms have demonstrated unethical business practices in their dealings with their clients.  In the last 15 years, financial misconduct has cost UK banks some £53 billion because they lack the checks and balances that could ensure transparency. This piece provides insight on how financial services providers are regulated in the UK for increased customer protection.

Here’s how financial service provider are regulated in the UK

In 2013, the British Government replaced the Financial Services Authority ‘FSA'(which previously had oversight functions on the Financial Industry) with the two distinct regulatory authorities. The Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA) are now regulating the financial services industry. The replacement was necessary in order to strengthen the financial system and to make it proactive for the digital age.

The PRA is saddled with the responsibility of providing regulatory and oversight functions to some 1700 banks, investment firms and insurers in order to ensure that they act in fiduciary to consumers. The FCA provides regulatory and oversight functions for promoting competition between financial services providers, enhancing the integrity of the financial industry, and protecting consumers in their financial transactions.

The PRA and FCA insist on some industry best practices and they conduct stress tests to see the measures that the management of financial services companies have put in place to minimize consumers’ risk. Financial services providers also have to demonstrate their ability to act in the best interests of consumers in practice rather than on paper.

Regulatory requirements that financial services firms must satisfy

The FCA’s role for payment institutions includes the regulation of banks and other companies that handle other people’s money such as money transfer companies. The FCA’s specifically ensures that payment institutions are compliant with regulatory requirements in their daily activities.

In the years past, the financial service industry often finds itself in scandalous events as participants engage in market abuse. In 2014 alone, the FCA fined UK’s top 5 banks a combined £1.12B for questionable ‘FX business practices’.  FCA Official observed that “the banks collectively undermined confidence in the UK financial system” and that it was necessary to ensure that financial institutions consistently access and mitigate the risks inherent in their business practices to ensure customer protection.

Interestingly, some stakeholders in the financial services industry think that there is a need for deregulation because the regulatory burden on financial service providers is too much.  The proponents of deregulation claim that it takes too much work for financial service providers to deal with separate regulatory requirements from the FCA and the PRA because both regulators have different objectives and approaches.

Nonetheless, there’s no denying the fact that FCA-approved firms and firms living up to the regulations of the PRA provide customers with a high level of confidence when conducting financial transactions. The regulatory requirements are also necessary to sanitize the payment processing industry and to reduce the chances of unethical practices that could cause people to lose faith in the financial services industry.

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