Financial Services
Seminar 3: Styles of regulation
INTERACTIVE QUIZ 3
Style of regulation: overview
 Context: regulatory discretion and
style
 Risk-based regulation
 Principles-based regulation
 ‘Light-touch’ regulation
Regulatory powers and discretion
 Regulatory powers




Rule-making
Supervision
Enforcement
Link to regulatory objectives
 Regulatory discretion

For
 Flexibility (adapt to firms and economic cycles)
 Regulators are better able to make rules than legislature

Against
 Lack of high-level political choice over risk in the financial
system (cf risk vs stability trade-off)
 Discretion may not be used when most needed (cf the
recent financial crisis)
Interactive Exercise 2
 https://www.bankofengland.co.uk//media/boe/files/financial-stabilityreport/2020/december-2020.pdf
-What is the main responsibility of the
FPC?
- Which institutions are represented in
the FPC?
Risk-based regulation: concept
 Regulation applied to markets, firms
and individuals according to the risks
they pose to regulatory objectives
 Risks arise from (mainly)
 Credit risk (default)
 Market risk (fall in value of securities)
 Systemic risk
Generic risk-control strategies
Prevent
Substance Prohibition
Limit
Remedy
Risk
threshold
Liability
standard
Process
ex ante Licensing
ex post
Enforcement:
exclusion/contain
ment/penalty
Supervision Deterrence
Negotiated
correction/
penalty
Enforcement:rest
itution/compensa
tion/penalty
Risk-based regulation: operation
(UK)



Risk assessment and monitoring
 Categorisation of firms
 Risk mitigation programme for each firm
Risk control through governance, management and financial control
requirements for firms
Risk control through approval and standards for individuals
 Risk control through capital and liquidity rules
 The FPC and systemic risk (Interactive
exercise 3)
Interactive exercise 3
 https://moodle.gla.ac.uk/pluginfile.ph
p/2736850/mod_resource/content/1/
Financial%20Services%20Act%20201
2.pdf
 What is the statutory objective of the Bank of
England?
 What is the objective of the FPC?
- How does the FPC fulfil this role?
Principles-based regulation
 The ‘principles vs rules’ choice in regulatory systems
 FSA adopted the principles-based approach
 For
 Compliance with the spirit and not just the letter of
rules
 Permits firms to interpret principles and focus on
outcomes
 Detailed rules cannot cover all eventualities
 Against
 Principles are vague and lack certainty
 Firms may not interpret principles correctly
 Principles-based regulation may easily become ‘lighttouch’ regulation
Light-touch regulation
 Rationale
 Trust in ‘self-correcting’ nature of markets
 Focus on innovation and flexibility for firms
 Focus on lowering the cost of regulation for firms
 Operation
 Trust in management strategy and decisions
 Non-confrontational supervision
 Limited enforcement action
 Post-crisis revision
 End of ‘light-touch’ policy
 More intensive supervision and enforcement
Reading
 Chapter 2 Iain Macneil ‘An
Introduction to the Law on Financial
Investments’
 Chapter 17 Principles of Financial
Regulation (e-book)