The document provides an overview of UK financial markets and regulation. It discusses the UK government's role in fiscal and monetary policy to manage the economy. It also covers topics like the money supply, interest rates, inflation, and the Bank of England's tools to implement monetary policy including quantitative easing and open market operations. International financial regulatory bodies and markets in other countries like the US, Europe, China and Hong Kong are also summarized.

1. Chapter 1
UK Financial Markets
Introduction to UK Financial Regulation &
Professional Integrity

2. CHAPTER ONE
UK FINANCIAL MARKETS

3. CHAPTER ONE
1. The UK Government’s Role in the Economy

4. 1.1 UK Government’s General Economy Policy
Main goal - to maintain a steady economy
Government’s role - directing, controlling and managing the economy

5. 5
1.2 Fiscal Policy
Fiscal policy is the use of…
Government
Spending
Taxation
Government
Borrowing
Direct
e.g. CGT
income tax etc.
Indirect
e.g. VAT
PSNCR
(Budget deficit)
Pensions, Education, Health,
Defence etc.

6. What is Monetary Policy?
Monetary policy involves changes interest rates, the supply of money
and credit and exchange rates to influence the economy
1.3 Monetary Policy

7. 1.3 Monetary Policy
The six basic goals:
• price stability
• higher employment
• economic growth
• stability of financial markets
• interest-rate stability
• stability in foreign exchange markets.

8. 1.3.1. Monetary Policy Committee (MPC) Meetings
MPC sets the interest rate every six weeks
Chief Economist
Deputy Governor
(Monetary policy)
Deputy Governor
(Financial Stability)
Deputy Governor
(Markets & Banks)
External Member
External Member
External Member
External Member
MPC
The Body
responsible for
managing the bank
rate to achieve the
2% inflation target
The Governor of
The B of E

9. Financial
Investment
Types

10. Financial
Markets
The Money
Market
The Capital
Market
The Foreign
Exchange Market
Forward
Market
Spot
Market
Secondary
Market
Primary Market
(New Issue Market)

11. Measure of payments between one country and
others.
Payments received, & money owed, from overseas
parties less payments made & debts owed to
people overseas.
Accounts used to measure the UK’s balance of
payments are:
• current account,
• capital and financial account
2.3. The Balance of Payments

12. 2.3. The Balance of Payments

13. UK exchange rates affect the competitiveness of the UK
economy for exports and imports E.G. depreciation in the
value of the currency will improve the current account
(reduce deficit)
UK current account deficit caused by three main factors:
• Net trade deficit (import is more than the export of
goods and services)
• Primary income deficit
• Wages
• Investment incomes
• Secondary income. Transfers, e.g. funds to EU, UN.
Exchange Rates

14. Financial Services Globally

15. Her Majesty's Treasury (HMT) = the Exchequer = the Treasury
Responsible for UK public finance & economic policy
Aims:
• Raise the rate of sustainable growth
• Achieve rising prosperity
• Better quality of life, with economic and employment opportunities
for all.
Financial Services in the UK

16. 16
Learning Objective:
• Understand the role and structure of the global
financial services influencing the UK financial
services sector
Financial Services Globally

17. The European Union (EU) set up after World War II
Aim:
• To integrate countries and help rebuild their
economies.
• EU works towards single European markets in various
sectors, including finance
Financial Services in Europe

18. Specific regulatory process in financial services
following Lamfalussy Report.
Introduced in 2001
Aim: to improve the regulatory process in financial
services in order to make it quicker and more
effective.
The Lamfalussy Process

19. The UK Regulators’ (FCA and PRA) Priorities for Work in the EU
and International Arena
The Financial Conduct Authority (FCA)
• Financial regulatory body in the UK
• Independent of Government
• Financed through fees from financial services
industry
FCA engages with Europe to:
• Enhance cooperation
• Share best practice
• Discuss issues of common interest.
The Prudential Regulation Authority (PRA):
• Part of the Bank of England
• Prudential regulation and supervision of approx. 1,500
financial institutions

20. • European Central Bank (ECB) is responsible for monetary policy for the ‘euro area’ since
January 1st 1999.
• ECB is the central bank for Europe’s single currency, the euro (€).
• Main task - maintain the euro’s purchasing power and price stability in the euro area (19 EU
countries who have adopted the euro)
The European Central Bank (ECB)

21. ECB’s main aim:
• To maintain price stability for economic growth and job
creation.
ECB responsible for:
• Defining and implementing euro system monetary policies
• Conducting foreign exchange operations
• Holding and managing the euro area’s foreign currency
reserves
• Promoting the smooth operation of payment systems
• Authorising the issuance of bank notes
• Macro prudential policy and financial stability
• International and European cooperation
The European Central Bank (ECB)

22. ECB is also responsible for:
• Statutory reports
• Monitoring financial risks
• Fulfilling advisory functions to community
institutions and national authorities
• Running the IT systems
• Strategic and tactical management of the
ECB’s foreign reserves.
The European Central Bank (ECB)

23. Regulatory Agencies
Three main areas of finance
• Banking (depository)
• Securities
• Insurance
Financial Services in the US
Targeted regulators for specific financial activities (consumer
protection) and markets (agricultural finance and housing
finance)

24. Depository Regulators
• Federal Reserve (FED)
• The Office of the Comptroller of the Currency (OCC)
• Federal Deposit Insurance Corporation (FDIC)
• National Credit Union Administration (NCUA)
Securities Markets Regulators
• Securities and Exchange Commission (SEC)
• Commodity Futures Trading Commission (CFTC)
Government Sponsored Enterprise Regulators
• Federal Housing Finance Agency (FHFA)
• Farm Credit Administration (FCA)
Financial Services in the US

25. The Federal Reserve - Central bank of the United States
Five functions:
• Conducts monetary policy to promote maximum
employment, stable prices, and moderate long-term interest
rates
• Promotes stability of the financial system, minimises and
contain systemic risks
• Promotes safety and soundness of financial institutions and
monitors their impact on the financial system
• Fosters payment and settlement system safety and efficiency
promotes consumer protection and community
development
• Promotes consumer protection and community
development
Depository Regulators

26. Securities markets can be divided into derivatives and other types of
securities
Derivatives, depending on the type, are regulated by the CFTC or the
SEC.
The Securities and Exchange Commission (SEC)
• Protects investors
• Maintains fair, orderly and efficient markets
• Facilitate capital formation.
Securities Markets Regulators

27. The SEC has jurisdiction over the following:
Participants in securities markets
• Issuers (e.g. equity and bonds)
• Asset managers (e.g. mutual funds and private funds)
• Intermediaries (e.g. broker-dealers, securities
• Underwriters, and securitisers)
• Experts who are neither issuing nor buying securities (e.g. credit rating agencies and research
analysts)
• Securities markets (e.g. stock exchanges) and market utilities (e.g. clearing house)
• Securities products (e.g. money market accounts and security-based swaps).
Securities Markets Regulators

28. (FINRA)
• Largest independent regulator for securities firms doing business in the US
• Oversees nearly 4,535 brokerage firms, about 163,000 branch offices and approximately
approximately 632,000 registered securities representatives
Role of FINRA:
• Safeguarding the investing public against fraud and bad practices
• Enforcing industry rules and federal securities laws
• Registers, tests and educates brokers
• Works to ensure investors are not misled
• Keeps an eye on the markets
• Educates and informs investors
• Demands fairness
The Financial Industry Regulatory Authority (FINRA)

29. The U.S. Department of the Treasury's mission:
• Maintain a strong economy
• Create economic and job opportunities by promoting
the conditions that enable economic growth and
stability at home and abroad
• Strengthen national security by combating threats and
protecting the integrity of the financial system
• Manage the U.S. Government’s finances and resources
effectively
The US Treasury

30. The basic functions of the Department of the Treasury:
• Managing Federal finances
• Collecting taxes, duties and monies paid to and due to the U.S.
• Paying all bills of the U.S.
• Currency and coinage
• Managing Government accounts and the public debt
• Supervising national banks and thrift institutions
• Advising on domestic and international financial, monetary, economic, trade and tax policy
• Enforcing Federal finance and tax laws
• Investigating and prosecuting tax evaders, counterfeiters, and forgers
The US Treasury

31. Asia includes some of the fastest-growing economies in the world
• World GDP share (in PPP terms) forecasted to reach 45% by
2025
• Much of this growth from China, and India
• The Association of Southeast Asian Nations (ASEAN)
emerging as an economic powerhouse
• 10 countries collectively projected to rank as the fourth-
largest economy by 2050
Financial Services in Asia

32. The financial regulatory services commissions in China are:
China Securities Regulatory Commission (CSRC)
• A ministerial-level public institution directly under the State Council
China Banking and Insurance Regulatory Commission (CBIRC)
• 2003 Chinese Government recapitalised banks and set up the CBRC as
the country's independent banking regulator
• April 2018 merger of China Banking Regulatory Commission (CBRC) &
China Insurance Regulatory Commission (CIRC)
• Regulates the banking sector of the PRC (except the territories of
Hong Kong and Macau)
People’s Bank of China (PBOC).
China

33. The main bodies responsible for regulating financial services
in Hong Kong are:
• Securities and Futures Commission (SFC)
• Stock Exchange of Hong Kong (SEHK)
• Hong Kong Futures Exchange (HKFE)
• Hong Kong Monetary Authority (HKMA)
• Independent Insurance Authority (IIA).
Hong Kong

34. Securities and Futures Commission (SFC)
• Regulates the securities and futures market
• Issues licences to corporations and individuals
Hong Kong Futures Exchange (HKFE)
• Regulates futures exchange participants
• Responsible for the discipline and sanctioning of sponsors and
compliance advisers.
• Regulates all persons participating in securities and futures trading,
Independent Insurance Authority (IIA)
• Supervises a self-regulation system governing the insurance industry
• Responsible for granting authorisation to insurers to carry on insurance
businesses and examining their financial statements and returns.
Hong Kong

35. • Financial Services Agency (FSA) - planning,
supervisory and inspection functions
• Securities and Exchange Surveillance Committee
(SESC) - part of the FSA and works closely with its
inspection function.
• Self-regulatory organisations (SROs), including the
Japanese securities exchanges and the Japan
Securities Dealers’ Association (JSDA)
• The FSA and SESC are under the direction of the
Commissioner of the FSA, who reports to the
Minister for Financial Services.
Japan

36. Monetary Authority of Singapore (MAS)
• Singapore’s central bank - regulates securities,
banking and insurance sectors
Singapore Exchange (SGX)
• Asia Pacific’s first demutualised integrated
securities & derivatives exchange
• Operates securities & derivatives exchange,
clearing houses and securities depository
• Performs all steps in the value chain of
businesses
Securities Trading Securities Industry Council (SIC).
• Advisory body assisting Minister of Finance
• Non-statutory body
Singapore

37. Fiscal and Monetary Economies

38. Interest
• What you pay for borrowing money
• What banks pay you for saving money with
them
Interest rates
• Shown as a percentage of the amount you
borrow or save over a year.
Bank Rate
• The single most important interest rate in the
UK
• Often called ‘Bank of England base rate’ or
‘interest rate’
The Interest Rate Setting Process

39. Function of a Central Bank

40. The Bank of England (BoE) is the sole issuer of sterling
(£)
The Bank’s market operations has two objectives
• Monetary policy – influencing market rates to deliver
the Monetary Policy Committee’s decisions
• Financial stability – providing liquidity insurance to
reduce the cost of disruption to critical financial
services
Money Market Operations

41. Objectives of the Money Markets Committee:
• Discuss important domestic & global market or
structural developments affecting the UK money, repo
& securities lending markets.
• Where appropriate, propose responses to any issues
identified.
• Aid understanding & enhance monitoring of the
functioning of the uk money markets.
• Endorse developments. & Facilitate continuing
market-wide adoption of the UK money markets code,
• Identify & address any high-level issues concerning
contingency planning in the UK money markets &
payment systems, having regard to international
developments.
Money Market Operations

42. Encourages banks to:
• Respond to deviations in overnight rates away from the target rate by substituting reserves
holdings across days.
• Lend out reserves when rates are above target
• Borrow in funds and hold them as additional reserves when rates are below target.
Between meetings of the Bank of England’s MPC, eligible UK banks and building societies undertake
to hold target balances (reserves) at the Bank on average over maintenance periods.
Reserves-Averaging Scheme

43. BoE’s very short-term deposit and lending facilities
• Help manage temporary problems in payments systems & overnight money markets.
• Standing facilities used at counterparty’s initiative (unlike OMO where the central bank
takes the initiative)
• Provide or absorb liquidity when other techniques have not been fully exploited.
• Operational standing deposit & lending facilities available to eligible UK institutions.
• Normally, lending/deposit rates are 25 basis points (bps) higher than base rate and 25bps
below base rate respectively.
Operational Standing Facilities (OSFs)

44. Bilateral liquidity facility activated on demand by a participating firm.
Provides liquidity
• Usually in the form of gilts
• Rollable 30-day term against a wide range of collateral
• In return for a fee (varies with collateral used and total size of borrowings).
• This facility is available on demand.
• Intended for firms anticipating, or experiencing, an unexpected liquidity need.
• May be drawn upon as and when required.
Discount Window Facility (DWF)

45. OMOs are a group of auction facilities offered by the Bank to supply or drain the
amount of reserves in the system
• Flexible monetary instrument
• Involvement of individual institutions is voluntary rather than compulsory
• Can be performed frequently and in any quantity
• Useful method of liquidity and short-term interest rate management
• Help to foster financial competition and market development.
Open Market Operations (OMOs)

46. • Quantitative easing puts money directly into economy - also called ‘QE’ or ‘asset purchase’
• Creates ‘new’ money, aiming to boost spending and investment.
• BoE is tasked with keeping inflation (rise in prices of goods & services) low and stable.
• Usual way to meet inflation target is to change Bank Rate (economy’s key interest rate).
Fiscal Easing and Other Interventions

47. • Central Bank adds a few zeros to their own account by injecting money (physical or
digital) into the economy
• “New money” is used to buy Government bonds & other assets from financial firms
• Firms use “new money” to lend to consumers or businesses and buys other assets such as
bonds
• Virtuous cycle of spending and investment
What happens in QE?
Quantitative easing

48. The money supply measures the total amount of money in the economy
NARROW MONEY
COINS BANKNOTES LIQUID ASSETS HELD
BY THE CENTRAL BANK
Money Supply and its Effects
Narrow Money
M0 = the level of notes and coins in
circulation + banks’ operational balances
at the Bank of England.
Broad Money
M4 = notes and coin + saving accounts
and deposits in a savings account

49. Inflation
• How much prices of goods and services have increased
over time.
• Compares cost of things today with how much they cost
a year ago.
• Average increase in prices is known as the inflation rate.
• If inflation is 3%, it means prices are 3% higher (on
average) than a year ago.
E.G. a loaf of bread cost £1 a year ago, now it’s £1.03, its price
has risen by 3%.
Deflation - a general fall in the level of prices
Disinflation -a reduction in the rate of inflation (i.e. a slowing of
price growth – as opposed to a fall in prices).
How Money Supply Affects Inflation, Deflation and Disinflation

50. The interest rate is the percentage charged on the total
amount you borrow or save.
Borrowing - it is what you pay to ‘hire’ someone else’s
money.
Saving - the interest is paid to you because the bank is
paying to ‘hire’ your money.
Monetary economic theory states that interest rates are
largely determined by the demand and supply of loanable
funds.
If the money supply increases, and there is no increase in
the demand for money (e.g. for investment purposes), the
amount of loanable funds available increases (e.g. for
savings).
There is more money available for savings, so this
depresses interest rates.
How Money Supply Affects Interest Rates

51. • The monetarist explanation of inflation operates through the Fisher equation.
• One implication of the Fisher effect is that nominal interest rates tend to mirror inflation,
making monetary policy neutral.
The Relationship between Money Supply, Inflation and Employment

52. Financial Markets in UK

53. GDP + Net property income from abroad - Net payment outflow to foreign assets = GNP
GNP - Capital consumption = NI (net)
National Income, Gross Domestic Product & Gross National Product

54. Summary
National Income Account
Supply = Demand
Y = C + I + G + (X-M)
Y = GDP
C = Consumption spending by households
I = Investments by business and households
G = Government purchases of goods and services
(X-M) = Net Export

55. • The United Kingdom (UK) is located off the
northwest corner of Europe
• Includes the island of Great Britain (England,
Scotland and Wales) + Northern Ireland.
• British Empire formed during the European
colonial era and peaked in the early 20th century
• Decolonised following World War II.
• The national Government is divided between
executive, legislative and judicial branches.
Global Influences

56. The economy influences financial markets.
Recession & start of recovery:
• Inflation and interest rates are low or falling.
• Coupons on yields on fixed-interest securities look attractive.
• Investors will be prepared to pay higher prices for such securities.
Boom period:
• higher interest rates result in lower prices for fixed-income securities.
• Investors unwilling to pay high price to secure fixed coupon attached to securities.
Market Behaviour

57. Market Behaviour

58. Global Trends

59. • UK is one of the leading international financial and related professional services centres.
• Good record managing financial & related professional business from developed economies.
• Developing economies need financial services to achieve further progress
• This means significant potential for growth (rise in the importance of emerging markets).
• UK supports them through its leading role in international financial markets.
• This role could potentially be enhanced following the UK’s departure from the EU.
International Markets

60. Globalisation of Business and Finance

61. • Globalisation helped by Governments and multinational
organisations
• World Trade Organisation (WTO)
• WTO deals with the rules of trade between different nations and
the liberalisation of trade laws between countries.
• Organisation for Economic Co-operation and Development
(OECD).
• OECD is ‘an international organisation helping Governments
tackle the economic, social and governance challenges of a
globalised economy’.
• It aims to help contribute to world trade, and to support
sustainable economic world growth.
Globalisation of Business and Finance

62. The Financial Technology industry offers services integrating finance with technology to provide
new or improved services to businesses and consumers.
Impacts of Technology
Industry Activities
• Operating peer-to-peer lending platforms
• Digital banking
• Payment services
• Operating investment platforms
• Investment management services
Products and Services
• Payments and digital banking
• Investment platforms and management
• Credit and lending
• RegTech
• Distributed ledger technology

63. Regulatory Challenges
FCA work closely with HM Treasury and the Bank of England to ensure the effective regulation of
benchmarks.
Globally, FCA helps set standards, through the European Securities and Markets Authority (ESMA),
and chairing/co-chairing of International Organisation of Securities Commissions (IOSCO) and
Financial Stability Board (FSB) committees.
FCA engage regularly with a wide range of European and international counterparts and
stakeholders to:
• enhance cooperation
• share best practice and
• discuss issues of common interest

64. Various trade associations, in Europe and the US, highlight six types of concerns with the
current approach being taken regarding regulatory change.
Regulatory Challenges
Their concerns are:
• Duplicative requirements
• Incompatible or conflicting requirements
• Distortion of competition/reduction of customer
choice
• Unintended impact on clients/counterparties who
are not directly subject to regulation
• Lack of progress for mutual recognition or
comparability
• Regulatory uncertainty and disproportionate
compliance burden.

65. Regulators in the US and EU want consistency in implementing G20 and other reforms to avoid
regulatory arbitrage to:
• Avoid unnecessarily duplicative requirements, distorting competition by uneven
• Application of duplicative regimes
• Encourage venue choices not based on avoidance of administrative complexity
• Decrease compliance burden or costs of compliance for regulated entities
Duplicative Requirements

66. Practical solutions include:
• Global impact assessment – analysis of the impact that measures will have on markets globally.
• Mutual recognition and exemptive relief – common regulatory standards should be measured
against equality of outcomes and effects, and not against the agreement of identical legal text.
• Targeted rules convergence – the G20 process can assist rules convergence as well as mutual
recognition.
The Financial Stability Board (FSB) can take a lead role in providing guidance
Regulatory Uncertainty and Disproportionate Compliance Burden

67. • The role of Government and its policy on taxation, public
borrowing and public spending.
• The role of financial investment in the economy –
primary and secondary markets (their purpose, who uses
them and why).
• The balance of payments – what they are and why they
are so important.
• The role and structure of financial services in the UK,
Europe, US and Asia – processes and purpose.
• The role of Government and central banks: interest rate
setting, supply of money, and its effects fiscal easing.
• The factors that influence the financial services sector in
the UK: national income GDP global trends –
globalisation EU.
Summary of Chapter One