The Financial Services Legal and Regulatory Framework

Title VIII also gave the Fed and the Financial Stability Oversight Council (FSOC) limited powers to participate in and override the regulation of systemically important clearing and settlement systems by the SEC or the Commodity Futures Trading Commission (CFTC) if they pose risks to financial stability. In the United Kingdom, there are separate regulatory regimes for the regulation of payment services and the issuance of electronic money by institutions other than credit institutions, credit unions and municipal banks (under the Payment Services Regulations 2017 (PSR) and the E-Money Regulations 2011 (EMRs)). The FCA is responsible for the authorisation and supervision of electronic money issuers and payment service providers. Prior to the financial crisis, responsibility for consumer financial protection was shared among a number of authorities (see Figure A-1). Title X of the Dodd-Frank Act created the CFPB to enhance consumer protection and harmonize consumer protection regulations for depository and non-depository financial institutions.23 The office is housed with, but independent of, the Federal Reserve. The CFPB Director also sits on the FDIC Board of Directors. The Dodd-Frank Act granted new powers and transferred existing powers from a number of agencies to the CFPB over a range of consumer financial products and services (including deposits, mortgages, credit cards and other extensions of credit, credit service, cheque guarantee, consumer reporting, , collections, real estate settlement, money transfer and financial data processing). The CFPB administers regulations that it believes protect consumers by establishing disclosure standards, suitability standards, and the prohibition of abusive and discriminatory practices. Bank holding companies with non-bank subsidiaries are also called financial holding companies.

Companies that sell securities – stocks and bonds – to the public must register with the SEC. Registration involves the publication of detailed information about the company, its management, the intended use of funds raised through the sale of securities and the risks to investors. The original registration information must be kept up to date by filing periodic financial statements: annual and quarterly reports (as well as special reports if the financial situation or prospects of the company change significantly). In addition, the G-20, an international body made up of the United States, the European Union and 18 other economies, led international coordination of regulatory reform in the aftermath of the financial crisis. It established the Financial Stability Board (FSB), composed of G-20 finance ministers and financial regulators, four formal international financial institutions, and six international standard-setting bodies (including those mentioned above) to formulate agreements to implement regulatory reforms. There is significant overlap between the FSB`s regulatory reform agenda and the Dodd-Frank Act. Companies carrying out regulated activities in the UK must generally be authorised by one of the UK`s financial services regulators (or, for some companies, registered with one of the UK`s financial services regulators), unless they have an exemption or exclusion. Once authorized, the applicable requirements vary depending on the type of regulated activities carried out. The financial system matches the available funds of savers and investors with borrowers and others who wish to raise funds in exchange for future payments.

Financial companies connect savers and borrowers with each other. Financial companies can act as intermediaries that issue bonds to savers and use these funds to make loans or investments for the company`s profits. Financial firms can also act as agents that act as custodians, placing savers` funds in segregated accounts in their name. The products, tools and markets used to facilitate this matching are numerous and controlled and monitored by a complex system of regulators. A distinction can be made between formal and functional definitions of these activities. Formal activities, as defined by the regulations, are only allowed for companies on the basis of their statutes or license. On the other hand, functional definitions recognise that, from an economic point of view, the activities carried out by different entities may be very similar. This tension between formal and functional activities is one of the reasons why the Government Accountability Office (GAO) and others have called the United States an “official party.” The regulatory system is fragmented, with gaps in powers, overlapping powers and dual powers.3 For example, “shadow banking” refers to activities such as loans and deposits, which are economically similar to those of formal banks, but occur in securities markets.

The activities described above are functional definitions. However, as this report focuses on regulators, it focuses primarily on formal definitions. Auditors of federally regulated financial institutions assess the risks of the institutions concerned. Specific security and soundness concerns common to FFIEC agencies are reflected in the manuals used by auditors to audit depositories. Key risk indicators such as capital adequacy, asset quality, liquidity and sensitivity to market risk include examples of safety and soundness issues. Each state has its own laws and regulations that define and govern the conduct of a money transfer business. Depending on the product or service offered, SEC, CFTC or CFPB laws, rules or regulations may also apply. In addition, most money services companies (MSBs) must register with FinCEN, which requires MSBs to establish and implement an anti-money laundering program. Table 1 shows the current structure of federal financial regulation.

Regulators can be divided into three main areas of finance – banking (custodian), securities, and insurance (where state rather than federal regulators play a dominant role). There are also targeted regulatory authorities for certain financial activities (consumer protection) and markets (agricultural finance and housing finance). The table does not include inter-agency coordinating bodies, standard-setting bodies, international organizations or government regulators described later in the report. Appendix A describes the changes made to this table since the 2008 financial crisis. In 2010, the Dodd-Frank Act created four new federal agencies related to financial regulation: the Financial Stability Supervisory Council (FSOC), the Office of Financial Research (OFR), the Federal Insurance Office (FIO), and the Consumer Financial Protection Bureau (CFPB). The OFR and OIF are offices within the Department of Finance, not regulators. Following the September 2012 Wheatley Report on the regulation of the London Inter-Bank Offered Rate (LIBOR), the Government decided to amend the Bill to include certain activities related to benchmark establishment within the regulatory scope of the FSMA listed in section 7 of the Act. HM Treasury intends to amend the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (SI 2001/544) (RAO) to create two new businesses: “Providing information relating to a regulated benchmark” and “Managing a regulated benchmark”.

At least initially, the only regulated benchmark in the UK will be LIBOR. As the government has decided not to transform these new regulated activities into PRA-regulated activities, the FCA will be the main regulator of LIBOR (and possibly other benchmarks in the future). Figure 2 shows a stylized example of a particular type of bank holding company called a financial holding company. This financial holding company would be regulated by the Fed at the holding company level. Its domestic bank would be regulated by the Office of the Comptroller of the Currency (OCC), its securities subsidiary would be regulated by the Securities and Exchange Commission (SEC), and its lending company could be regulated by the CFPB.