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Sample Thesis Paper on the Difference of Financial Regulation between China and UK

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Sample Thesis Paper on the Difference of Financial Regulation between China and UK

Introduction

Financial regulation refers to a form of supervision that is directed towards financial institutions in order to see to it that certain guidelines, restrictions, and requirements that are required of them are met in order to maintain the level of integrity that is required in the financial system. Financial regulation may be facilitate by either a non-governmental organization or the government. Regulation of finance has influenced the banking sectors’ structures by lowering the costs of borrowing and instead increasing the availability of a variety of products in the financial sector. Financial regulation aims at accomplishing four major objectives i.e. to maintain and increase the level of confidence in the financial system, to secure the most viable means for protecting the consumers, to assist in enhancing and protecting the level of stability within the financial system, and reduction of the probability for a regulated business being used for a purpose related to commission of financial crimes.

The structure of financial regulation is such that acts are put in place which hand over the mandate of monitoring financial activities and enforcing of actions to government and non-governmental organizations. The process of financial regulation involves a number of combinations and steps. This includes the regulation of stock exchanges, regulation of investment management, regulation of listed companies, and regulation of banks and other providers of financial services. Regulation of stock exchanges is directed towards ensuring that exchanges involving trade are conducted in the required manner. This kind of regulation in most cases concentrates on the process of pricing, settlement of trades and execution, and efficient and direct monitoring of trade. Regulation of investment management entails the supervision of asset management in order to see to it that friction is eliminated in the operation process.

Regulation of listed companies on the other hand is directed at ensuring that the market participants and listed companies live up to the requirements of the trading acts. For instance, the trading act requires that listed companies publish director headings, and their financial reports with the market participants being required to publish notifications of their major shareholders. This regulation is meant to ensure that adequate and essential information is accessible to investors in order to aid them in making more informed decisions on the listed companies and their respective securities.Regulation of banks and providers of financial services involves laying down rules and regulations that govern financial institutions and that dictate the process involved for getting started. Such regulations are aimed at eliminating unwanted developments which might result into interference on the smooth running of the financial institutions. This regulation has seen to it that the financial system is strengthened and more efficient.

Literature review

The Bank of England made a conclusion from its recent study on the financial crisis arguing that it depicted the need for change in the financial regulatory system used by several nations. Baker also supports these arguments by asserting that the renovation of the transgovernmentalism concept would draw the participatory deficit within the global financial architecture into a sharp focus, pointing into the direction of a functional agenda for reform that would increase participation and inclusion. Coordination measures were enhanced over regulatory measures since the renovation of transgovernmentalism with respect to financial regulations which saw the international stage in financial regulations prepared for reforms. Literature offers different understandings of a financial architecture that demands an international cooperation that is redefined. The traditional market-oriented approach separates the financial sector into three distinct sections: insurances, banks, and securities industries. Recently, literature has tended towards depicting the structure of the modern financial industry by giving an interpretation of the existing categories within a single framework due to the lack of accuracy in the traditional division.

Aims and Objectives

This research aims at establishing the particular differences between financial regulations in China as compared to those in the UK. It also aims at giving a deeper analysis of the two countries’ financial regulations systems, their difficulties and shortcoming in order to develop a deeper understanding of the existing differences.

Methodology

Given that the research was majorly primed at determining the differences between the financial regulation system in China and the UK, the research gives a brief introduction, featuring a literature review on the same. The research clearly outlines the aims and objectives for the study, the methods of collection and analysis. The research then examines independently, the different systems used for financial regulation in the UK and China in depth, including the various challenges experienced by the systems, before giving its findings which constitute the particular differences that were found to exist between the two systems.

Data collection and analysis

The research collected data majorly through online research databases such as ProQuest and Ebscohost and the Web. The key words used during the research were, financial regulation in China, financial regulation in UK, and financial regulation systems. The materials used for the research was selected based on their extent of coverage, relevance to the study, methods of data collection used, and authority of the authors. The data was then analyzed through comparing and contrasting the different systems of financial regulation used in the two nations after having examined them in depth.

Financial regulations in China

The recent global financial crisis questioned the effectiveness and viability of the financial regulations in China, both at the supranational and national levels. Currently, China is faring quite well in the global downturn which has seen all major economies I the western region go into recession even though China herself is not yet immune to the fallout. China’s financial system has also been facing some challenges. For instance, China’s transition during the last quarter of the century to an economy that is market oriented resulted into unprecedented growth in the economy which saw the financial systems in China develop rapidly in order to support the metamorphosis. However, the transition was accompanied by its own shortcomings. Being that the stability and healthy development of China’s financial systems is key to her success, there has been a calling need to better the financial regulatory regime in order to make the financial system better in terms of efficiency.

Centralized and single financial regulators

The development of China’s markets and her economy saw a significant improvement in 1978 after the introduction of the economic reform policy. The system of banking was transformed in order to see to it that pace was kept with the transition to the market based economy. The process commenced with the establishment of state owned banks to offer specialized services among them, the Industrial and Commercial Bank of China, the Bank of China, Agricultural Bank of China, and the Construction Bank of China. In order to increase the level of competition in the banking sector market, several banks were allowed to sprout both at the local and national level. This form of regulation saw the emergence of the Export-Import Bank of China and the Agricultural Development Bank of China from provision of loans thereby enabling them to fully operate as commercial banks.

Multiple sector based regulators

The fast development in China’s financial markets since the dawn of the 1990s has seen China advance steadily towards a regulation model that is sector-based which includes separate regulators for insurance, banking, and securities. Beginning of October 1992 saw the spun of responsibility for regulation of securities to the China Regulatory Commission and the State Council Securities Commission. The regulators of securities were joined together which saw the China Securities Regulatory Commission vested with absolute mandate for controlling the securities market. Thereafter, in order to keep pace with the insurance market that was booming, the China Insurance Regulatory Commission was formed. At last, the China Banking Regulatory Commission was established to take total control of direct banking functions from the People’s Bank of China. China’s financial regulatory framework consists of the four mentioned independent organizations. The supervision and administration of different financial sectors i.e. the insurance, banking, and securities, has been assigned to different regulatory commissions. The regulatory model adopted in China that is sector-based corresponds to her financial markets and services.

Current financial regulation structure in China

China’s current financial regulation structure is sector oriented with the People’s Bank of China, just like the central bank, taking over the financial responsibilities in order to see to it that stability is restored in the financial system and the monetary policy. The major authorities responsible for financial regulation in China include the CIRC, CBRC, and CSRC. There are also currently some governmental organizations and/or bodies that also play a part in ensuring financial regulation. For example, China’s ministry of finance has the mandate to formulate policy and strategic decisions on taxation and finance, issuing of treasury bonds, and setting the standards for accounting. Approving of the issuing of treasury bonds is vested on the National Development and Reform Commission which is also involved in the formulation of monetary and financial policies. Auditing of financial accounts of banks owned by the state, insurance companies and securities firms is the responsibility of the National Audit office. Other than government agencies that ensure financial regulation, there are also other self-regulatory organizations which are responsible for the conduct of their members and their respective markets even though they are under the regulatory oversight of government regulatory agencies. Such self-regulatory organizations include the Insurance Association of China, China Futures Association, China Banking Association, China Trustee Association, and Securities Association of China.

The People’s Bank of China, being China’s central bank, has the mandate for formulating and implementing monetary policies, maintaining the stability of the financial sector under the State Council’s leadership, and reduction of the financial risks involved. Just like other central banks world over, the People’s Bank of China is responsible for issuing of currency, banker to the government, and banker of other banks. The People’s Bank of China aims at stabilizing China’s financial system and currency through indirect macro-economic means as compared to the direct interventionist approach. The Central bank, through such monetary tools as open market operations, deposit reserves, interest rates, and rediscount rates, ensures that there is micro-economic regulation on the financial markets. Securities have also experienced a rapid growth in the Chinese financial markets due to its significance in rescuing the financial situation which saw it accorded high priority by the leadership of China.

The financial regulation system in China has however been associated with lack of regulatory independence for a long time. As much as the law of the central bank is aimed at preserving some measures for itself, there is lack of independence. This is illustrated in the way the functions of the People’s Bank of China are run. For instance, the law of the People’s Bank of China states that “the People’s Bank of China shall, “under the leadership of the State Council,” independently implement monetary policies, perform its functions and carry out its operations according to law free from any intervention of local governments, government departments at all levels, individuals, or public organizations.The three major commission in China in charge of financial regulations barely have full independence from the government. Taking for instance the CBRC, it was formally the central government’s instrument which makes it vulnerable to the direct leadership of the State Council. Other than the CBRC being referred to as “a banking supervision institution of the State Council, all its leaders are appointed by the State Council which makes them accountable to the Premier.

The CBRC’s authority has also been weakened by the role played by the state in the financial markets. The financial system in china is highly concentrated with the state taking the largest share in domination. Lack of independence is also evident between the governmental and non-governmental regulatory bodies. The system of financial regulation in China is also faced with the challenge of financial modernization and innovation as a result of her traditional regulatory structure. The recent developments in the financial markets of China have exerted a lot of pressure on China’s financial regulation. As a result, China has followed the international trend, a process trend referred to as financial modernization, which involves eliminating the structural barriers that hinder financial markets and restrict institutions to conducting a specific line of business. The current financial innovation and modernization process in progress that has resulted in the sprouting of complex cross-sectional products in the finance industry and large financial conglomerates offering a variety of services, has resulted into a significant transition in the operation of the Chinese financial markets. The transition has presented some serious challenges to the traditional sectorial regulation of China under which the responsibility of financial regulation is divided along the traditional line of insurance, banking, and securities. Such challenges could be linked to the inadequacy of the response to the changing financial landscape. The financial regulation cost in China has been increased by the differences between the market that she regulates and her regulatory structure which has resulted in gaps and overlaps in the coverage of the regulatory structure.

Financial regulations in UK

The UK relies on the Financial Service Authority (FSA) for financial regulations, which is a powerful and universal regulator for the industry of financial services in the UK. This body was introduced by the Financial Service and Market Act in order to bring about uniformity in the supervisory and regulatory functions of the financial industry that were previously facilitated by nine bodies in the UK. This action of transitioning to a single regulator from multiple regulators was pushed for after the fall of Barings, and a series of failures by banks in the 1990s which raised the need to smoothen the previous regime that was fragmented and viewed as confusing, inefficient, and lacking clarity of allocation of responsibilities. The Financial Service Authority is an effective financial regulator in its unusual broad mandate for financial regulation. The FSA regulates quite a number of financial businesses including insurance, banking, and securities and is also responsible for regulating the prudential and conduct of businesses. This type of regulatory structure used in the UK is referred to as the integrated regulation model or single regulatory structure.

The Financial Service Authority’s board was appointed by the treasury even though it operates as an independent body free from the interference of the government. This body was designed as a company that was limited by guarantee and it solely depends on the fees charged to the industries offering financial services for its funding. The Financial Service Authority was put in place in June 1985 known as the Securities and Investments Board. After quite a number of scandals in the 1990s which saw the fall of Barings Bank, the self-regulation system of financial services regulation was brought to a stop in order to consolidate the regulatory responsibilities that has been distributed to several regulators. The Securities and Investments Board was then changed to the Financial Services Authority in 1997 taking over the statutory mandate accorded to it by the Financial Services and Markets Act 2000. FSA was now in charge of the other self-regulatory bodies such as the Securities and Futures Authority which was responsible for supervision of futures and trading shares in the UK. The Financial Services Authority also controlled general insurance intermediaries and the mortgage business other than controlling financial advertisers, banks, and insurance companies.

The Financial Services Association was in charge of all companies that issued electronic money, accepted deposits, dealt with investments either as agents or principals, managed investments, effected or carried out contracts of insurance as principals, arranged investments deals, regulated contracts of mortgages, home purchase plans, or home revision plans, assisted in the performance and administration of insurance contracts, sent dematerialized instructions, safeguarded and administered investments, advertised on investments, established personal pension schemes, collective investment schemes, or stakeholder pension schemes, entered or administered funeral plans, among others. The Financial Services Authority was also put in charge of regulating the motor industry whenever insurance products were sold together with purchased vehicles in order to ensure that customers were treated in a fair means.

UK’s Financial Services Association organization had four major statutory objectives. FSA was to ensure that, confidence was maintained in the financial system, the UK’s financial system was protected and its stability enhanced, ensuring that the consumers were well protected, and reducing the rate and number of crimes in the financial industry. Several principals of good relation that governed the Financial Services Association whenever it executed its duties supported these objectives. Such principals include economy and efficiency, which required the FSA to make use of its resources in the most economical and efficient manner. Another principal is the role of management, which stipulated that ensuring the compliance of a business with the regulatory requirements and the responsibility of the organization’s activities were the manager’s duties. This principle was put in place to ensure that the FSA does not unnecessarily interfere with the business of other firms, and that the top most management would be held responsible for any controls and risk management within the association. This ensured adequate monitoring of the association’s activities and responsibility in the execution of its functions.

The principle of proportionality required that the association should only impose restrictions to a given business or organizations taking into account the benefits that would be expected from the restrictions. The FSA is required to factor into consideration the cost that would be incurred by both the consumers and the firms. To ensure this, the association employs a cost benefit analysis of the proposed requirements for regulation. The principle of innovation requires that regulation activities be facilitated with desirable innovation. For instance, the FSA could allow room for different compliance means in order to unduly restrict market participants from introducing new financial services and products. The principal of competition addresses the need to reduce the negative effects on competition resulting from the association’s activities and the desire by the association to oversee competition between the regulated firms. This principle ensures that unnecessary regulatory barriers in the expansion or entry to business are evaded. The last principle is the principle of international character which addresses the desire to maintain UK’s competitive position.

The Financial Services Association developed work in order to increase the level of capability and confidence among the consumers in the UK’s financial system. The work was distributed as a national strategy directed towards building financial stability. The association started a program for reviewing retail distribution in 2006 which the association believed would improve the level of consumer confidence in the market of retail investments. Management of the association was independent and as a result was not liable to the parliament or the treasury minister. The association was also free of government interference as it was funded by the funds received from other firms it regulated through compulsory levies, fees and fines imposed. The regulatory decisions of the Financial Services Association could be appealed to the Financial Services and Markets Tribunal. The associations also receives advice on consumers concerns and interests from the Financial Services Consumer Panel, which is an independent body that addresses the issues affecting the financial services of the consumers.

The association is also faced by its own share of challenges. For instance, due to its laxity in handling wider implication cases, there were several complains raised by the consumers to the Financial Ombudsman Service concerning bank charges and payment protection insurance. After the association had established that there was a problem, it took action against a few of the firms imposed in the case till the Office of Fair Trading stepped in to take the over the role of the wider implication in the case that involved bank charges. The Financial Services Association was also condemned for increasing the fees charged to firms and their perceived retroactive actions of enforcing current standards to historic business practices.

Research Findings

The financial regulation system in UK is unique compared to the kind of systems used in majority of other countries. The Financial Services Association’s uniqueness is brought about by the fact that it is a private company that discharges public functions. The association is not structured as an independent branch of the bureaucracy of the state like it is in majority of the countries but is instead structured as a company limited by guarantee. Unlike the financial regulations system in China that are financed by the government, the financial regulation system in UK is financed by the industries within the finance industry that it regulates as opposed to the state budget. Another unique difference in the financial regulation system in the UK is the fact that the Financial Services Association is accountable to the treasury of the UK which has the power to both dismiss and appoint the board. The uniqueness is brought about by the fact that the UK system has evaded government interference in its business.

The Financial Services Association of UK, unlike majority of the financial regulation systems, it gives a soft approach when handling issues of financial regulation by using broad guidance and principles that have close but informal collaboration with the industry. There is also a great relationship between the Financial Services Association, the central bank of UK, and the Bank of England. The Bank of England was established which then later assigned banking supervision responsibilities to the Financial Services Association. The memorandum of understanding between the treasury, the Bank of England, and the Financial Services Association accounts for the overall stability of the financial regulation system in UK. Following the global financial crisis, the role played by the Bank of England was increased which saw the statutory objectives for maintaining stability in UK’s financial system handed over to the bank.

On the other hand, the People’s Bank of China, being China’s central bank, has the mandate for formulating and implementing monetary policies, maintaining the stability of the financial sector under the State Council’s leadership, and reduction of the financial risks involved. The People’s Bank of China also aims at stabilizing China’s financial system and currency through indirect macro-economic means as compared to the direct interventionist approach. The Central bank, through such monetary tools as open market operations, deposit reserves, interest rates, and rediscount rates, ensures that there is micro-economic regulation on the financial markets. Securities have also experienced a rapid growth in the Chinese financial markets due to its significance in rescuing the financial situation which saw it accorded high priority by the leadership of China. The system in the UK contrasts from the Chinese system of financial regulation in that the one in UK is more stable unlike the one in China, which is still under major transition due to significant changes over time in the financial markets.

Unlike in the UK where the Financial Services Association operates independently free from government interference, as it is a private body discharging public functions, the financial regulation system in China has been associated with lack of regulatory independence for a long time. As much as the law of the central bank is aimed at preserving some measures for itself, there is lack of independence. This is illustrated in the way the functions of the People’s Bank of China are run. For instance, the law of the People’s Bank of China states that “the People’s Bank of China shall, “under the leadership of the State Council …” which implies that the state has major control on the People’s Bank of China. The three major commission in China in charge of financial regulations also barely have full independence from the government. Taking for instance the CBRC, that was formally the central government’s instrument, makes it vulnerable to the direct leadership of the State Council. Other than the CBRC being referred to as “a banking supervision institution of the State Council, all its leaders are appointed by the State Council which makes them accountable to the Premier.

The CBRC’s authority has also been weakened by the role played by the state in the Chinese financial markets. The financial system in China is highly concentrated with the state taking the largest share in domination. Lack of independence is also evident between the governmental and non-governmental regulatory bodies. The system of financial regulation in China is also faced with the challenge of financial modernization and innovation as a result of her traditional regulatory structure. The recent developments in the financial markets of China have exerted a lot of pressure on China’s financial regulation. As a result, China has followed the international trend, a process referred to as financial modernization, which involves eliminating the structural barriers that hinder financial markets and restrict institutions to conducting a specific line of business. The current financial innovation and modernization process in progress that has resulted in the sprouting of complex cross-sectional products in the finance industry and large financial conglomerates offering a variety of services, has resulted into a significant transition in the operation of the Chinese financial markets.The financial regulation cost in China has also been increased by the differences between the market that she regulates and her regulatory structure which has resulted in gaps and overlaps in the coverage of the regulatory structure.

On the other hand, as the CBRC’s authority is being weakened by the role played by the state in the Chinese financial markets, the role played by the bank of England in the UK was increased, which bestowed more power on the bank to maintain the stability of the financial system in the UK. The Bank of England was also put in Charge of establishing the Financial Stability Committee. Another difference that would be worth noting is the contrast in the interests of these two systems. For instance, the financial regulation system in the UK is more focused on building consumer and investors’ confidence and trust and stabilizing the UK’s financial system while on the other hand, the Chinese system of financial regulation is more market oriented and aims at transitioning to meet up the demands of the financial markets. The leadership structure in the countries also differs as the Chinese financial regulation system has more dictatorship from the government as all its leaders are liable to the State Government as compared to that in the UK where by the leadership is neither liable to the Government nor the member of parliament as it is fully independent. The UK system makes its decisions independently.

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