4.4.4 The regulation of the financial system

• Financial markets include stock markets, bond markets, and foreign exchange markets
• What is the role of the Financial Conduct Authority (FCA)?

  Regulates conduct of financial firms
• The Financial Stability Board monitors global financial stability.


  True
• Financial markets provide platforms where financial instruments are traded
• Match the objective of financial regulation with its description:

  Maintaining Financial Stability ↔️ Ensuring the safety of financial institutions

  Protecting Consumers ↔️ Safeguarding consumer interests

  Promoting Competition ↔️ Encouraging an efficient financial sector
• What do liquidity requirements ensure financial institutions hold?

  Liquid assets for short-term obligations
• Order the steps involved in financial regulation enforcement actions:

  1️⃣ Non-compliance is identified

  2️⃣ Investigation is conducted

  3️⃣ Penalties or fines are imposed

  4️⃣ Compliance is monitored
• Capital requirements ensure financial institutions hold a minimum level of capital to absorb losses
• Stress testing assesses financial institutions' performance under adverse economic conditions.

  True
• What do conduct of business rules govern?

  Behavior with consumers and investors
• What is the financial system used for?

  Transfer funds between savers and borrowers
• The Central Bank sets monetary policy and ensures financial stability.


  True
• The Prudential Regulation Authority (PRA) regulates the safety and soundness of financial firms
• What role does the financial system play in the economy?

  Allocates capital efficiently
• What is the main purpose of financial regulation?

  Ensure stability and proper functioning
• Capital requirements ensure financial institutions hold a minimum level of capital
• Stress testing assesses how financial institutions would perform under adverse economic conditions.


  True
• Match the regulatory tool with its description:

  Capital Requirements ↔️ Minimum capital to absorb losses

  Liquidity Requirements ↔️ Minimum liquid assets for obligations

  Stress Testing ↔️ Performance under adverse conditions

  Reporting and Disclosure ↔️ Regular reports on financial health
• Liquidity requirements ensure financial institutions hold a minimum level of liquid assets to meet short-term obligations
• Reporting and disclosure requires financial institutions to regularly report on their financial health and risk exposures.


  True
• What are enforcement actions imposed for?

  Non-compliance with regulations
• Liquidity requirements ensure financial institutions can meet their short-term obligations
• What is the purpose of reporting and disclosure requirements?

  To inform regulators and stakeholders
• Enforcement actions include penalties, fines, or restrictions for non-compliance with regulations.


  True
• Match the financial system component with its definition:

  Financial Institutions ↔️ Entities providing financial services

  Financial Markets ↔️ Platforms where instruments are traded

  Financial Instruments ↔️ Contracts representing financial claims
• Financial markets are platforms where financial instruments are traded
• Match the regulatory body with its role:

  Central Bank ↔️ Sets monetary policy and ensures stability

  Financial Conduct Authority (FCA) ↔️ Regulates firm conduct and protects consumers

  Prudential Regulation Authority (PRA) ↔️ Regulates safety and soundness of firms

  Financial Stability Board (FSB) ↔️ Monitors and recommends on global stability
• What is the primary role of the Financial Conduct Authority (FCA)?

  Regulates firm conduct and protects consumers
• The Financial Stability Board (FSB) monitors and makes recommendations on global financial stability.


  True
• What is an example of maintaining financial stability?

  Capital requirements for banks
• Promoting competition is a key objective of financial regulation.


  True
• Which regulatory bodies work together to achieve the objectives of financial regulation?

  Central Bank, FCA, PRA
• Capital requirements ensure financial institutions hold a minimum level of capital to absorb losses
• What do stress tests assess in financial institutions?

  Performance under adverse conditions
• Match the regulatory framework in the UK with its objectives:

  Basel III ↔️ Strengthen bank capital and liquidity

  MiFID II ↔️ Increase trading transparency

  PSD2 ↔️ Enhance payment security
• Regulatory frameworks are structured systems of rules and guidelines
• MiFID II aims to increase transparency
• What are the key benefits of regulatory frameworks in the UK financial sector?

  Stability, protection, competition
• Financial stability ensures the system can withstand economic shocks
• Match the regulatory tool with its impact on financial stability:

  Capital Requirements ↔️ Reduces insolvency risk

  Liquidity Requirements ↔️ Prevents liquidity crises

  Stress Testing ↔️ Identifies vulnerabilities

  Reporting and Disclosure ↔️ Improves transparency