FCA publishes report on Market-Based Finance

The FCA today published Occasional Paper No. 18: Market-Based Finance: Its Contributions and Emerging Issues. This paper provides an overview of the evolution as well as recent innovations in market-based finance (MBF). It argues that MBF is not merely an alternative way of providing banking-like services; it is in many ways a more efficient means of creating, distributing, and managing money, credit and risk globally. Properly regulated and supervised MBF can contribute to a dynamic and competitive financial services sector, develop new and innovative products to meet customers’ needs.

The paper has three broad objectives:

  • to better understand the factors that have transformed the relatively simple traditional banking model into one that is increasingly global and market-based
  • to develop an analytical framework to help us appreciate market-based finance’s (MBF) contribution to consumer welfare and identify its potential risks
  •  to gather information from various sources on recent developments and discuss their significance for the FCA as a securities markets and conduct regulator.

The paper concludes that MBF has grown in response to advances in financial engineering and the globalisation of funding and capital markets, enhancing efficiency through specialisation, giving it comparative advantages over the traditional (bank-based) model of finance. Specifically, it has achieved diversification of the types of funding available to loan-making institutions, geographical diversification of the investor base, and has contributed to the development of new products and services for risk distribution and management. The MBF ecosystem is constantly evolving, so new products and services which are currently not part of it can, over time, move inside the MBF perimeter if they become sufficiently large and interconnected.

Market-based finance has many benefits but there are some risks which should not be overlooked. The system is complex, still not very well understood and can at times be unstable. This is particularly true for some areas in which regulators have not yet gained access to data to assess the risks. For some products, unsolved market failures are present.

The FCA statement and the report are available here.

Lavanya Rathnam

Lavanya Rathnam is an experienced technology, finance, and compliance writer. She combines her keen understanding of regulatory frameworks and industry best practices with exemplary writing skills to communicate complex concepts of Governance, Risk, and Compliance (GRC) in clear and accessible language. Lavanya specializes in creating informative and engaging content that educates and empowers readers to make informed decisions. She also works with different companies in the Web 3.0, blockchain, fintech, and EV industries to assess their products’ compliance with evolving regulations and standards.

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