On May 26, the UK Financial Conduct Authority (FCA) published an occasional paper (Paper) on “market-based finance” (MBF). The Paper, written by staff in the FCA’s Chief Economist’s Department, expands on the general concept of shadow banking (credit intermediation carried out by non-banks) and focuses on the FCA’s concept of MBF—which it notes is set apart from the traditional model of banking because, in MBF, aspects of credit intermediation are carried out and priced on global markets for money and risk.  

The FCA’s Paper has three objectives, which include:

  • to understand the factors that have pushed traditional banking toward a model that is “increasingly global and market-based;”
  • to develop a framework to understand how MBF impacts consumer welfare, and to identify any risks; and
  • to collate information on recent developments in MBF and discuss any impacts on the FCA as a securities and conduct regulator.

According to the FCA, MBF is “an enormously important part of the financial system” and is “here to stay”—being an important contributor to consumer welfare. The Paper reports that MBF bolsters consumer welfare by (1) giving borrowers access to a range of investors and risk preferences; (2) increasing ease of access to credit; and (3) catering to the needs of a range of investors through customisable products (among others). However, the FCA also concludes in the Paper that MBF is not without significant risks, and can be complex and unstable. The FCA feels that MBF must be properly understood to be regulated, and notes that regulators need access to data in order to determine if policy intervention is necessary.

The Paper is available here.

The FCA’s accompanying press release is available here.