HM Treasury and Financial Regulation
So far, we have looked at three important parts of the UK financial system:
- the Bank of England
- the Financial Conduct Authority (FCA)
- the Prudential Regulation Authority (PRA)
However, another organisation sits at the heart of the UK’s economic and financial policy.
This is HM Treasury.
HM Treasury is the UK Government’s economic and finance ministry.
Therefore, it has a very different role from the FCA or PRA.
In simple terms:
HM Treasury helps shape the Government’s economic and financial policy.
Meanwhile, regulators such as the FCA and PRA carry out their regulatory roles within the framework set by law.
Understanding this difference will make the UK’s financial system much easier to follow.
What Is HM Treasury?
HM Treasury, often simply called the Treasury, is a UK Government department.
It is responsible for important areas of economic and financial policy.
For example, its work includes:
- public spending
- taxation policy
- government borrowing
- financial services policy
- economic policy
- financial stability arrangements
Therefore, Treasury decisions can affect households, businesses and financial firms.
In turn, they can also affect the mortgage and housing markets.
HM Treasury Is Not a Bank
Despite the word Treasury, HM Treasury is not a bank.
For example, it does not normally:
- provide current accounts
- take customer deposits
- offer mortgages
- provide credit cards
Instead, it is a government department.
Therefore, its role is mainly concerned with managing and developing government economic and financial policy.
This makes it very different from a commercial bank or building society.
HM Treasury Is Not a Financial Regulator
Another important point is that HM Treasury is not the same as the FCA or PRA.
The Treasury helps shape the legal and policy framework for financial services.
However, day-to-day financial regulation is carried out by regulatory bodies.
Therefore:
HM Treasury
Think:
Government economic and financial policy
FCA
Think:
Conduct, markets and consumers
PRA
Think:
Safety and soundness of certain financial firms
Keeping these roles separate is important.
Who Leads HM Treasury?
HM Treasury is led politically by the Chancellor of the Exchequer.
The Chancellor is one of the most senior members of the UK Government.
Among other responsibilities, the Chancellor has a major role in decisions about:
- taxation
- government spending
- borrowing
- economic policy
Therefore, when you hear news about the Budget, tax changes or government spending plans, the Chancellor and HM Treasury are usually central to the story.
What Is the Budget?
The Budget is an important government financial statement.
Through the Budget, the Government can announce changes to areas such as:
- taxation
- public spending
- borrowing
- financial policy
Therefore, Budget decisions can affect both households and businesses.
For example, changes could affect:
- income tax
- property taxes
- savings
- business taxes
- government support schemes
As a result, some Budget decisions can also affect the housing and mortgage markets.
A Simple Housing Example
Imagine the Government changes the tax paid when certain properties are purchased.
As a result, the cost of buying a home may change for some buyers.
This could affect:
- how much money a buyer needs
- the size of their available deposit
- demand for property
- decisions about when to buy
Therefore, government tax policy can sometimes affect mortgage customers even though HM Treasury does not provide mortgages itself.
This is an important link to understand.
Government Spending
HM Treasury also plays a major role in government spending.
The Government raises money through taxation and other sources.
It then spends money on public services and other priorities.
For example, public spending can include areas such as:
- health
- education
- defence
- transport
- benefits
- housing programmes
Therefore, HM Treasury has to consider how public money is raised and how it is spent.
This forms part of fiscal policy.
What Is Fiscal Policy?
Fiscal policy means the Government’s use of taxation, spending and borrowing to influence the economy and manage the public finances.
For example, the Government could:
- change taxes
- increase spending
- reduce spending
- borrow more
- borrow less
Therefore, fiscal policy can affect the level of demand in the economy.
In turn, this can affect areas such as:
- economic growth
- employment
- inflation
- household finances
As a result, fiscal policy can eventually affect mortgage customers as well.
Fiscal Policy Versus Monetary Policy
This is an important difference to understand.
Fiscal Policy
Mainly involves:
Government taxation + spending + borrowing
Therefore, think:
HM Treasury and the Government
Monetary Policy
Mainly involves actions designed to influence inflation and monetary conditions.
For example, this includes setting Bank Rate.
Therefore, think:
Bank of England and the Monetary Policy Committee
A simple way to remember the difference is:
Fiscal = Government money
Monetary = Interest rates and monetary conditions
This distinction will appear again during CeMAP.
A Simple Comparison
Imagine inflation is too high.
The Government could make decisions involving taxation or spending.
These would be part of fiscal policy.
Meanwhile, the Bank of England’s Monetary Policy Committee could change Bank Rate.
That would be part of monetary policy.
Therefore, different organisations can influence the economy in different ways.
However, their decisions can interact.
Government Borrowing
Sometimes, the Government spends more money than it receives in revenue.
As a result, it may need to borrow.
Government borrowing is mainly carried out by issuing debt, including government bonds.
In the UK, these bonds are commonly called gilts.
Investors lend money to the Government by buying these securities.
In return, the Government agrees to make payments according to the terms of the gilt.
Therefore:
Government needs to borrow
↓
Gilts are issued
↓
Investors provide funds
↓
Government receives borrowing
The real market is more complex.
However, this gives you the basic idea.
Why Do Gilts Matter?
At first, government bonds may seem unrelated to mortgages.
However, financial markets are connected.
Gilt yields can influence wider market interest rates and the cost of longer-term borrowing.
In addition, expectations about inflation and Bank Rate can affect bond markets.
Therefore, movements in government bond markets can form part of the wider financial conditions that influence lenders.
As a result, a mortgage adviser benefits from understanding that mortgage rates do not exist in isolation.
HM Treasury and Financial Services
HM Treasury also has important responsibilities for financial services policy.
For example, the Government and Parliament create the laws that provide the framework for financial regulation.
The Treasury can therefore be involved in developing policies that affect:
- financial regulation
- banking
- insurance
- mortgages
- consumer finance
- financial markets
However, regulators then carry out their responsibilities within that framework.
Therefore, it is useful to separate:
Making the legal and policy framework
from
Applying and enforcing regulatory rules
Who Makes Financial Law?
Financial regulation ultimately sits within a legal framework created through legislation.
Parliament passes Acts of Parliament.
Meanwhile, the Government can also make certain forms of secondary legislation where it has legal power to do so.
HM Treasury often has an important role in developing financial services legislation and policy.
Therefore, the basic chain can look like this:
Government develops policy
↓
Parliament passes legislation
↓
Regulators receive legal powers and duties
↓
Regulators make and apply detailed rules within those powers
↓
Financial firms follow the rules
This helps explain where regulatory authority comes from.
The Financial Services and Markets Act
One particularly important piece of legislation is the Financial Services and Markets Act 2000, usually shortened to FSMA.
FSMA created a major part of the UK’s modern financial regulatory framework.
It has since been amended and developed through further legislation.
For CeMAP, FSMA is important because it helps provide the legal framework for regulated financial services.
Therefore, you will see it again later.
For now, remember:
FSMA = Financial Services and Markets Act 2000
We will study it properly on a later page.
Where Does the FCA Get Its Powers?
The FCA does not simply decide for itself that it has authority over financial firms.
Instead, its powers and responsibilities come from legislation.
FSMA is a major part of this legal framework.
Therefore, Parliament provides the legal foundation, while the FCA carries out its regulatory role within that framework.
For example, the FCA can:
- authorise firms
- make regulatory rules
- supervise firms
- investigate misconduct
- take enforcement action
However, these powers must have a legal basis.
Where Does the PRA Get Its Powers?
The PRA also operates within a legal framework.
As we learned earlier, the PRA is part of the Bank of England.
It has responsibilities for the prudential regulation of certain financial firms.
For example:
- banks
- building societies
- credit unions
- insurers
- certain investment firms
Therefore, legislation gives the PRA its regulatory responsibilities.
Meanwhile, HM Treasury and Parliament form part of the wider system that creates and changes the legal framework.
The Regulatory Chain
At this stage, the UK financial regulatory system may seem complicated.
However, we can simplify it.
Parliament
Passes legislation.
↓
Government and HM Treasury
Develop financial and economic policy and bring forward legislation.
↓
Bank of England, PRA and FCA
Carry out their legal responsibilities.
↓
Financial firms
Follow the relevant laws and regulatory rules.
↓
Customers
Receive financial products and services within this regulated system.
Therefore, each part has a different role.
Who Is Responsible for What?
Let’s compare the main organisations we have covered.
HM Treasury
Main focus:
Government economic and financial policy
For example:
- tax policy
- public spending
- government borrowing
- financial services policy
Bank of England
Main focus includes:
Monetary and financial stability
For example:
- Bank Rate
- monetary policy
- financial stability
PRA
Main focus:
Prudential regulation
For example:
- capital
- liquidity
- financial resilience
- safety and soundness
FCA
Main focus:
Conduct and markets
For example:
- consumer protection
- financial conduct
- customer outcomes
- financial promotions
- mortgage conduct rules
Therefore, the organisations work within the same financial system but have different jobs.
What Happens During a Financial Crisis?
The different parts of the system become particularly important during periods of financial stress.
Imagine several major financial firms experience serious problems.
The response could involve different organisations.
For example:
Bank of England
May act within its responsibilities for monetary and financial stability.
Meanwhile:
PRA
May focus on the safety and soundness of regulated firms.
At the same time:
FCA
May focus on conduct, markets and consumer issues.
Finally:
HM Treasury
May become involved in government policy and decisions about public finances.
Therefore, major financial problems can require several organisations to work together.
The Financial Services Compensation Scheme
The wider regulatory system also includes the Financial Services Compensation Scheme, or FSCS.
The FSCS can provide compensation to eligible customers when certain authorised financial firms are unable to meet claims against them.
For example, protection can apply to eligible deposits within the relevant limits.
However, the exact protection depends on the type of product and the circumstances.
Therefore, do not assume that every financial loss is covered.
We will study the FSCS in detail later.
The Financial Ombudsman Service
Another important organisation is the Financial Ombudsman Service, or FOS.
The FOS helps resolve eligible complaints between consumers and financial businesses.
For example, a customer may complain to a mortgage firm.
If the complaint is not resolved to the customer’s satisfaction, they may be able to take it to the FOS, subject to the relevant rules.
Therefore, the FOS forms another part of the wider consumer protection system.
Regulation Has Several Layers
By now, you can see that financial regulation is not controlled by one organisation.
Instead, there are several layers.
For example:
Law
Sets the legal framework.
↓
Regulators
Create and enforce detailed requirements within their powers.
↓
Financial firms
Put those requirements into practice.
↓
Complaints and compensation systems
Provide additional consumer protection where relevant.
Therefore, understanding the system becomes easier when you think in layers.
How Can Treasury Decisions Affect Mortgages?
HM Treasury does not set mortgage rates.
However, its decisions can still affect the mortgage market.
For example, Treasury and government policy can influence:
- property taxation
- household finances
- housing schemes
- economic activity
- government borrowing
- financial regulation
In turn, these factors can affect buyers, lenders and the housing market.
Therefore, government policy forms part of the wider environment in which mortgage advice takes place.
A Simple Mortgage Example
Imagine the Government introduces a housing scheme designed to help certain buyers purchase a home.
As a result, some customers may have access to support that changes how they fund their purchase.
A mortgage adviser may then need to understand:
- who qualifies
- how the scheme works
- how it interacts with a mortgage
- what restrictions apply
- whether participating lenders have additional requirements
Therefore, government housing policy can become directly relevant to mortgage advice.
Why Does a Mortgage Adviser Need to Know This?
A mortgage adviser does not need to become an expert in government finance.
However, they do need to understand the system in which mortgage lending operates.
For example, government decisions can affect:
Tax
↓
Household finances
↓
Property costs
↓
Housing demand
↓
Mortgage decisions
Meanwhile, financial regulation can affect:
Lenders
↓
Mortgage products
↓
Advice
↓
Customers
Therefore, wider financial policy can eventually affect an individual mortgage customer.
Don’t Confuse Policy With Regulation
This is an important distinction.
Policy
Decides the broad direction or objective.
For example:
The Government wants to change part of the financial services framework.
Legislation
Provides the legal framework.
For example:
Parliament passes a law.
Regulation
Applies detailed requirements within that legal framework.
For example:
The FCA makes and enforces rules using its legal powers.
Therefore:
Policy → Law → Regulation → Firms → Customers
This is simplified.
However, it is a useful way to understand the process.
Fiscal Policy and Mortgages
Let’s return briefly to fiscal policy.
Imagine the Government reduces a tax affecting some home purchases.
This could reduce the amount of money certain buyers need for transaction costs.
As a result, some buyers may have more money available towards their purchase.
On the other hand, a tax increase could increase the overall cost.
Therefore, fiscal policy can affect property decisions even though it does not directly determine the mortgage interest rate.
Monetary Policy and Mortgages
Now compare this with monetary policy.
Suppose the Bank of England raises Bank Rate.
As a result, borrowing conditions may become more expensive.
Some mortgage rates could then rise.
Therefore, monthly mortgage costs may increase for some borrowers.
So, remember:
Fiscal policy can affect taxes, spending and household finances.
Meanwhile:
Monetary policy can affect interest rates and borrowing conditions.
Both can affect mortgage customers, but in different ways.
The Bigger Picture
We can now connect the organisations covered so far.
HM Treasury
Shapes government economic and financial policy.
↓
Bank of England
Supports monetary and financial stability.
↓
PRA
Supervises the financial strength of certain firms.
↓
FCA
Regulates conduct, markets and customer outcomes within its responsibilities.
↓
Financial Firms
Provide products such as mortgages.
↓
Mortgage Advisers
Help customers understand and choose suitable mortgage options.
↓
Customers
Make financial decisions within this system.
Therefore, mortgage advice sits at the end of a much larger chain.
Key Terms to Remember
HM Treasury
The UK Government’s economic and finance ministry.
Chancellor of the Exchequer
The government minister who leads HM Treasury politically.
Fiscal Policy
Government decisions involving taxation, spending and borrowing.
Monetary Policy
Actions designed to influence inflation and monetary conditions.
Budget
An important government statement covering areas such as tax, spending and public finances.
Government Borrowing
Money borrowed by the Government to help finance spending.
Gilt
A UK Government bond.
FSMA
Financial Services and Markets Act 2000.
Legislation
Law made through the legal process.
Regulation
Rules and requirements applied within the legal framework.
Quick Knowledge Check
Before moving on, let’s check what you have learned.
1. What is HM Treasury?
The UK Government’s economic and finance ministry.
2. Who leads HM Treasury politically?
The Chancellor of the Exchequer.
3. What is fiscal policy?
Government decisions involving taxation, spending and borrowing.
4. What is the basic difference between fiscal and monetary policy?
Fiscal policy mainly involves government tax, spending and borrowing, while monetary policy involves actions such as Bank Rate designed to influence inflation and monetary conditions.
5. Who sets Bank Rate?
The Bank of England’s Monetary Policy Committee.
6. What is a gilt?
A UK Government bond.
7. What does FSMA stand for?
Financial Services and Markets Act.
8. Does HM Treasury regulate the day-to-day conduct of mortgage advisers?
No. The FCA carries out conduct regulation within its responsibilities.
9. Can government policy affect the mortgage market?
Yes. For example, tax, housing, spending and financial policies can affect households and the property market.
10. Why does financial regulation need legislation?
Because regulators need a legal basis for their powers and responsibilities.
Quick Summary
To sum up, HM Treasury is the UK Government’s economic and finance ministry.
It plays an important role in areas such as:
Tax
↓
Government spending
↓
Government borrowing
↓
Economic policy
↓
Financial services policy
Therefore, Treasury decisions can affect households, businesses and financial firms.
However, HM Treasury is not the same as a financial regulator.
Instead:
HM Treasury → Government economic and financial policy
Bank of England → Monetary and financial stability
PRA → Prudential regulation
FCA → Conduct, markets and consumers
In addition, remember the difference between two important types of economic policy:
Fiscal policy → Tax + spending + government borrowing
Monetary policy → Interest rates and monetary conditions
Finally, financial regulation operates within a legal framework created through legislation.
Therefore, a useful way to see the system is:
Government policy → Legislation → Regulators → Financial firms → Customers
Understanding this structure will make the regulation sections of CeMAP much easier to follow.
Next Page
How Banks, Building Societies and Other Financial Firms Work