The Financial Conduct Authority published an Occasional Paper on the emerging issues and market contributions associated with market-based finance. The paper focuses on the more comprehensive concept of market-based finance, emphasizing the roles of markets and market-making mechanisms in the modern banking system. The FCA published the paper to better understand the impacts of market-based finance on the stability of the financial system as a whole. The FCA’s findings are based on a substantial review of existing literature on market-based finance, trade press and various web sources and discussions with internal and external stakeholders. 

The FCA concluded that the market-based finance system, if appropriately designed and supervised, can improve allocation of resources in the market place and reduce the cost of capital. In providing more diversified means of financing, the real economy is likely to become more resilient to adverse shocks and the diversification of financing means increased competition with the traditional banking sector. The FCA highlighted the potentially significant risks associated with market-based finance if not properly understood and regulated.  Issues of financial fragility can arise if associated infrastructure is badly designed and fails efficiently to distribute risks across the system. The FCA concluded that the greatest current risk is an insufficient understanding of the market-based finance system. In order to enhance currently regulatory framework, the FCA suggests that continued engagement with the market-based finance system on national and international levels is required.

View the Occasional Paper.