2.6 Bank of England, Financial Institutions and Financial Crime

The Bank of England is at the centre of UK financial services. This section sets out its three core roles — monetary policy, financial stability, and prudential regulation — and then surveys the main categories of financial crime that the regulatory framework is designed to detect and prevent.

The Bank of England

The Bank of England is the UK's central bank, owned by HM Treasury. It was nationalised in 1946 and given operational independence for monetary policy in 1997. It is led by the Governor of the Bank of England and operates under the Bank of England Act 1998 and the Financial Services Act 2012 (as amended by FSMA 2023).

graph TD
    BoE["Bank of England"] --> MPC["Monetary Policy Committee (MPC)"]
    BoE --> FPC["Financial Policy Committee (FPC)"]
    BoE --> PRA["Prudential Regulation Authority (PRA)"]
    BoE --> FMI["Financial Market Infrastructure Supervision"]
    BoE --> RTGS["RTGS / Payment Systems"]

Monetary policy

The Monetary Policy Committee (MPC) sets the official Bank Rate to meet the government's inflation target (currently a 2% CPI inflation rate, set annually by HMT). The MPC has nine members (Governor, three Deputy Governors, the Bank's Chief Economist, and four external members appointed by the Chancellor). It meets eight times a year.

The MPC's main tools are:

• Bank Rate — the interest paid on reserves that banks hold at the Bank, which anchors other short-term rates (including mortgage and savings rates).
• Asset purchases (quantitative easing / tightening) — buying or selling gilts and corporate bonds to influence long-term yields and the money supply.
• Forward guidance — communicating the likely path of future policy.

When inflation is above target, the MPC typically raises Bank Rate; when below, it cuts. The Bank's monetary policy actions directly affect the cost of mortgages and the return on savings, so they matter to every retail client.

Lender of last resort

The Bank acts as lender of last resort — it can lend to a solvent but illiquid bank against good collateral when market funding is unavailable. This role was formalised in the 19th century (Bagehot's dictum: 'lend freely at a penalty rate against good collateral') and was used during the 2008 crisis. Emergency liquidity assistance is decided by the Governor under conditions set by the Court of the Bank.

Financial stability

The Financial Policy Committee (FPC), established in 2013, identifies, monitors and takes action to address systemic risks to UK financial stability as a whole — distinct from the PRA, which looks at individual firms. The FPC publishes the Financial Stability Report twice a year, sets the countercyclical capital buffer rate for UK banks, and can make recommendations to the PRA, the FCA and HM Treasury. The FPC's July 2026 meeting considered the macrofinancial implications of AI for financial stability.

Prudential Regulation Authority

The Prudential Regulation Authority (PRA) is part of the Bank of England. It regulates around 1,500 banks, building societies, credit unions, insurers and major investment firms for safety, soundness and policyholder protection. Its statutory objectives are:

• A general objective to promote the safety and soundness of PRA-authorised firms.
• An insurance objective specifically to protect policyholders.
• A competition objective (subject to the primary objectives).

The PRA's rules form the PRA Rulebook, which implements Basel standards in the UK. It supervises firms through on-site inspections, capital and liquidity reporting, stress testing, and Senior Manager Regime approvals. The PRA confirmed the FSCS deposit protection limit increase to £120,000 effective 1 December 2025 (PS9/25 / PS24/25).

Financial market infrastructure supervision

The Bank supervises financial market infrastructures — clearing houses (LCH, ICE Clear Europe), payment systems (CHAPS, RTGS) and securities settlement systems (CREST, operated by Euroclear) — under the Financial Market Infrastructure Supervision regime. The FCA supervises recognised investment exchanges such as the LSE.

Main Types of Financial Crime

Financial crime is a perimeter risk for the FCA, the PRA, the Bank and the National Crime Agency. The Proceeds of Crime Act 2002, the Money Laundering Regulations 2017, the Bribery Act 2010, the Computer Misuse Act 1990 and the Criminal Justice Act 1993 are the principal statutes. The main categories are:

Fraud

Fraud is dishonestly making a personal gain or causing a loss to another. Investment fraud includes Ponzi schemes, boiler-room share sales, pension scams and APP (authorised push payment) fraud. The FCA's ScamSmart campaign and the Take Five to Stop Fraud initiative target retail investors. APP fraud reimbursement is now mandatory under the Payment Systems Regulator's rules, with a reimbursement limit of £85,000 per claim from 7 October 2024.

Money laundering

Money laundering is the process of disguising the criminal origin of funds, with three stages:

1. Placement — introducing illicit cash into the financial system.
2. Layering — moving it through layers of transactions to obscure its source.
3. Integration — returning it to the criminal as apparently legitimate wealth.

UK firms must perform customer due diligence, monitor transactions, report suspicious activity to the National Crime Agency (Suspicious Activity Reports), and apply enhanced due diligence to high-risk customers.

Terrorist financing

Terrorist financing is providing or collecting funds knowing they are to be used for terrorism. It is closely related to money laundering but is a distinct offence under the Terrorism Act 2000. Financial institutions must freeze the assets of designated individuals and entities and report matches.

Bribery and corruption

The Bribery Act 2010 creates four offences: bribing another person, being bribed, bribing a foreign official, and failing to prevent bribery by an associated person (the corporate offence). Firms must have 'adequate procedures' to prevent bribery; these are the only defence to the corporate offence.

Cybercrime

Cybercrime includes hacking, ransomware, distributed denial-of-service attacks and account takeover. The financial sector is a top target. Operational resilience rules (PRA SS1/21 and the FCA's PS21/3) require firms to identify important business services, set impact tolerances, and remain within them during severe but plausible disruption.

Insider dealing and market abuse

Insider dealing is trading on inside information (the Criminal Justice Act 1993). Market abuse is a broader civil concept under the UK Market Abuse Regulation (now in the FCA Handbook, MAR), covering insider dealing, unlawful disclosure, market manipulation and attempted manipulation. The FCA publishes alerts about suspicious transactions and can impose unlimited financial penalties.

Impacts of Financial Crime

Financial crime harms the system in five ways:

The FCA, the PRA, the Bank and law enforcement share responsibility for detecting and deterring financial crime; firms have primary responsibility under their senior manager regimes and the FCA's Financial Crime Guide.

Key Takeaways for the Exam

• The Bank of England sets monetary policy (MPC), safeguards financial stability (FPC), supervises FMIs and acts as lender of last resort.
• The PRA, part of the Bank, regulates banks, building societies, insurers and major investment firms.
• The main financial crime categories are fraud, money laundering, terrorist financing, bribery and corruption, cybercrime, insider dealing and market abuse.
• Firms are the first line of defence: CDD, monitoring, SARs, adequate procedures, operational resilience and market-abuse controls.
• Financial crime imposes direct losses, higher costs, reduced trust, reputational damage and systemic risk.