Regulation Flashcards
Define self-regulation
Operated and organized by the participants
Without government/legislative/regulatory intervention
Ad and disad of self-regulation
Implemented and managed by those with best knowledge
Great incentives to achieve optimal cost/benefit balance
Respond quickly to market needs
Easier to persuade participants to cooperate with self-regulated entity
Closeness means that it might not be truly independent
Might not lead to strict enough regulation and result in low public confidence
Lead to barriers for new participants
Incentive for self-regulation
Regulation is an economic good
Consumers of financial services are willing to pay for
Benefits all participants
Government may threaten to impose statutory regulation if an adequate self-regulatory system is not implemented
six roles of state in provision of benefits
Direct provision of benefits
sponsoring the provision of benefits
provision of financial incentives through tax system
education
regulation to encourage or compel benefit provision
regulation for benefit providers
provide financial instrument
eight ways of SA government to regulate the cost or level of life assurance benefits
Restricting distribution channel and commission scales
restricting which investments are held
regulating independent ombud schemes
regulating information provided to policyholder on sale
requiring life insurers to prove solvency regularly
requiring sales staff to be ‘fit and proper’
preventing monopolies and encouraging competition
taxing benefits
regulation of microinsurance and funeral insurance limiting the sum insured
8 conditions for POPIA
Accountability - conditions and all the measures in the act are complied
processing limitation - processed in a fair and lawful manner
purpose specific - only be processed for specific, explicitly defined and legitimate reasons
further processing limitation - may not be processed for a secondary purpose unless is compatible with the original purpose
information quality - ensure that personal information is complete, accurate not misleading and updated where necessary
openness - the subject must be aware that you are collecting such personal information the its purpose
security safeguards - kept against risk of loss, unlawful access, interference
data subject participation - subjects may request info on their information
Functions of regulator
Influencing and reviewing government policy
Registration and vetting of firms to conduct business
Supervising the prudential management
Enforcing regulations and investigating breaches
Providing information to consumer and the public
Five types of regulatory regimes
Unregulated markets
Voluntary codes of conduct
Self-regulation
Statutory regulation
Mixed regimes
main benefits associated with regulation of financial services
correct perceived market efficiencies and promote efficient and orderly markets
(in which the investors can trade confidently and fairly)
(such as by ensuring that investors have adequate information)
protect consumers of financial products
(against losses due to fraud or mismanagement)
(but not against losses arising purely from market movements)
maintain confidence in the financial system
(so that it continues to operate effectively for the greater good of society)
help reduce financial crime
(vetting firms and individuals authorised to conduct certain activities)
(and by enforcing regulations)
(investigating suspected breaches)
(imposing sanctions)
limit the likelihood of failure of major financial institutions
(to reduce the likelihood of the government or central bank having to step in as lender of last resort)
direct and indirect costs of regulations
direct costs:
administering the regulation
complying with it
normally be passed on to end investor/policyholder as higher charges
indirect costs:
change in behaviour of consumers
(from false sense of security)
(reduced sense of responsibility)
undermining of professional responsibility for advisors
(less incentive to provide optimal advice)
reduction in customer protection mechanism from the market
(since consumers are protected by regulation)
reduced product innovation
(additional cost of complying with reglations)
reduced competitions
(additional constraints imposed by the regulations on the providers)
areas where regulation can be expected to influence the operations of a DB fund
Investment regulation
tax regulation
governance related regulation
regulation of benefits
regulation on fees and expenses which can be deducted
regulation around timing of contribution and benefits
regulation if the fund should wind-up
regulation around options at retirement
regulation around member communication
measures that regulator can implement to maintain consumer confidence in financial markets
Capital adequacy:
hold sufficient financial resource to cover liabilities
can include capital, cash, liquid securities
require sufficient margins in place to meet liabilities in adverse scenarios as well
regulator may prescribe methods of calculating such margins
or allow companies to model it with prescribed framework
Competence and integrity;
ensure practitioners operate with a minimum standard of competence and integrity
may have to prove by obtaining specified qualifications
prevent someone from working in a industry/level if they dont meet ‘fit and proper’ requirements
Compensation schemes:
may establish compenstation schemes funded by government/industry to recompensate consumers
cover losses due to fraud and mismanagement
not market related losses
may be limited to a maximum to incentivise investors to consider financial integrity of investors
Stock exchange requirements:
listed companies will have to fulfil criteria regarding financial stability
Aims of climate change regulations being considered by regulators
Consider climate risks in business decision making and strategic planning
Effectively disclose and report on climate-related risks and opportunities
Adopt a consistent and reliable means of assessing, pricing, and managing climate-related risks
Incorporate ESG factors into investment management decisions
Incorporate financial risks from climate change into existing risk management processes
Use scenario analysis to inform risk identification and to estimate the impact of financial risks arising from climate change
Consider the impact of climate risks on the ability to meet obligations towards policyholders and other key stakeholders
