Chapter 3 Flashcards
(14 cards)
What are the aims of climate change related financial regulators
Consider, disclose and report, assess, price, manage, consider impact on phL, risk management process, ESG investment management
* Consider climate risks in business decisions and 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 into investment management decisions
* Incorporate fin risks from climate change into existing risk management process
* Use scenario analysis to inform risk identification and to estimate impact of fin risks arising from climate change
* Consider impact of climate risks on ability to meet obligations towards phs and other key stakeholders
Define information asymmetry
At least one party to a transaction has relevant information which the other party/parties don’t have. (Comes in the form of anti-selection, moral hazard or fraud)
What are the functions of a regulator
SIEVE
* S – Supervising
o the prudential management and conduct of financial organisations.
* I – Influencing
o Influence and review government policy related to the financial sector.
* E – Enforcing
o Enforce regulations, investigate suspected breaches, and impose sanctions.
* V – Vetting
o Vet and register firms and individuals authorised to conduct financial business.
* E – Educating
o Provide information to consumers and the public to support informed decision-making.
Define anti-selection
People will be more likely to take out contracts when they believe their risk is higher than the insurance company has allowed for in its prems
Define moral hazard
The action of a party who behaves differently from the way they would have if they were exposed to the consequences of that action. The party behaves inappropriately or less carefully than they would otherwise, leaving the org to bear some of the consequences of that action
What are the forms of regulation
Prescribes, freedom of action and outcome-based
What are the advantages of statutory regulation compared to other forms
C.L.E.A.R.
* Advantages
* Consumer Protection
* Legal Enforcement
* Equal Standards
* Accountability to Public
* Removal of Industry Bias
How does regulation address maintaining confidence in financial systems
Capital requirements
Competence and integrity
Stock exchange requirements
Compensation schemes
Ensure transparency and protection
Name the regulatory regimes
Unregulated markets and LoBs
Voluntary codes of conduct
Self-regulation
Statutory regulation
What are the disadvantages of statutory regulation compared to other forms
BURDEN
* Bureaucratic Delays
* Uncooperative Industry
* Rigid Rules
* Disengaged Participants
* Expensive to Run
* Not Always quick
How do regulators deal with information asymmetries?
Disclosure and education
Conflicts of interest - insider trading reg, Chinese walls, separate functions
Negotiation - consumer position is weak - price controls and regulating selling practices
Unfair features of contracts
TCF
What are the costs of regulation for a firm?
Direct costs:
Compliance costs = hiring legal experts and training staff= maintaining and collating records for regulator= any fees or levies that must be priced into prems=developing systems to track solvency and claims
Indirect costs:
* less of an incentive to protect consumers above the legal limit
* less competition
* less product innovation
What are the costs of regulation for a regulator?
- They need to develop the rules and guidelines
- They must collect and review all information provided by participants
- They must investigate potential breaches and take legal action where necessary
- They must administer the regulation
What are the aims of regulation?
CLEAR
Consumer protection
Limit P(failure) and systemic risk
Efficient and orderly markets
not be lender of last resort
Reduce financial crime
