Chapter 4: Regulation Flashcards
4 Principle aims of regulations
G - Give & maintain confidence in the financial system
R - Reduce financial crime.
I - to correct perceived market inefficiencies and to promote efficient and orderly markets
P - to protect consumers of financial products
Direct costs of regulation
- administering the regulation
- compliance for the regulated firms
Indirect costs of regulation
P - reduced product innovation
- reduced competition
U - an undermining of the sense of professional responsibility amongst intermediaries and advisors
M - a reduction in consumer protection Mechanisms developed by the market itself
A - alteration in the behaviour of consumers, who may be given a false sense of security and a reduced sense of responsibility for their own actions
2 reasons for the need for regulation
- confidence
- asymmetric information
7 Functions of a regulator
- VETTING & registration of firms/indivs auth’d to conduct business
- check the PRUDENTIAL management of fin organisations and the way in which they conduct their business
- enforce REGULATIONS
- investigate BREACHES
- impose SANCTIONS
- Review & influence GOV POLICY
- EDUCATE consumers & the public
It will be necessary to regulate:
- deposit-taking institutions
- financial intermediaries
- securities markets
- professional advisors
- non-financial companies offering securities to the public
Information asymmetry
The situation where at least one party to a transaction has relevant information which the other party or parties do not have.
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 premiums.
Can also arise where existing policyholders have the opportunity of exercising a guarantee or an option. Those who have most to gain from the guarantee or option will be the most likely to exercise it.
Moral hazard
Action of a party who behaves differently from the way they would behave if they were fully exposed to the consequences of that action.
The party behaves less carefully, leaving the organisation to bear some of the consequences.
6 key outcomes to be achieved by the FCA’s TCF (Treating Customers Fairly)
- Consumers can be confident that they are dealing with firms where the FAIR TREATMENT of customers is central to the corporate culture.
- Products and services marketed and sold in the retail market are designed to meet the needs of identified consumer groups and are targeted accordingly.
- Consumers are provided with CLEAR INFORMATION and are kept appropriately informed before, during and after the point of sale
- Where consumers receive advice, the ADVICE IS SUITABLE and takes account of their circumstances,
- Consumers are provided with products that perform as firms have led them to expect, and the associated service is of an ACCEPTABLE STANDARD and as they have been led to expect
- Consumers do not face unreasonable post-sale BARRIERS imposed by firms to change product, switch provider, submit a claim or make a complaint.
Main influences on policyholder expectations:
- statements made by the provider, especially those made to the client in marketing literature and other communications
- the past practice of the provider
- the general practices of other providers in the market.
5 Areas addressed by regulation - maintaining confidence
- Capital adequacy
- Competence and integrity
- Compensation schemes
- Investor protection
- Stock exchange requirements
Capital Adequacy
Institutions must hold sufficient capital to cover their liabilities
Compensation schemes
Compensation schemes - funded either by the industry or by government - provide recompense to investors who have suffered losses.
Typically losses due to fraud, bad advice or failure of the service provider rather than market-related losses.
3 Forms of regulation
- Prescriptive
- Freedom of action
- Outcome-based
