Chapter 8: Regulation of financial services Flashcards
(13 cards)
g.i) describe the principles and aims of market conduct regulation regim
List Four aims of regulation
- to correct market inefficiencies and to promote efficient and orderly marekts
- to protect customers of financial products, e.g., against financial fraud
- to maintain confidence in the financial system
- to help reduce financial crime
Benefits of regulation stem from achievement of these aims
g.i) describe the principles and aims of market conduct regulation regim
How are these aims met and what are the functions of the regulator?
- Supervision of authorised firms (checking solvency and enforcing strict accounting information)
- Ensure sufficient liquidity
- Reduce crime
- Vetting and registration of financial services providers
- Information provision (quotation systems and provide literature)
- Compesation schemes
- Efficient and orderly trade
g.i) describe the principles and aims of market conduct regulation regim
Dicuss the costs of financial services regulation
The costs of regulation
Regulation has a cost. Regulators must attempt to develop a system which aims to achieve the aims specified above at minimum cost, so that the benefits which are difficult to measure, outweigh the costs.
Direrct costs:
1. Admnistration costs (to regulator)
- collecting and examining information provided
- monitoring their activities
2. Compliance costs (e.g., reporting, legal and consulting fees, record keeping etc)
3. regulatory examinations and audits
These are borne by investors in the form of:
- tax to fund the regulator
- higher fees and charges
Indirect costs (moral hazard):
1. less care taken when choosing provider
2. Diminishing responsibility of intermediaries & brokers
3. Less Consumer Protection Mechanisms built into the
4. Reduced innovation
5. Discourages competition (Creates a barrier to entry)
g.i) describe the principles and aims of market conduct regulation regim
- Give two reasons why it is often claims that regulatoin of financial markets is greater than the need for regulation in most other markets.
Outline what a loss of confidence could lead to.
The need for regulation
Need for regulation
1. Importance of confidence in the financial system
2. The damage that would be done by a systematic financial collapse.
Loss to confidence:
- loss of faith in the banking system and consequently ‘run’ on banks
- banks hold fraction of funds deposited with them –> they do not expect all deposits to be withdrawn at once
- low confidence could lead to banks recalling loans –> leading to widespread bankruptcies
- lead to liquidity issues of solvency financial intermediaries
g.i) describe the principles and aims of market conduct regulation regim
Distinguish between the different form of regimes
-
Prescriptive - sets out detailed rules setting out exactly what may and may not be done
- tight control
- reduces likelihood of things going wrong
- greater costs, direct or indirect - Freedom of action - with rules on on publicity so that third parties are fulled informed on FSPs
- Outcome based - allows freedom of action, but prescribes outcomes that will be tolerated.
Forms of regulation
g.i) describe the principles and aims of market conduct regulation regim
List examples of prescriptive rules that can be enforced
Forms of regulation
- types of investment or contract offered by institution
- types of services provided
- the levels of charges that may be levied
- the types of investment that may be included within a collective investment vehicle
- required levels of capital adequacy
- types of investment in which institutions invest
- who may contract the institution - fit and proper
g.i) describe the principles and aims of market conduct regulation regim
List four main types of regulatory regime in order of increasing degre of regulation
- Unregulated markets
- voluntary codes of conduct
- self-regulation
- Statutory regulation
NB These can be combined as a mixed regime
g.i) describe the principles and aims of market conduct regulation regim
Describe are the merits of unregulated markets.
argued that costs of regulation in somes markets, especially those where only professionals operate, outweigh the benefits
Benefits:
- Increased Innovation - allow for quicker development and deployment of new financial products and services.
- Reduced Costs - translates to potentially lower compliance costs for financial institutions, which could translate into lower fees for consumers
- Greater Efficiency - Unregulated markets, in theory, could foster a more efficient allocation of capital as institutions compete more freely.
Downside:
- Increased Risk - consumers might be exposed to predatory practices, fraudulent schemes, and a lack of transparency.
- Market Instability - unregulated markets are more susceptible to bubbles and crashes, potentially leading to financial crises with severe economic consequences.
- Information Asymmetry - Consumers might lack the financial expertise to make informed decisions in an unregulated market, leading to exploitation by unscrupulous providers.
Overall, the potential benefits of unregulated financial markets are outweighed by the significant risks.
g.i) describe the principles and aims of market conduct regulation regim
Describe are the merits of voluntery codes of conduct
Benefits:
- Reduced costs
- Greatest knowledge by market participant who aim to maximise benefits and minimize costs
Risks
- High incentive to breach code
- suffer from lack of public confidence
- a few ‘rogue’ operators refusing to co-operate –> leading to a breakdown in the system
g.i) describe the principles and aims of market conduct regulation regim
Explain:
- what is meant by self-regulatory system
- the incentive to setting up such a system
- Organised and operated by participants in a particular market without government intervention
- Incentive to setting up stems from the fact that regulation is an economic good that consumers of financial services are willing to pay for and which benefits all participants
- Alternative incentive is threat by government to impose statutory regime if satisfactory system isn’t implemented.
g.i) describe the principles and aims of market conduct regulation regim
Describe are the merits self regulated regimes.
Benefits:
- The system is implemented by the people with greatest market knowledge.
- System is implemented by people who are incentivised to maximise cost benefit ratio of regulation and ensure system is non-bureaucratic.
- Should be more flexible than the alternatives and be able to respond rapidly to changes in market needs.
- Cooperation with a self-regulatory organisation may be more forthcoming than with a government agency (but not necessarily).
Risks/downsides:
- Regulator will be perceived to be closer to industry than customers.
-This can lead to a lack of confidence from consumers and purchasers…
-…particularly when criticism of industry is high in the wider economy - Self-regulatory organisation likely to have fewer powers to fine and punish industry members than a government agency established under statute.
- Barriers to entry
g.i) describe the principles and aims of market conduct regulation regim
Outline the potential goals that a performance presentation standards (PPS), which include details about performance calculations aim to meet in a self-regulated regime
Potential goals of PPS:
- Achieve greater uniformity …
- … and comparability between performance calculations.
- Improve service offered to investment management clients.
- Enhance professionalism of the industry.
- Bolster the notion of self-regulation.
- Provide the industry with a yardstick to evaluate fairness …
-… and accuracy in investment performance evaluations
g.i) describe the principles and aims of market conduct regulation regim
Describe are the merits statutory regulatory regimes.
Benefits:
+ Less open to abuse
+ Greatest confidence
+ Economies of scale => separate departments for different aspects
Downsides:
- Costly= Est reg authority+ Reg monitoring+ Compliance
- Slower response to changes
- Impose unnecessary rules that are costly
