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IFoA CP1 > 3. Regulation > Flashcards

3. Regulation Flashcards

1
Q

What are the 4 aims of regulation? (PPLM)

A
  • Promote efficient markets
  • Protect consumers
  • Lender of last resorts
  • Maintain confidence in financial system
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2
Q

What does ‘lender of last resort’ mean?

A

They lend money to financial institutions in financial difficulty with no borrowing option

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3
Q

Why do market inefficiencies exist?

A

Consumers make imperfect choices

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4
Q

Why is it hard to quantify the success of regulation

A

Benefits and costs are hard to isolate

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5
Q

What is the optimum level of regulation?

A

That where marginal cost = marginal benefit

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6
Q

Give the 2 direct costs of regulation

A
  • Administering regulation e.g. examining data
  • Compliance from regulated firms e.g. maintaining records
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7
Q

How are direct regulation costs generally paid for?

A

Tax

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8
Q

Give 4 indirect costs of regulation

A
  • Altering consumer behaviour
  • Undermining firm’s sense of professional responsibility
  • Reduced product innovation
  • Reduced competition
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9
Q

How has regulation had to change with globalisation?

A

Regulators have needed to become more coordinated across nations

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10
Q

What is “systemic risk”

A

The risk of financial institutions falling like dominoes

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11
Q

Given an example of systemic bank collapse

A

Bear Stearns

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12
Q

What’s a bank run?

A

Where a large amount of clients withdraw their money from a bank simultaniously

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13
Q

What can cause systemic collapse?

A

Low consumer confidence

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14
Q

How do regulators avoid systemic collapse?

A

By ensuring the collapse of one bank doesn’t lead to others

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15
Q

What is asymmetric information?

A

Where one party has more information than the other which can be used to their benefit

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16
Q

What are the 7 functions of the regulator? (GIVESSP)

A
  • Government policy review
  • Investigating suspected breaches
  • Vetting firms
  • Enforcing where necessary
  • Supervising management of financial organisations
  • Supervising business conduct
  • Providing information to the public
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17
Q

What 4 groups need to be regulated? (DIPS)

A
  • Deposit-taking institutions
  • Intermediaries
  • Professional advisers
  • Securities markets
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18
Q

How does information asymmetry lead to an inefficient allocation of resources?

A

Imperfect information leads to sub-optimal choices

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19
Q

What’s anti-selection?

A

Whereby people are more likely to take out contracts if they believe their risk is higher than the insurer allows for in their premium

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20
Q

Give an example of anti-selection

A

Someone in poor health applying for life insurance with limited underwriting

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21
Q

What’s moral hazard?

A

Whereby an insured party behaves differently than how they’d act if they weren’t insured & were fully exposed to that risk

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22
Q

Give an example of moral hazard

A

Insured driver no longer bothering to use their garage

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23
Q

How is there information asymmetry in a moral hazard scenario?

A

The party acting with moral hazard has more information than the insurer

24
Q

What information asymmetry most concerns the regulator?

A

Asymmetry between the provider and their customer

25
Q

How can information asymmetry lead to insurance contracts which are unfair to the consumer?

A
  • Insurer writes the terms
  • Insurer has expertise in writing contracts in their favour
26
Q

Give the 3 methods of dealing with information asymmetry through regulation (PEC)

A
  • Price control
  • Education
  • Conflict of interest control
27
Q

How can regulators use price control to reduce the advantage the insurer has over the consumer via information asymmetry? (MMM)

A
  • Max premium rates
  • Max management charge
  • Max commission scale
28
Q

Name the 2 parts of an insurance contract which need to be regulated to avoid excessive information asymmetry (LD)

A
  • Literature of contract
  • Discontinuance benefit
29
Q

What’s the discontinuance benefit?

A

The contract surrender benefit

30
Q

What’s ‘whistle blowing’?

A

Notifying the relevant authorities if customers aren’t being treated fairly

31
Q

Name the 3 sources of assumptions made under PRE: Policyholder Reasonableness Expectations

A
  • Statements made in literature
  • Past practise of provider
  • Past practise of other product providers
32
Q

What is the FCA’s TCF?

A

TCF: Treat Customers Fairly

33
Q

Name the 6 steps of the FCA’s TCF (good luck!)

A
  1. Consumer confidence is key to corporate culture
  2. Products & services should meet consumer needs
  3. Consumers should be clearly informed before, during & after contract
  4. Where customers need advice, circumstance should be taken into account
  5. Product provided performs as described
  6. Consumers don’t force unreasonable post-sale barriers
34
Q

What’s capital adequacy?

A

Holding sufficient capital to cover liabilities

35
Q

Give 3 examples of securities held to maintain capital adequacy (CCL)

A
  • Liquid securities
  • Cash
  • Credit links
36
Q

What does regulation say around capital adequacy?

A

Sufficient liquid assets must be held to where the probability of insolvency is below a prescribed level

37
Q

Capital adequacy must be held with accuracy, competence & integrity. Define competence & integrity

A

Competence - knowing the appropriate cause of action
Integrity - choosing to take it

38
Q

What is a compensation scheme?

A

A scheme which covers investors who’ve been subjected to:
- Fraud
- Service provider failure
- Poor advice

39
Q

Who funds a compensation scheme?

A

May be funded by an industry or government

40
Q

Firms listed on the stock exchange need to fulfil criteria around financial stability. What is monitored about each firm?

A

Prices of deals & their reporting

41
Q

Why are trading volumes recorded on the stock exchange?

A
  • Deter insider trading
  • Prevent substantial acquisition of shares quickly
42
Q

What’s statutory regulation?

A

Regulation via government policy

43
Q

Give 3 advantages of statutory regulation (PER)

A
  • Public confidence
  • Economies of scale where the regulator can group by function
  • Reduce abuse
44
Q

Give 4 disadvantages of statutory regulation

A
  • Costly
  • Flexibility
  • Concern regulator will take heed of provider over consumer
  • Market participants are in the best place to regulate
45
Q

How does self-regulation deter providers from acting in their own interests?

A

The incentive is the threat of statutory regulation

46
Q

Give 4 advantages of self regulation (KSBB)

A
  • Knowledge - implemented by those who know the market beat
  • Speed of response
  • Best interest - providers have the most to lose from low faith
  • Bureaucracy minimised
47
Q

Give 4 disadvantages of self regulation (PIDT)

A
  • Public confidence may be low in this approach
  • Deter market entrants
  • Image over actual - must be perceived to be being fair, may not be the case
  • Third parties may be a second thought
48
Q

Give an argument for an unregulated market

A
  • Participants are still held to jurisdiction
  • Could be argued the cost of regulation outweighs the benefits
49
Q

Name the 4 possible types of regulation system (SSVU)

A
  • Statutory
  • Self-regulation
  • Voluntary code of conduct
  • Unregulated
50
Q

Give 2 disadvantages of a Voluntary Code of Conduct

A
  • Vulnerable to low confidence
  • Can be ruined by a rogue operator
51
Q

Name the 5 roles of the Central Bank (IIESL)

A
  • Interest rates set
  • Inflation control
  • Exchange rates control
  • Stability control
  • Lender of last resort
52
Q

Give 2 disadvantages of state intervention

A
  • Innovation stifled
  • Restricts free markets
53
Q

Give 2 advantages of having a large, dominant participant in a market

A
  • Niche can be found by small firms
  • Stabilise Premium rates
54
Q

Give a disadvantage of having a large, dominant participant in a market

A

Have power to distort market

55
Q

How do firms with a climate conscience usually benefit?

A

Will result in an increased share price

56
Q

What climate conference decided to keep the global temperate rise since pre-industrial levels below 2 degrees?

A

2015 Paris agreement

IFoA CP1 (9 decks)

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