3 - Regulation

Question 1

Give the principle aims of regulation of financial services.

Answer 1

GRIP

Give confidence in the financial system
Reduce financial crime
Inefficiencies and promoting orderly markets
Protect consumers

Question 2

Give the direct costs of regulation.

Answer 2

1. Administering the regulation

2. Compliance for the regulated firms

Question 3

Give the indirect costs of regulation.

Answer 3

1. Altering consumer behaviour
2. Undermining the sense of professional responsibility among intermediaries and advisors
3. Reduction in self-regulation in the market
4. Reduced product innovation
5. Reduced competition

Question 4

Give the main needs for regulation.

Answer 4

Maintain confidence in the financial sector

Deal with information asymmetries

Question 5

Give the main functions of the regulator.

Answer 5

SERVICE

Setting sanctions
Enforcing regulation
Reviewing and influencing government policy
Vetting and registering companies and individuals
Investigating breaches
Checking conduct and management of providers
Educating consumers and the public

Question 6

Define an information asymmetry.

Answer 6

These occur when one party has relevant information or expertise or negotiating strength not shared by another party.

Question 7

Give two of the problems caused by information asymmetries in the financial sector.

Answer 7

1. Lead to anti-selection

2. Are exacerbated by the complex and long-term nature of financial contracts

Question 8

Give the mitigation tools available to regulators to deal with information asymmetries.

Answer 8

1. Disclosure of information in plain language
2. Chinese walls
3. Cooling-off periods
4. Customer legislation on unfair contract terms and TCF
5. ‘Whistle-blowing’ by actuaries if they believe the client is treating customers unfairly

Question 9

Give the main reason the regulator needs to uphold confidence in the financial system.

Answer 9

There is a danger that the problems in one area of the financial system spread, leading to a collapse of the whole system.

Question 10

Give the mitigation tools available to the regulator to maintain confidence in the financial system.

Answer 10

1. Checks on capital adequacy of providers
2. Ensuring practitioners are competent and act with integrity
3. Industry compensation schemes
4. Ensuring orderly and transparent markets
5. Stock exchange requirements

Question 11

Give the main types of regulatory regimes.

Answer 11

1. Unregulated markets
2. Voluntary codes of conduct
3. Self-regulation
4. Statutory regulation
5. Mixed

Question 12

Define unregulated markets

Answer 12

Where no financial services specific regulations apply; markets participants are instead subject to normal legislation

Question 13

Define voluntary codes of conduct

Answer 13

Drawn up by the financial services industry itself

Question 14

Define self-regulation

Answer 14

Organised and operated by the participants in a particular market without government intervention

Question 15

Give the main forms of regulation.

Answer 15

1. Prescriptive regimes - detailed rules
2. Freedom of action - rules on publicly available information
3. Outcome based regimes - prescribed tolerated outcomes

Question 16

Describe how central banks play a role in supporting the regulatory and wider business environment.

Answer 16

Controlling or influencing economic variables and acting as a lender of last resort.

Question 17

Describe how state intervention plays a role in supporting the regulatory and wider business environment.

Answer 17

Provision of products and control of premium rates.

Question 18

Describe how large market participants play a role in supporting the regulatory and wider business environment.

Answer 18

Influencing premium rates
Allowing smaller participants to find niche markets
May distort the market