CH 3: Regulation Flashcards
1 Aims of regulation
4
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
GRIP
2 Costs of regulation
2,4
Direct Costs:
- Administration (eg. costs for collection and analysis of info. participants & monitoring their activities)
- Compliance The cost incurred by regulated firms to comply with regulation
Indirect costs:
- Change consumer behaviour, reliance on regulator
- Undermines professional responsibility
- No self developed consumer protection mechanisms
- Reduced innovation and competition.
3 Need for regulation
2,2
Confidence in financial system:
- Important part in success of system.
- Systemic risk : knock on effect of failure off one institution( regs aim prevent this)
Asymmetric information:
- Between provider and consumer
- Information advantage can be used for own benefit.
4 Functions of a regulator
Acronym - S = Setting sanctions - E = Enforcing regulation - Re = Reviewing and enforcing government policy - V = Vetting and registering individuals - I = Investigte breaches - C = Check management and conduct of providers - E = Educate consumers and the public
SEReVICE
5 Information asymmetry
1,3,2
- 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 more likely to take out contracts where they believe the risk is higher than accounted for by insusrer.
- Options/Guarentees exercised when most benefit.
- Info asym leads to anti-selection. eg Not disclosing health issues.
Moral Hazard:
- Party behaves in more risky manner than they would if fully exposed to risk.
- Change of behaviour that increases level of risk taken.
Main influences on policyholder expectations:
3
- Statements made by the provider, especially those made to the client in marketing literature and other communications
- Past practice of the provider
- General practices of other providers in the market.
Dealing with information asymmetries:
SPIDER CCUTW
S - Selling practices regulated P - Price controls I - Insider trading prevented D - Disclosure of information in plain language E - Educate consumers R - Restrict knowledge about 3rd parties to publicly available C - Cooling-off periods for consumers C - Chinese walls U- Unfair features T- TCF W- Whistle blowing
SPIDER CCUTW
6 Maintaining confidence
5
- Capital adequacy: Reg req capital to be held to cover liabilities with margins
- Competence and integrity: Qualified, competent members in field
- Compensation schemes: Setup by Gov and industry to fund losses by misconduct
- Investor protection: Regulators ensure that the mkt. is transparent, orderly.
- Stock exchange requirements: Fulfil criteria and listing req
CCCIS
Forms of regulation
3
- Prescriptive: Declared rules state what can/not be done
- Freedom of action: Frre to act but must disclose info publicily
- Outcome-based: Prescribed end results that are tolerated.
Types of regulatory regime
5
- Unregulated markets: Well informed parties, don’t require regulation.
- Voluntary codes of conduct: Effective if theres buy in. Incentive to refuse to follow.
- Self-regulation: Operated by mkt participants, threat of intervention if fail
- Statutory regulation: Setup and Policed by Gov. Most systems mixture
- Professional Bodies: Ensure members are qualified and competent and uphold standards. PA and FSCA in SA
Advantages of self-regulation
4
- The system implemented by the people with the greatest knowledge of the market,
- Greatest incentive to achieve the optimal cost-benefit ratio.
- Respond rapidly to changes in market needs.
- May be easier to persuade firms and individuals to co-operate with a self-regulatory organisation than with a government bureaucracy.
Disadvantages of self-regulation
3
- The closeness of the regulator to the industry it is regulating. The danger that the regulator accepts the industry’s POV and is less in tune with 3rd parties.
- Can lead to a weaker regime than is acceptable.
- May inhibit new entrants to a market (existing participants frame rules)
Advantages of statutory regulation
3
- Less open to abuse
- Higher degree of public confidence
- Regulator can be run efficiently by splitting by function of regulation.
Disadvantages of statutory regulation
2
- High cost
- Cannot respond rapidly to change
Roles of the central bank
7
- Control the money supply
- Determine interest rates, inflation rates, exchange rates
- Target macroeconomic features such as growth and unemployment
- Ensure stability of the financial system
- Lender of last resort to commercial banks
Role of State and Large Institutions
1,3
State:
- Restrict free market by imposeing max charges/rates
Large market institutions:
- Distort mkt by being monopoly
- Take up large portion of regulator resources
- Systemically important institution.
9 Climate change policy
1
- Regulation ensure companies consider climate change in daily operations, to prevent further damage.
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.
