Ch 7 - Regulation of Financial Services Flashcards
Aims of Regulation
Correct market inefficiencies (to promote efficient and orderly markets)
Protect consumers of financial products
Maintain confidence in the financial system
Help reduce financial crime
Direct costs of regulation
AC DC with SAM
Administrating the regulation
Compliance for the regulated firms
Development of regulations (SAM)
Indirect costs of regulation
Reduce CPS against CPA
Reduced competition
Reduced product innovation
Reduction in self-regulation by the market
Alteration in consumer behaviour
Undermining of the sense of professional responsibility amongst intermediaries and advisors
Regulatory arbitrage
Forms of regulation
Prescriptive
Freedom of Action
Outcome-Based
Prescriptive
Detailed rules setting out what may or may not be done
Reduces the likelihood that things can go wrong – but at greater costs!
E.g.
Types of contracts that can be offered by the institution
Types of service provided
Levels of charges allowed
Types of investments allowed in a collective investment vehicle
Required levels of capital adequacy
Types of investments a financial institution is allowed to invest in
Who may control the institution and advise on products (professionals, etc)
Freedom of Action
Rules only on publicity of information
Outcome-Based
The regime can allow freedom of action but prescribe the outcomes that will be tolerated
Types of regulatory regimes
Unregulated markets Voluntary codes of conduct Self-regulation Statutory regulation Mixed
Unregulated markets
no financial services regulations apply. Still subject to laws of the land and other general trading laws
Voluntary codes of conduct
drawn up by the financial services industry itself
Self-regulation
organised and operated by the participants in a particular market without government regulation
Statutory regulation
in which a government body sets out the rules and policies, and policies them
Mixed
a combination of the above
Advantages and disadvantages of each type of regulatory regime
NBC REEKs + flexibility + cost + public confidence
New entrant allowed
Break rules - incentive
Closeness (of regulator)
Respond quickly to changes
Ease of which to persuade firms to cooperate
Economies of scale
Knowledge
