Chapter 1 - Models of Regulation

Question 1

What are the objectives and benefits of regulation?

Answer 1

1. Increase confidence in the market, services and instruments.
2. Environment for wealth creation.
3. Reduce the risk of market and system failure.
4. Enhance consumer protections.
5. Reduce financial crime.

Question 2

What are the features of a rules based approach to financial regulation?

Answer 2

• Highly prescriptive
• Strict adherence required
• Inflexible - cannot adapt to rapidly evolving market
• Tick box exercise - certainty in knowing what is expected of the firm.

Question 3

What are the features of a ‘principles based’ approach to financial regulation?

Answer 3

• Focus on behaviour + outcomes
• Flexibility in evolving markets
• Fundamental guidance
• Inconsistent interpretation

Question 4

Which approach to financial regulation has the FCA taken?

Answer 4

A mixture of rules and principles based approaches.

Question 5

How does self regulation work?

Answer 5

A mixture of private interest with government oversight which delivers regulation.

Question 6

What are the broad objectives of a self regulatory model?

Answer 6

• Preserve market integrity
• Preserve financial integrity
• Protect investors

Question 7

What are the forms of self regulation that exist?

Answer 7

• industry SROs
• exchange self-regulatory frameworks
• private associations
• Firm’s own ethics
• Islamic finance

Question 8

What are the key elements of an effective self-regulatory model?

Answer 8

1. Industry specialised knowledge
2. Industry motivation - competition and reputation
3. Contractual relationship - ethical standards
4. Transparency and accountability - compliance programme should ensure confidentiality and procedural fairness.
5. Flexible SRO compliance programmes - adaptability to industry developments.
6. Coordination and sharing information - information and coordination as a priority. Cross market approach to combat market abuse or systemic risk.
7. Development of guidebooks and educational material.

Question 9

What can SRO compliance programmes do to ensure transparency and accountability?

Answer 9

• SRO rules publicly accessible.
• Publicising disciplinary actions.
• Educational outreach schemes.
• Mix of public officials and industry professionals on an SRO governing body.
• Sharing regulatory objectives with the statutory regulator.

Question 10

Name an example of a SRO?

Answer 10

ISDA - International Swaps and Derivatives Association

Question 10

What did the IOSCO Consultative Committee Directive indicate should be a SROs common regulatory practice and objectives?

Answer 10

1. Enforcing rules - fines and disciplinary action
2. Conducting sales and operations examinations.
3. Conducting fitness assessments for market entry.
4. Consumer complaint resolution.
5. Surveillance programme for market misconduct.
6. Sharing information.
7. Providing a dispute resolution forum.

Question 11

What are the benefits of joining the ISDA?

Answer 11

Netting provisions - the total sum of derivatives trades can be aggregated into a single legal entity with a single net value.

Question 12

What are the prohibitions in Islamic Finance?

Answer 12

Interest and unnecessary uncertainty

Question 13

What are the Islamic SROs?

Answer 13

• Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI)
• Islamic Financial Services Board (IFSB)

Question 14

Who are typically members of the IFSB?

Answer 14

Central banks