Chapter 14 External regulation of business

Question 1

1.1 Regulation

Answer 1

Is any form of state interference with the free market. The government may interfere to address market failure and protect public interest. Addressing failure occurs when the market mechanism (interaction of supply/demand) fails to result in economic efficiency. Regulation appropriate where imperfect competition, externalities, imperfect information and to improve social justice occurs. Protecting public interests is to ensure that needs of stakeholders are met, not just shareholders.

Question 2

2.1 Regulation of business

Answer 2

Regulatory bodies include:
- Environment agency
- Information commissioner: enforce Data Protection Act 1998 and freedom of information Act 2000
- Takeover panel: enforce city code on takeovers and mergers for listed companies, so they do not undermine competition
- Competition and market authority: investigate those suspected of breaching competition act and the enterprise Act 2002. They can enter premises and demand documents, impose fines, and disqualify directors

Question 3

2.2 Competition regulation in UK

Answer 3

Competition Act 1998 prohibits anti-competitive arrangements (cannot form an anti-competitive agreement, formal or informal) and abuse of a dominant market position (which is behaving indecently of the competition. A business group of colluding firms are dominant if they have a high market share, few competitors and little potential for new competitors). Typical abuses include unfair selling prices, restricting production, applying different trading conditions to equivalent transactions, and attaching unrelated conditions to contracts. Breaches of the act can include a 10% fine on worldwide revenue.

Question 4

2.3 Prohibiting cartels

Answer 4

A cartel is a formal or informal agreement among supposedly competing firms. This can occur when there is few competitors, little product differentiation, established communication with competitors, recession, and an industry with excess capacity.

Question 5

2.4 Business responses to regulation

Answer 5

Non-response (face consequences and pay fines), mere compliance (comply but pass costs to customers), full compliance (change in behaviour to meet compliance) and innovation (regulation triggers need for new products and methodologies).

Question 6

3.1 Regulation of people: market abuse and insider trading

Answer 6

Insider trading using insider knowledge to make a profit or avoid a loss on listed company shares. It is a criminal offence under the Criminal Justice Act 1993. Market abuse is distorting market prices or making false or misleading statements or misusing information. This is a civil offence under Financial Services and Markets Act 2000 and carries an unlimited fine.

Question 7

3.2 Regulation of directors

Answer 7

Fraudulent trading is where a company being wound-up due to insolvency continues to trade with intend to defraud creditors. The consequences can be director disqualification and criminal sanctions. The directors are personally liable for the company debts in this situation.
Wrongful trading where a company director continues to trade despite knowing the company cannot avoid insolvency or does not take reasonable steps to minimise the potential loss to creditors. The consequences are directors may be disqualified and may be asked to contribute to the company’s debts.

Question 8

3.3 other regulations

Answer 8

Money laundering has extensive regulations under the Proceeds of Crime Act 2002 and the Money Laundering Regulations 2007. Practitioners must implement and comply with these.

Question 9

4.1 International regulation of trade

Answer 9

The regulators of international trade include the World Trade organisation which was set up in 1995 to promote free trade and remove barriers, the EU intended to allow free movement of labour, goods and free competition and other regional trading organisations such as NAFTA and ASEAN (southeast Asia).

Question 10

4.2 Advantages of international free trade

Answer 10

The advantages of international free trade include:
- Specialisation: countries specialise in what they are good at
- Transfer raw materials from those with surplus to those with deficit
- Increased competition from new competitors and increased efficiency
- Large markets: economies of scale
- Trading links: closer political links

Question 11

4.3 Barriers to international trade

Answer 11

• Tariffs or customs duties: import taxes
• Import quotas: restrictions on quantity
• Embargoes: bans on certain types of products
• Hidden subsidies: government grants for domestic producers
• Import restrictions: excessive regulations/documentation/ safety standards