Chapter 3

Question 2

3.2: Compare and contrast the objectives of the PRA and FCA

Answer 2

Compare and contrast the objectives of the PRA and FCA.
The objectives of each regulator are summarised in the following table:

PRA:
- Promoting the financial safety and soundness of the firms
it regulates
- For insurers, securing an appropriate degree of protection
for existing and potential future policyholders
- Facilitating effective competition

FCA:
- Consumer protection
- Protecting the integrity of financial markets from misconduct
- Promoting competition in financial markets to ensure
that consumers get a fair deal

These objectives are very similar, but there are differences. The PRA is primarily focused on prudential regulation, and the FCA on conduct of business regulation. In other words, the PRA is focused on financial stability and the FCA is
focused on ensuring that consumers are protected against misconduct on the part of financial institutions. Sometimes these two areas of focus can conflict. For example, the PPI mis-selling compensation provided to consumers ensures that they get a fair deal, but the costs involved could potentially threaten financial soundness.

Question 3

3.3: Why are market-based incentives for health-and-safety risk management often thought to be insufficient?

Answer 3

Market-based incentives such as wages or prices may be insufficient because of asymmetric information and public good problems.

Asymmetric information between the organisation and its stakeholders may mean that these stakeholders are unable to assess the level of health and safety risk to which they are exposed by the organisation. Stakeholders may be exposed
to excessive amounts of risk because they cannot properly price the cost of risk into their relationship with the firm (their
salary or the price they pay for a product or service). This problem can be particularly acute in longer-term (known as
latent) health-and-safety risks, such as exposure to cancer-causing chemicals.

Public good problems arise where the costs associated with exposure to health-and-safety risks are not fully internalised
by the organisation and its more immediate stakeholders, such as consumers and employees. Third parties (such as local residents) may be exposed to health-and-safety risks as a result of pollution, but they have no market mechanism available to help them obtain compensation for such risks. Legal liability claims do not count as a market mechanism, as they rely on laws and regulations to make them enforceable.

Question 4

3.4: Describe the regulatory powers of a typical environmental regulator

Answer 4

Environmental regulators have a range of roles. They typically have the authority to:
* issue rules and guidance on the management of environmental risks
* ensure that the activities of organisations do not breach any international treaties that the country has signed up to
(such as carbon dioxide emissions)
* inspect the premises of organisations
* licence activities that may be a source of environmental risk (such as chemical use)
* take enforcement action (issuing fines, for example).