Chapter 3 - Regulation Flashcards
1
Q
What are the Aims of regulation?
A
- Limit the likelihood of failures
- Limit the potential cost of failure
- Limit the need to step in as lender of last resort
2
Q
What are the principal Aims of regulation?
A
- Correct perceived inefficiencies
- Protect consumers
- Maintain trust
- Reduce financial crime
3
Q
Describe the costs around regulation?
A
- Regulation has a cost
- Achieve their aims at minimum cost and hope that benefits outweigh the cost
- Direct and Indirect costs
4
Q
What are the functions of a regulator?
A
- Influence and review government policies
- vetting and registration of firms and individuals
- Supervising prudential management
- Supervising market conduct and taking enforcement where needed
- Enforcing regulation, investigate suspected breaches, imposing sanctions
- Providing information to consumers and the public
5
Q
What is the need for regulation?
A
- Need is greater in Financial Markets than other markets
- Confidence
- Asymmetric Information
6
Q
Why is confidence in the Financial Market important?
A
- There is a danger of problems in one area spreading to another
- The damage done by a systemic financial collapse
- Ensure failure of one participant doesn’t threaten the whole system
7
Q
What is Asymmetric Information?
A
- When at least one party has relevant information that the other party or parties do not have
8
Q
What is Anti-Selection?
A
- More likely to take out a policy if the person believes their risk is higher than what was priced for
9
Q
What is Moral - Hazard?
A
- The action of a party that behaves differently to what they normally would if they were fully exposed to the consequences
- Leaving the origination to bear the consequences of the action
10
Q
Why is Information asymmetry important to regulators?
A
- Information asymmetry between the product provider and end customer
- ie. A bank gains at the expense of the consumers through complex pricing
- There exists a difference in expertise and negotiating strength in financial transactions - retail markets
- Insurance, Investment and Pensions can have a significant impact on future economic welfare of individuals
11
Q
How can a regulator deal with Information Asymmetry?
A
- Disclose information in plain language
- Chinese Walls (for conflicts)
- cooling-off periods
- customer legislation on unfair contract terms and TCF
- ‘Whistle Blowing’
12
Q
How can a regulator ensure confidence is maintained?
A
- Checks on Capital Adequacy of providers
- ensure practitioners are competent and act with integrity
- industry compensation schemes
- ensuring orderly and transparent markets
- stock exchange requirements
13
Q
Outline the different forms of Regulation?
A
- Prescriptive through rules
- Freedom of action with rules in publicity
- Outcome Based - Freedom of Action but set outcomes
14
Q
Challenges with Statutory regulation?
A
15
Q
What roles do major FIs play?
A
- Central Bank - controlling/influencing economic variables - acting as lender of last resort
- State Intervention - Provision of products (through state monopoly companies), control of premiums
- Large Market Participants - influence premium rates, allow smaller participants to find niche markets, distort market and may use to much regulatory resources
