Chapter 3 - Regulation Flashcards
Aims of regulation
Correct market inefficiencies
Protect consumers
Maintain confidence
Reduce financial crime
Direct costs
Administering the regulation
Compliance for regulated firms
Indirect costs
Alteration in consumer behavior Undermining of sense of professional responsibility Reduction in self regulation Reduced product innovation Reduced competition
Need for regulation
Maintain confidence
Deal with info asymmetries
Functions of regulator
Influence and review government policy
Vetting and registering firms
Supervising prudential management of financial organizations
Supervising conduct of financial businesses
Enforcing regulations and investigating breaches
Providing information to the public
Areas addressed by regulation
Information asymmetries
One party more info than other
Lead to anti selection
Exacerbated by complex and long term nature of financial contracts
Mitigation: disclosure, Chinese walls, cooling off periods, customer legislation, whistle blowing
Areas addressed by regulation
Maintaining confidence
Problem in one area spreads
Mitigating: capital adequacy, integrity, industry compensation, orderly and transparent markets, stock exchange requirements
Regulatory regimes
Unregulated markets Voluntary codes of conduct Self regulation Statutory regulation Mixed
Can be
Prescriptive
Freedom of action
Outcome based
Role of major financial i stitutions
Central Bank - control or influence economic variables
State intervention - provision of products, control premium rates
Large market participants - influence premium rates
Climate risk related policy and regulatory developments
Consider climate risks
Effectively disclose clime risks and opportunities
Consistent and reliable means of assessing, pricing and managing climate risks
Incorporate ESG factors
Incorporate financial risks
Use scenario analysis
Consider impact of climate risks on ability to meet obligations
