Chapter 7 - Regulation

Question 1

Aims of regulation

Answer 1

• To correct market inefficiencies
• To protect consumers
• To maintain confidence in the financial system
• To help reduce financial crime

Question 2

Regulation: Direct costs

Answer 2

In administering and complying with regulation

Question 3

Regulation: Indirect costs

Answer 3

Arise from changes in behavior of consumers and regulated firms in reaction to regulations

Examples:

• Sense of diminished professional responsibility in intermediaries and advisers
• Reduction in consumer protection mechanisms developed by market itself
• Reduced product innovation
• Reduced competition

Question 4

Reason for greater need for regulation of financial markets (compared to other markets)

Answer 4

Due to importance of confidence in financial system and the damage that would be done by a systemic financial collapse

Question 5

Forms of regulation

Answer 5

• Unregulated markets
• Voluntary codes of conduct
• Self-regulation
• Statutory regulation

Question 6

Argument for Unregulated markets

Answer 6

In some markets, especially those where only professionals operate, the costs of regulations likely outweigh the benefits

Question 7

Self-regulation

Answer 7

A system organised and operated by the participants in a particular market

Question 8

Statutory regulation

Answer 8

A system wherein the government sets out the rules and polices them

Question 9

Advantages and disadvantages of statutory regulation

Answer 9

Advantages

• Less open to abuse
• May command a higher degree of public confidence
• Might achieve greater economies of scale

Disadvantages:

• Might be more costly
• Might be slow to respond to changing market circumstances
• Might impose rules that do not achieve desired aim due to regulators having less knowledge/expertise in market being regulated than the participants themselves

Question 10

Advantages and disadvantages of self-regulation

Answer 10

Advantages:

• Rules are implemented by those with the most knowledge of the market
• Is able to rapidly respond to changes in the market
• Might be easier to convince firms and individuals to participate

Disadvantages:

• Regulator might side with the industry instead of the consumer
• Lack of confidence from consumers
• Might impose rules to inhibit new entrants into the market