Chapter 7: Regulation of financial services

Question 1

List the four principle aims of regulation

Answer 1

1. To correct market inefficiencies and to promote efficient and orderly markets
2. To protext consulmers of financial products e.g. agianst financial fraud
3. to maintain confidence in the financial systems
4. to reduce financial crime

Question 2

Discus the costs of financial services regulation

Answer 2

Regulation has a cost. Regulation must attempt to develop a system which can achiee the aims specified above at minimum cost so that the benefits which are difficult to measure outweigh the costs

Direct costs arises from admistering the regulation

Indirect costs arise from changes in behaviour, both consumers and regulated firms, to reach to the regulations

Question 3

Give 2 reasons why it is often claimed that the need for regulation of financial markets is greater than the need for regulation of most other markets

Answer 3

The need for regulation of financial markets is seen to be greater than the need for regulation of most other markets primarily because of the importance of confidence in teh financial system and the damages that would be done by systemic financial collapse

Question 4

Distiinguish between the following approaches to regulation

1. Prescriptive
2. Freedom of action
3. outcome based

Answer 4

• Prescriptive approach sets out detailed rulees setting out exactly what may or may not be done
• Alernatively, regulation can incolve freedome of action, but with rules on publicity so that third parties are fully informed about providers of financial services
• Outcome based approach allows freedome of action, but prescribes outcomes that will be tolerated

Question 5

List the four main types of regulatory regime in order of the increase degree of regulation involved

Answer 5

1. Unregulated markets
2. voluntary codes of conduct
3. self regulation
4. statory regulation

Question 6

What is meant by self regulatory system

• What is meant by self regulatory system
• the incentive to setting up such a system

Answer 6

• Organised and operated by participants in a particular market without government intervention
• incentive to setting up system stems from fact that regulation is economic good that consumers of financial services are willing to pay for and which will benefit all participants
• alternative incentive is threat by government to impose statutory regulation if satistifactory self-regulatory system isn’t implemented