External Regultion Of Business Flashcards
Regulation definition
Any form of state interference with the operation of the free market
Reasons government may regulate
Address market failure
Protect public interest
Market failure definition
When market mechanism fails to result in economic efficiency
Market mechanism
Interaction of supply and demand
When regulation to address market failure is appropriate
- Imperfect competition
E.g. monopoly - Externalities
E.g. reducing pollution, banning smoking - Imperfect information
E.g. improving quality standards - Equity (social justice)
E.g. sex discrimination legislation
Why protect public interest
The ensure needs of stakeholders are met
Not just of shareholders
Economic Regulatory bodies
- Environment Agency (EA)
- Information Commissioner
- Takeover Panel
- Competition and Markets Authority (CMA)
Information Commissioner
Responsible for enforcing:
1. Data protection act
2. Freedom of Information act
Takeover Panel
Independent body
Enforces city code on takeovers and mergers for listed companies
Intended to not undermine UK competition
CMA
Inspect those suspected of breaching:
- Competition act
E.g. price fixing, cartels, abusing a dominant position - Enterprise act
CMA has powers to
- Enter premises
Demand documents
As part of investigation - Impose fines
- Disqualify directors
How is competition regulated in UK?
Competition act
Competition act prohibits:
- Anti-competitive agreements
- Abuse of a dominant market position
Anti competitive agreements can be
Formal
Informal
Abuse of a dominant position by either…
One firm or a group of firms
Dominant position definition
Able to behave independently of competition
Business or group of colluding firms likely to be dominant if…
- Have high market share
- Few competitors
- Little potential of new competitors
Typical abuses e.g.
Unfair selling prices
Restricting production
Applying different trading conditions to equivalent transactions
Attaching unrelated supplementary conditions to contracts
Breach of competition act penalty
Fined up to 10% worldwide revenue
Cartel
Formal or informal agreement among supposedly competing firms
What is cartel activity also a criminal offence under?
Enterprise act
Conditions where cartel activity likely to occur
Few competitors in the industry
Little product differentiation
Established communication with competitors
Recession
Industry has excess capacity
Business responses to regulation
- Non-response
- Mere compliance
- Full compliance
- Innovation
Regulation: Non response outcome
Penalties e.g. fines
Mere compliance outcome
Passing costs to customers
Full compliance outcomes
Behaviour is changed as the company adapts their products to meet compliance
Innovation can be due to
Regulation
(Porter)
Insider trading with listed company shares definition
Using insider knowledge to:
Make a profit
Avoid a loss
Insider trading penalties
Also criminal offence under
Criminal justice act
Most severe type of market abuse
What should market participants follow to prevent market abuse and insider trading?
FCA’s code of market conduct
Market abuse
Distorting market prices
Making false or misleading statements
Misusing information
Market abuse penalties type of offence
Civil offence
Under financial services and markets act
Market abuse max penalty
Unlimited fine
Regulation of directors in terms of trading
- Fraudulent trading
- Wrongful trading
Fraudulent trading
Company wound up due to insolvency continues to trade
With ‘intention to defraud creditors’
Fraudulent trading potential consequences
Director disqualification
Criminal sanctions
Directors personally liable for company debts
Wrongful trading
Director continues to trade
Despite knowing the company cannot avoid insolvency
Or doesn’t take reasonable steps to minimise the potential loss to creditors
Wrongful trading potential consequences
Directors disqualified
Contribution to company debts
Money laundering act 2 parts
Proceeds of crime act
Money laundering regulations
Regulators of international trade
- World trade organisation (WTO)
- EU
- Other regional organisations
WTO
Promotes free trade
Removes barriers
EU
Intended to operate as a single European market
To allow free movement of:
Labour
Goods and services
Free competition
Other regional trading organisations
NAFTA (USA, Canada, Mexico)
ASEAN (S.E. Asia)
Advantages of international free trade
Specialisation
Countries specialise in what they’re good at
Transfer raw materials
From surplus to deficit
Increased competition
From new competitors
So increased efficiency
Larger markets
So economies of scale
Trading links
Closer political links
Barriers to international trade
Tariffs/customs duties
Import taxes
Import quotas
Embargoes
Hidden subsidies
E.g. gov grants for domestic producers
Import restrictions
Excessive regulations/documentation/safety standards
