The State Flashcards
What is market structure regulation useful for?
- Creates a framework where FSPs can operate, ensuring fair competition, market stability, and consumer protection.
- Examples: licensing requirements, capital adequacy rules, ownership, and governance standards, as well as other operational aspects of financial institutions.
- A key aspect of market structure regulation is the uptake of benefits. Benefits can either be mandated, or left as voluntary, with or without incentives.
What is prudential regulation used for?
- Ensure that FSPs can pay benefits when they fall due.
- Require funding in advance
- Require seperation between sponsor’s assets and any funds required to provide benefits
- Authorise individuals/organisations to invest funds
- Regular checks on solvency levels or funding levels (including stress tests)
- Minimum soclvency requirements
- Restrictions on asset classes used for funds.
What is mandatory insurance?
Despite regulation, financial product providers and benefit arrangements still have the potential to fail. Some countries mandate insurance to cover beneficiaries in the event of such a failure. This is closely linked to prudential regulation.
What is market conduct regulation?
Regulations relationship between FSPs, their customers and thier service providers.
* Mandate clear product names to ensure product behaviour matches title
* Savings producst need to show benefit projections based on certain criteria
* Dictate how salespeople and advisers are compensates
* Restrict sales channels for different profits.
* Monitor complaints procedures
* Treat customers fairly policies.
* Policy wording and benefit arrangement rules should be clear and unambiguous
Buy-side vs. supply-side product regulation?
Focus: Buy-side regulation primarily focuses on how investment funds are managed, ensuring that investment strategies adhere to specific guidelines to protect investors’ interests. In contrast, sell-side regulation governs the sales and marketing practices of financial products, ensuring that consumers are treated fairly and that products are sold with transparency.
Target Audience: Buy-side regulations target fund managers and institutional investors, ensuring they adhere to prescribed investment strategies. Sell-side regulations, however, focus on insurers, brokers, and other intermediaries involved in the selling process, mandating fair practices in marketing and sales.
Nature of Regulation: Buy-side regulation is often centered around investment performance and risk management, while sell-side regulation deals more with consumer protection, ensuring that financial products are sold in a way that prevents mis-selling and protects the rights of consumers.
Compliance: Compliance with buy-side regulations typically involves adherence to investment limits and asset allocation rules, whereas compliance with sell-side regulations may involve maintaining documentation of sales processes, adhering to pricing rules, and ensuring the transparency of product features and benefits to consumers.
Examples of supply-side regulation
- Charge Limits: Regulations may limit the types and amounts of fees retirement funds can charge their members.
- Medical Insurance Conditions: In private medical insurance (PMI), regulations dictate which conditions must be covered and how much must be paid for treatment.
- Underwriting Restrictions: Providers may face rules about the underwriting decisions they can make, including what factors can be considered.
- Fee Caps on Personal Pension Products: In the UK, there are regulated limits on fees for personal pension products to protect consumers.
- Prescribed Minimum Benefits (PMBs): South African medical schemes must cover specific conditions, similar to regulations in Germany and the USA.
- Non-discrimination in Coverage: In South Africa, individuals cannot be denied medical scheme coverage, although waiting periods for pre-existing conditions may apply.
- Code of Conduct on Genetic Testing: In the UK, insurers cannot use genetic test results in underwriting certain contracts and cannot require genetic testing.
- Regulatory Approval for New Products: Providers may need approval before launching new insurance products or benefits.
- Pension Increase Policies: Defined benefit funds in South Africa must have policies for pension increases that meet regulatory standards.
- Withdrawal and Surrender Terms: Regulations set the conditions for members to withdraw from or surrender their benefits, ensuring fairness.
- Product Standards for Competition: Sell-side standards help enhance competition among providers by making products more comparable
Why is the state involved in benefit provision?
- To address inequality that private provision can create by redistributing wealth
- To protect the nation’s health, to ensure a healthy workforce.
- To address failures of private market (behavioural biases, externalities, asymmetric information, imperfect competition)
- To make use of efficiencies such as economies of scale
- External pressure to appease voters or to improve certain development metrics
- Social culture or political promises.
What might cause the private market to fail?
- Behavioural biases: individuals might under-estimate how much need at retirement
- Externalities: not buying PMI, could cause bankrupty thus cannot provide for child’s education.
- Asymmetric information: adverse selection increases premium, making it unaffordable
- Imperfect competition: collusion could cause price fixing
State provision constraints
cost: poor countries can’t provide protection to their people, and high taxes hampers economic growth.
capability: poor countries struggle to carry out policies due to poor infrastructure and resources.
inertia: changing old systems can be hard and expensive, so might never be done.
efficiency: a public healthcare system may be cheaper + more efficiency than having multiple private companies offering the same service
moral hazard and vested interests: politicians may make bad decisions to secure votes.
needs of the people: If a country is dealing with a health crisis, it may need to prioritise funding for hospitals over schools.
behaviour of the people: sometimes early retirement benefits reduce workforce and lower economic output
Possible co-existence models between private and public benefit provision
