Regulations

Regulators are always trying to protect policyholders!
They are concerned with What can be done
Aim of regulations
  • To correct perceived market inefficiencies
  • To promote efficient and orderly markets
  • To protect consumers of financial products
  • To maintain confidence in the financial systems
  • To help reduce financial crime
Cost of regulations
Direct costs
  • Administering the regulation
  • Compliance of the regulated firms
Indirect costs
  • An alteration in the behaviour of consumers, who may be given a false sense of security and a reduced sense of responsibility for their own actions.
  • An undermining of the sense of professional responsibility amongst intermediaries and advisors.
  • A reduction in consumer protection mechanisms developed by the market itself.
  • Reduced product innovation
  • Reduced competition.
Functions of a regulator
  • Influencing and reviewing government policy
  • Vetting and registration of firms and individuals authorised to conduct certain types of business e.g. Before being able to give pensions advice it maybe a requirement that the salesperson must attend courses to get the qualification. And the qualification will be taken away if they are found giving inappropriate advice.
  • Enforcing regulations, investigating suspected breaches and imposing sanctions. There will need to be a framework put in place that details both how the regulations will be tested and penalties will be enforced if the organization fail to comply.
  • Providing information to consumers and the public.
    • The regulator either directly or through the state can issue guidance on the various financial products available.
    • The regulators an force the financial institutions to supply the information.
Regulation serves two purposes
  • Information asymmetry
    • If a product/terminologies used is too complex to be understood by average people, it would be better to be directly regulated by the regulatory body, instead of trying to educate people what to do.
    • Awarding products certificates if they reach certain standards on such features as charges.
  • Maintain confidence
    • Capital (In)Adequacy
    • Compensation schemes
    • Regulations for security markets
Types of regulatory regime
  • Prescriptive
    • If we have prescriptive regulation then this will contain the higher levels of regulation as actions that must be followed or are prohibited will be detailed fully and must be obeyed.
  • Freedom of action
    • Regulation where individuals and providers are allowed to take the actions that they see as most fitting.
  • Outcome based
    • This is because although the way that the benefit provider needs to act is not fully prescribed there are certain regulations that must be met about the outcome of individual decisions.
  • Unregulated markets
    Regulations are not suitable when
    • The price of the product has already been low. The cost of regulation may mean that this product will not be profitable.
    • Certain markets where only professionals operate should be unregulated as well, as these professionals should understand the risk that they are being exposed to and should therefore be able to make decisions based on available information and not have to face the costs of regulation.
  • Voluntary codes of conduct
    • There are guidelines to how companies or individuals operating in the market should behave
    • There are no actual official regulations to be met so costs are kept down.
  • Self-Regulation
    • Voluntary codes of conduct is enforced by the participants in the industry rather than an outside body of a regulator.
    • It is perceived as too weak because of the flexibility, and being in the interest of the providers rather than the individuals.
    • It may be used by the established players in the industry to stop new entrants.
  • Statutory Regulation
    • Under this method the State will appoint regulators and issue the rules that must be followed.
    • Firstly, the costs of this type of regulation are the highest although there is an argument that possible economies of scale can occur if similar types of regulation are carried out over a number of different industries.
    • The second argument is that the regime can be too inflexible as outside regulators may not fully understand all the risks and so increase costs to minimise what are already small risks.
  • Mixed regimes
    • Because self-regulation and statutory regulation both have benefits, a mixed regime hoping to combine the best elements of each is often adopted.