Chapter 3: Regulation

Question 1

Principal aims of regulation / benefits of regulation

Answer 1

(FCPCi)
Help reduce financial crime (fraud)
Maintain confidence in the financial system
Protect consumers of financial products
Correct market inefficiencies and promote efficient and orderly markets

Question 2

Direct costs of regulation (ANS time and money)

Answer 2

Time to administer the regulation, includes collecting information on, and monitoring of the firms
Compliance for the regulated firms will result in costs, such as the collection and provision of required informaton.
These costs will most likely be borne by customers

Question 3

Indirect cost of regulation (the impact on the market)

Answer 3

(RURARP)
Reduced competition – All products will be the same
An undermining of the sense of professional responsibility among intermediaries and advisors
Reduced product innovation – They will be a lot of limits imposed by the regulator
An alteration in the behavior of consumers
Reduction in consumer production mechanisms developed by the marker itself
Providers may not feel they need to be as careful about what they provide.

Question 4

Functions of a regulator

Answer 4

(VISEP)
Vetting and registration of firms and individuals authorized to conduct certain types of business
Influencing and reviewing the government policy
Supervising the prudential management and conduct of financial organizations
Enforcing regulations, investigating suspected breaches and imposing sanctions
Providing information to consumers and the public.

Question 5

Anti-selection

Answer 5

Don’t tell insurance about some of my risks

People take out contracts when they believe their risk is higher than the insurance company has allowed for in its premiums.

Question 6

Moral hazzard

Answer 6

Reckless with my phone because I have insurance

Party behaves differently from the way they would behave if they were fully exposed to the consequence of the action

Question 7

Outcomes that can be achieved as a result of treating customers fairly

Answer 7

Consumers can be confident that they are dealing with firms where the fair treatment of customers is central to the corporate culture.
Products and services marketed and sold in the retail market are designed to meet the needs of identified consumer groups and are targeted accordingly.
Consumers are provided with clear information and are kept appropriately informed before, during and after the point of sale.
Where consumers receive advice, the advice is suitable and takes account of their circumstances.
Consumers are provided with products that perform as firms have led them to expect, and the associated service is of an acceptable standard and as they have been led to expect.
Consumers do not face unreasonable post-sale barriers imposed by firms to change products, switch providers, submit a claim, or make a complaint.

Question 8

Possible regulatory regimes

Answer 8

Voluntary code of conducts
Self regulation
Statutory regulation
Unregulated markets and unregulated lines of business
Mixed regimes

Question 9

Functions of central bank in regulatory

Answer 9

Control the money supply
Determine or influence interest rates
Determine or influence inflation rates
Determine or influence exchange rates
Ensure stability of the fin system
Be lender of last resort
Target macroeconomic factors such as growth and unemployment

Question 10

How confidence is maintained in the market

Answer 10

Capital Adequacy
Competence and integrity
Compensation schemes
Stock exchange requirements
Regulators will seek to ensure that the market is transparent, orderly and provides protection to investors

Question 11

Sources of information which a personal investor can gain additional information

Answer 11

Companies published reports and accounts
* Independent financial intermediaries and advisors
* Financial providers themselves
* Financial press
* Books
* Trade associations and consumer associations
* The internet
* Own knowledge and previous experience
* Informed friends, colleagues etc