What It Means To Be Regulated?
Many regulated entities hold strong views about regulation mainly because it comes with costs, can be inflexible and inefficient bureaucracies yet financial services providers have unique characteristics within their businesses which require customisation of the rules. Financial regulation involves rules and laws for operating in the financial industry that credit providers, money lenders, savings and credit cooperative societies, insurance companies, brokers and agents, investment firms and asset managers must follow. The regulators establish specific requirements, restrictions, guidelines and conditions for operating in the financial industries, in order to maintain stability and integrity of the financial system. Regulation is not going anywhere, either way financial services providers will always be regulated. However, it should be effective and efficient for all players, in order to ensure equality and eliminate “free-riders”.
Financial regulators each have duties and responsibilities in the system in order to monitor and supervise the activities they regulate. The reason behind regulation is preventing fraudulent activities and protect the interests of consumers. However, opinions on the efficiency, effectiveness and need for regulators differ amongst the regulated entities, especially the small and medium size ones who feel the cost of being regulated far surpasses the benefits to them.
Regulation started after governments noticed the surge in unfair and poor treatments of customers, either due to an increase in pyramid or Ponzi schemes and other fraudulent action from financial service providers which resulted in the loss of consumers’ hard-earned savings and investments.
The type of regulations we need to be aware of include; Prudential Regulation and Market Conduct Regulation. Prudential Regulation is a type of financial regulation that requires financial services providers to control risks and hold adequate capital (mostly institutional capital) as defined by capital requirements, liquidity requirements, by the imposition of concentration risk (or large exposures) limits, and by related reporting and disclosure requirements (https://en.wikipedia.org/wiki/Prudential_regulation).
On the other hand, market conduct focuses on consumer protection that encompasses oversight of the entity’s business conduct, including treatment of consumers and pricing of financial services and products. The need for such regulation was due weaknesses in the industry including poor governance and control structures; weak corporate culture; mind-set and behaviour; inappropriate incentivisation; high, opaque and complex fee structures; lack of transparency and disclosure; design and sale of inappropriate products and services; reckless lending and poor collection processes. (https://assets.kpmg/content/dam/kpmg/za/pdf/2017/01/za-regulatory-change-is-upon-us.pdf)
Benefits of regulation
Regulation applies to both banking institutions, which are regulated by the central bank or reserve bank, depending on each country, and non-bank financial institutions, which are regulated by government agencies usually from the Ministry of Finance. Responsible businesses have the power to work with government influence legislation aimed at irresponsible behaviour and help new players strengthen their internal controls and governance systems.