Financial regulation

Financial regulation is a broad set of policies that apply to the financial sector in most jurisdictions, justified by two main features of finance: systemic risk, which implies that the failure of financial firms involves public interest considerations; and information asymmetry, which justifies curbs on freedom of contract in selected areas of financial services, particularly those that involve retail clients and/or Principal–agent problems. An integral part of financial regulation is the supervision of designated financial firms and markets by specialized authorities such as securities commissions and bank supervisors.

In some jurisdictions, certain aspects of financial supervision are delegated to self-regulatory organizations. Financial regulation forms one of three legal categories which constitutes the content of financial law, the other two being market practices and case law.^[1]

History

In the early modern period, the Dutch were the pioneers in financial regulation.^[2] The first recorded ban (regulation) on short selling was enacted by the Dutch authorities as early as 1610.

Aims of regulation

The objectives of financial regulators are usually:^[3]

market confidence – to maintain confidence in the financial system
financial stability – contributing to the protection and enhancement of stability of the financial system
consumer protection – securing the appropriate degree of protection for consumers.
reduce financial crime
regulate foreign participation

Structure of supervision

Acts empower organizations, government or non-government, to monitor activities and enforce actions.^[4] There are various setups and combinations in place for the financial regulatory structure around the globe.^[5]^[6]

Securities market regulation

Exchange acts ensure that trading on the floor of exchanges is conducted in a proper manner. Most prominent the pricing process, execution and settlement of trades, direct and efficient trade monitoring.^[7]^[8]

Financial regulators ensure that listed companies and market participants comply with various regulations under the trading acts. The trading acts demands that listed companies publish regular financial reports, ad hoc notifications or directors' dealings. Whereas market participants are required to publish major shareholder notifications. The objective of monitoring compliance by listed companies with their disclosure requirements is to ensure that investors have access to essential and adequate information for making an informed assessment of listed companies and their securities.^[9]^[10]^[11]

Asset management supervision or investment acts ensures the frictionless operation of those vehicles.^[12]

Supervision of banks and financial services providers

Banking acts lay down rules for banks which they have to observe when they are being established and when they are carrying on their business. These rules are designed to prevent unwelcome developments that might disrupt the smooth functioning of the banking system. Thus ensuring a strong and efficient banking system.^[13]^[14]