Financial Services Regulation

INTRODUCTION

With the impact global financial crises still very fresh, most economies are just recovering from its wreckage. What is in the minds of many now is how to prevent a future re-occurrence of economic crises. This burden has fallen on financial regulators of who are therefore crossing their T’s and dotting their I’s in order to ensure a risk free financial market.

 Financial analysts have all come out with heated debate as to what role should regulators consider most appropriate in order to ensure effective and efficient delivery of their set goals.

This essay therefore will not deviate from this current debate, as it will look at the appropriate role of and its relative importance of financial services regulation. The essay will equally take a critical analysis of various institutional structures and tend to suggest the most appropriate institutional structure a nation might adopt for the attainment of its goals.

Objectives of financial regulation

There are no universally agreed set of objectives for regulation in the academic circle, as various views have been aired as regards objectives by various authors over the years. One thing therefore is that though their views are different, they all have similar frame up except for that fact that their set of objectives vary on their preference scale. The major objectives therefore as spelt out by these authors are: prevention of the financial system against risk (Systemic Risk), preventing supplier of financial services from taking undue advantage on investors and depositors (consumer protection) and promoting market confidence. (Llewellyn, 1999; 2006; Goodhart et al, 1998 and Georgosouli, 2007).

From the foregoing objectives, it is imperative to have a brief look at what these objectives seek to achieve. “The rationale for regulation arises from the fact that even the best market can fail” Carmichael (2001, p.314). Therefore though regulatory objectives may differ from institution to institution, and from country to country, what they aim to achieve is to ensure ‘safety and soundness’ and also to promote ‘confidence’ and stability in the financial system generally, to this fact Llewellyn (1999, p.9) puts it succinctly that the basis of all regulatory objectives is centred on ensuring safety and soundness and as such “the purpose for regulation should be limited to identified market imperfections and failures” of which FSA (2003) equally highlights this as a major aim of its regulatory regime.

There has been heated debate as to how regulation should be carried out by regulators in preventing market failures to which much of the debate have been centred around ‘consumer protection’. Several authors hold various opinions relating to this fact. Some have argued that protecting consumers should not be limited to financial sector and financial products alone. Benston (1998, p.25), opined that “consumer protection would be most efficiently conducted either generally (along with other products and services) or with special bureaux, rather than through regulation of financial institutions and markets alone.