Financial Regulation Objectives and Approaches

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Questions and Answers

What is the main objective of the Basel Consultative Group?

To provide a forum for banking supervisors to discuss issues of mutual concern (correct)

To establish capital standards for insurance companies

To provide a framework for securities regulation

To regulate the international foreign exchange market

What are the three objectives of securities regulation that the International Organization of Securities Commissions (IOSCO) aims to achieve?

Promote financial stability, ensure transparency, and reduce regulatory burden

Enhance competition, improve liquidity, and reduce volatility

Protect investors, ensure fair and efficient markets, and reduce systemic risk (correct)

Encourage entrepreneurship, increase market access, and reduce costs

What is the main responsibility of the US Securities and Exchange Commission (SEC)?

To set monetary policy and regulate interest rates

To oversee the securities industry and enforce securities laws (correct)

To regulate the banking industry

To manage the national debt and regulate government securities

What is the primary purpose of diagnostic tools in thematic-based supervision?

To identify potential risks and weaknesses in firms Signup and view all the answers

Why do regulators require firms to have adequate capital standards?

To protect depositors and prevent bank failures Signup and view all the answers

What is the primary objective of regulation?

To ensure fair and stable financial markets Signup and view all the answers

What is the main difference between rules-based and principles-based approaches to regulation?

Rules-based focuses on following strict guidelines, while principles-based focuses on underlying principles Signup and view all the answers

What is the penalty for breaching the General Data Protection Regulation (GDPR)?

Up to €20 million or 4% of global turnover Signup and view all the answers

What is the objective of the Dodd-Frank Act?

To promote financial stability and prevent future economic crises Signup and view all the answers

What is counterparty risk?

The risk of default by a trading partner Signup and view all the answers

How do regulators approach Fintech?

By providing support and guidance to Fintech startups Signup and view all the answers

What is the punishment for defrauding securities investors?

Imprisonment for up to 20 years Signup and view all the answers

What is the definition of payment services?

Services enabling cash to be placed on a payment account Signup and view all the answers

Study Notes

Objectives of Regulation

Regulation aims to protect consumers, maintain financial stability, and ensure fair market conduct

Approaches to Regulation

Rules-based approach: focuses on specific, detailed prescriptions for firms to follow
Principles-based approach: emphasizes high-level principles and outcomes, allowing firms to adapt and innovate

Penalties for breach: up to €20 million or 4% of global annual turnover
Data subject rights:
- Right to access
- Right to rectification
- Right to erasure
- Right to restriction of processing
- Right to data portability
- Right to object

Dodd-Frank Act

Objective: to promote financial stability, prevent systemic risk, and protect consumers

Markets in Financial Instruments Directive (MiFID)

Investment services subject to passporting:
- Reception and transmission of orders
- Execution of orders
- Dealing on own account

Sarbanes-Oxley (SOX) Act

Section 404: publicly registered US companies must report on internal controls and procedures
Internal controls report: required at least annually
Payment services: include services enabling cash to be placed, transferred, or withdrawn
Punishment for defrauding securities investors: up to 25 years imprisonment

Settlement Process

Steps in the settlement process:
- Trade execution
- Trade confirmation
- Clearing and settlement
- Custody and asset servicing

UK Bribery Act

Extraterritorial reach: applies to bribery committed by UK companies or individuals abroad

5AMLD (5th Anti-Money Laundering Directive)

Additional changes: implementing stricter regulations on cryptocurrency transactions and prepaid cards

Exchange Operators

Four forms of disciplinary action:
- Public censure
- Suspension of trading
- Expulsion from membership
- Fines

Counterparty Risk

Risk that a counterparty will default on their obligations

Fintech and Regulators

Approach: regulators focus on understanding, regulating, and supporting Fintech innovation
Possible applications of artificial intelligence (AI):
- Risk assessment
- Fraud detection
- Customer service
Expectations of regulators in relation to Fintech and corporate governance:
- Strong governance and risk management
- Effective use of AI and data analytics
- Compliance with existing regulations

Insurance Markets and Investment Services

Types of regulators typically covering insurance markets and investment services at a national level:
- Insurance regulators
- Securities regulators

Basel Consultative Group

Provides a forum for international cooperation and discussion on banking supervision

International Organization of Securities Commissions (IOSCO)

Objectives of securities regulation:
- Protect investors
- Ensure fair and efficient markets
- Reduce systemic risk
Eight Principles Relating to the Regulator:
- Independence
- Accountability
- Transparency
- Cooperation
- Proportionality
- Fairness
- Consistency
- Enforcement

US Securities and Exchange Commission (SEC)

Main responsibility: to protect investors and maintain fair and efficient markets

Thematic-Based Supervision

Diagnostic tools used:
- Risk assessments
- Compliance reviews
- On-site inspections

UK-Regulated Activities

Can be split into four categories:
- Depositing and lending
- Investing and managing
- Insuring and reinsuring
- Paying and settling

Capital Standards

Regulation requires firms to have adequate capital standards to ensure financial stability and maintain public trust

Home and Host State Regulations

Home state regulation: regulates firms based on their domicile
Host state regulation: regulates firms based on their activities in the host state

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Description

Learn about the objectives of financial regulation, including consumer protection and financial stability. Explore the rules-based and principles-based approaches to regulation, and get an overview of the General Data Protection Regulation (GDPR).