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 In finance, systemic risk is the risk of collapse of an entire financial system or entire market, as opposed to the risk associated with any one individual entity, group or component of a system, that can be contained therein without harming the ...

, which implies that the failure of financial firms involves public interest considerations; and

information asymmetry In contract theory, mechanism design, and economics, an information asymmetry is a situation where one party has more or better information than the other. Information asymmetry creates an imbalance of power in transactions, which can sometimes c ...

, which justifies curbs on freedom of contract in selected areas of financial services, particularly those that involve retail clients and/or

principal–agent problem The principal–agent problem refers to the conflict in interests and priorities that arises when one person or entity (the " agent") takes actions on behalf of another person or entity (the " principal"). The problem worsens when there is a gr ...

s. An integral part of financial regulation is the supervision of designated financial firms and markets by specialized authorities such as

securities commission A securities commission, securities regulator or capital market authority is a government department or agency responsible for financial regulation of securities products within a particular country. Its powers and responsibilities vary greatly ...

s and bank supervisors. In some jurisdictions, certain aspects of financial supervision are delegated to

self-regulatory organization Self-regulation may refer to: *Emotional self-regulation *Self-control, in sociology/psychology *Self-regulated learning, in educational psychology *Self-regulation theory (SRT), a system of conscious personal management *Industry self-regulation, ...

s. Financial regulation forms one of three legal categories which constitutes the content of

financial law Financial law is the law and regulation of the commercial banking, capital markets, insurance, derivatives and investment management sectors. Understanding financial law is crucial to appreciating the creation and formation of banking and finan ...

, the other two being market practices and

case law Case law, also used interchangeably with common law, is a law that is based on precedents, that is the judicial decisions from previous cases, rather than law based on constitutions, statutes, or regulations. Case law uses the detailed facts of ...

History

In the

early modern period The early modern period is a Periodization, historical period that is defined either as part of or as immediately preceding the modern period, with divisions based primarily on the history of Europe and the broader concept of modernity. There i ...

, the Dutch were the pioneers in financial regulation. The first recorded ban (regulation) on

short selling In finance, being short in an asset means investing in such a way that the investor will profit if the market value of the asset falls. This is the opposite of the more common Long (finance), long Position (finance), position, where the inves ...

was enacted by the Dutch authorities as early as 1610.

Aims of regulation

The objectives of financial regulators are usually: * 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 Consumer protection is the practice of safeguarding buyers of goods and services, and the public, against unfair practices in the marketplace. Consumer protection measures are often established by law. Such laws are intended to prevent business ...

– 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. There are various setups and combinations in place for the financial regulatory structure around the globe.

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. 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. Asset management supervision or investment acts ensures the frictionless operation of those vehicles.

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.

Financial regulatory authorities

References

External links

Securities Lawyer's Deskbook
from the University of Cincinnati College of Law
Ana Carvajal, Jennifer Elliott: IMF Study Points to Gaps in Securities Market Regulation

IOSCO: Objectives and Principles of Securities Regulation (PDF-Datei 67 Seiten)
{{DEFAULTSORT:Financial Regulation Financial law