- Definition of financial service regulation.
- Who oversees the financial service regulation?
- Financial institutions that need regulation.
- HM treasury in the United Kingdom.
- Extend to which retail protection is required in financial service sector.
- Different approaches to protection achievement and their effectiveness.
Definition of financial service regulation
Financial service regulation is defined as a form of supervision that is aimed at subjecting financial bodies or institutions to guidelines, structured restrictions and requirements. This kind of regulation aims at maintaining the trust and the integrity that is supposed to be associated with any credible financial system. Financial service regulation is overseen by the government or can be delegated to an organization not affiliated to the government.
The main aims of the regulation are to make sure the laws set and applicable are enforced, to ensure that cases linked to misconduct are punished and prosecuted, to ensure that providers of such financial services are licenced appropriately and to also make sure that consumers or clients especially the retail ones are protected. The regulation also aims at enabling investigations of all complaints forwarded to the financial institutions and regulation bodies. Therefore, for the sake of maintaining trust and confidence in the financial sytems then regulations are paramount (Mudida 2003).
There are institutions that deal with money and that need to be regulated. They include but are not limited to the banks, insurance companies, global financing systems, commodity markets, securities institutions and international monetary bodies. Countries all over the world have introduced authorities in their own jurisdictions for the purpose of regulating the mentioned financial service providers and ensuring accountability in the financial market. For example in the United States of America there are several authorities that regulate and check on operations of the banks. Same case applies to other countries such as United Kingdom, Japan, German and China just to mention a few.
There can be a specific authority with the mandate to regulate every sector in the lucrative finance industry mainly banking; pensions market, securities and insurance or only one authority can be tasked to regulate all the financial institutions in a country. Other than the regulatory authorities it will also be noted that the central banks in every country do supervise and control banking industry by for example encouraging liquidity and solvency. Central bank thus inspects commercial banks and in this way become the principal advisors on whether or not to issue them with licences of operation. Apart from commercial banks the central bank will at times supervise other authorized dealers in the banking related markets in the country.
There are also other regulatory bodies that operate at the world level such as the Basel committee for the banking industry. The bodies too work to regulate financial service providers and ensure checks and balances at the world financial market stage. It has to be noted that financial service regulation in the world has drastically changed over the last twenty years as the constitutional and geographical territories between markets change. Markets in securities, in banking and also in insurance have been more or less blurred due to the effect of globalization (Gatheru and Shaw 1998).
HM treasury in the United Kingdom
The government of the United Kingdom on 26th of July 2010, made a proposal to alter the the structure of institution for financial regulation in a document called ‘A new approach to financial regulation; judgement, focus and stability’. The countries HM treasury was tasked with lauching some consultation aimed at gathering opinions and views on the proposal by the government to do reforms for the regulatory financial framework and by so doing provide the Bank of England with some sort of control over the macro-prudential supervision and also oversight on micro-prudential control.
The government proposes to legislate and by so doing create a committee on financial policies for the Bank of England. It also wants to create an authority on the aspect of prudential regulation and which will be a subsidiary body of the Bank of England. Lastly, the government proposes to create a consumer protection policy which is independent coupled with a market authority. The HM treasury therefore invited responses from stakeholders during that period of doing the consultation which was scheduled to run from July 26 to October 18, 2010. The responses got during the consultation were up to 200 mostly from firms dealing with financial services.
These firms included banks, some building societies and firms dealing with insurance, financial advisors who are independent, trade associations, brokers, the exchanges and consumer groups’ representatives. The summary of those responses which is called the consultation document were published by the government on 24th of November 2010. It was also expected to present the document containing the policies to the public and other stakeholders in early 2011(Hm Treasury 2010).
Extend to which retail protection is required in financial service sector
Other aspects within the financial service regulation include productivity, public private agreements or partnerships, welfare, taxation, enterprises and also international issues. Regulation is very critical in financial service sector to a very large extent and more so in relation to the protection of the retail consumer. Consumers have to be protected from the banks ability to raise interest rates for loans and therefore precipitating a crisis within the market.
If banks are left to operate with impunity, then they can end up swindling retail consumers of their hard earned cash. This leaves the retail consumer with no option but to pay large portions of their money on interests and at times paying double the amount that they borrowed from the bank. The retail consumer will have a less borrowing power since the interest rates are exorbitant.They cannot go on borrowing from the bank but result to other means of getting credit due to lack of affordability. Therefore, it is important that the institutions that are tasked with protecting the consumer by checking on the interest rates the banks are offering do so with a lot of dedication.
These are the authorities appointed by governments, central banks and also the internationally recognized regulators. The central banks have to fix the maximum the banks can offer as interest rate in line with the amount of money borrowed by the client. Financial regulators also have the responsibility to ensure that there are no hidden charges on credit advanced and that there is openness in service delivery. Regulation has to be introduced to ensure that the bank loans also mature at the set time and no unnecessary delays that at times injure the consumer (Grant 2000).
Many times the insurance companies have come under heavy criticism by the media and consumer friendly organizations for operating with impunity. Retail consumers have lost their money through unlicenced insurance companies that operate within big towns and which most of time will pass as genuine. These companies are for life insurance, car insurance and insurance against theft, fire insurance and so forth.
Many times they fail to meet the obligations stated in the mission they operate under while they have collected a lot of money from the clients registered with them. Unnecessary procedures and demands given to the retail consumers also raise a lot of questions than answers since some of them were not revealed at the time of engagement. Others will tell a consumer that whatever case they are presenting was not what was originally agreed upon which constitutes misrepresentation. Therefore, it is very important that the insurance companies are closely monitored and regulated in order to avoid a situation where the retail consumers lose money which they entrusted with these companies. They ought to follow the laid down procedures on operations of insurance companies (Mudida 2003).
Stock markets have also been very instrumental in the financial service. Many people have also entrusted their wealth with these stock brokers with many of them losing a lot of money to them in equal measure. Stock brokers at the national stock exchanges operate with money which belongs to the retail consumer and therefore have to be put under check and regulation. Stock brokers have collapsed in many occasions or been put under receivership meaning that the customer’s funds are in danger.
Regulatory measures are necessary to ensure that retail consumers have confidence in the brokerage companies and are sure their wealth is safe. They also have to be checked to ensure that they operate under a minimum balance in their accounts. They have to also be investigated for bankruptcy and their net worth monitored at all times so that they remain admissible (Wason 1986).
Security financial companies are also important in the financial service provision. It is not rare for retail consumers to lose money on transit through the companies they trust can make secure deliveries of their cash. Monies lost in transit will in most times not be recovered leading to huge losses on the part of the retail consumers. It’s therefore very important that the market for financial securities is regulated, investigated and closely monitored.
This ensures that there is trust in them by the consumers and the government in moving money from one destination to another. Money under transit is usually very risky and needs a lot of investment so as to reach the destination in time and safely. This can only be achieved through having proper planning on manpower to offer security and other necessary infrastructure such as good transport means and smooth roads for speedy movement. Establishment of security commissions to regulate this financial service security companies will go along way in ensuring that retail consumers money is protected and avoid losses in line with ensuring that the companies follow the laid down procedures and restrictions(Killick 1981).
The financial service providers at the international level should also be regulated. There are those that operate genuinely and others operating as ‘con-men’ and ‘con-women’. They too have to be checked by the financial regulatory bodies at the world level. People have in more than one time lost huge sums of money to fake companies which have even branches in various countries in the world. They pass as credible but at the end of the day end up swindling money out of unsuspecting consumers of the purported product the company deals with.
With proper regulation, monitoring and evaluation system these companies can be put under check and in so doing save clients and consumers the agony of losing money to them. There ought to be introduced regulations by regulatory organizations recognized internationally for the purposes of monitoring on the operations of some of these financial institutions (Koutsoyianis 1979).
Retail consumer protection can be achieved if the different approaches available are made effective and operational. If banks are not let to unliterary amend the lending rates to the loans they advance to the retail consumers, then the protection policy can be achieved to a large extend. This can only be effective if the central banks and other authorities with the mandate to check on the interest lending rates work to achieve results.
Banks will need to consistently be reminded to lower the lending rates when it’s appropriate to do so. Additional costs that clients have to bear have to also be investigated so as to ensure there is transparency in the way banks and other financial intermediaries are offering their services. Every transaction has to be undertaken above board so that there can be trust of the client and that fairness is seen. This way consumer protection can be achieved greatly (Solomon,Stuart and Marshall 2009).
In the process of protecting the retail consumer, financial authorities need to be vested with a lot of powers and competencies to execute their mandate. This includes powers to prosecute those who fail to follow the laid down procedures of operation, those breaking the law on business operation and even those operating without the required documentation. The financial authorities should also be allowed to revoke licences for those who fail to meet the set standards of operation including advising them to close business if need be. This approach will generally lead to protecting the consumer from such unscrupulous financial service providers in the market.
This authorities have to also be allowed to vet those entering the financial market and their history so that a clear knowledge of whom they are is established and made public for the sake of those who want to angage them in any business related activity. The employees of such companies have to also be scrutinized to establish the qualifications for the work they are involved in. This way the competencies will be established and also give an insight into what they are capable of achieving and not achieving. The authorities’ have to also check that the employees have a certificate from the police for good conduct (Todaro 1992).
Another approach which can prove effective in protecting retail consumer is the introduction of a code of conduct between the banking associations, the government and the retail banks themselves. If agreed upon this code will bide the various boards involved and in so doing protect the ultimate consumer. Violation of the code should also lead to penalties and at worst revocation of the operating licences. The code of conduct should also be given a legal backing so that it can operate as legislation for avoidance of any doubt. This way it will operate as a law with the winner being the retail consumer who is at the end of the chain.
All those involved should also sign the document as prove that they have abided themselves to adhere to its letter and spirit. Apart from the code of conduct there are also other discussions of legal nature that can be introduced to the various financial service providers. This will allow for the voluntary adherence and acceptability of regulations for consumer protection by the key players. The participants in the retail financial market will then be allowed to implement the agreed discussions freely without being pushed and see how best they can serve their clients and in so doing maintain them for the future business growth (Zuvekas 1979).
Different approaches to protection achievement and their effectiveness
Consumer protection laws are also efficient in ensuring that consumers are protected. These laws can emanate from the government or members of the legislature who feel that consumers to a certain extent are being exploited by one or more companies operating in the financial market. The laws will therefore be anchored in the countries constitution and then implemented by the agencies of constitutional implementation.
Most of what is put in a constitution of a country is adhered to and therefore this will be an effective way of ensuring that the consumers are protected from losses that are associated with financial service provision. Failure of a financial services provider to respect the laws will also attract penalties. Apart from the laws anchored in the constitution to protect the consumer, levies can also be introduced and implemented by the local authorities or local governments such as the town councils. The levies can be incorporated in the by-laws of the local government and operate to regulate the financial institutions that operate at the local level.
This way they also ensure consumers get value for for money, services are provided and the prices for financial services are not hiked above the reach of the consumers. The government can also decide to introduce sanctions to some financial service providers that in its own assessment are violating the set standards of operation. This is too an effective method to protect the consumer from those companies that operate with impunity (Hardwick, Khan and Langmead 1994).
Unfair practices in the market have to be regulated. There are those financial service providers who have advantages over others either in terms of market capitalization, the kind of service they provide or have a large operating capital. This may lead to a situation where they take that advantage to edge other similar companies or competitors out of the market and therefore end up exploiting the consumers in the guise of offering better services. Regulating these companies is crucial in ensuring that the consumers are given value for money and that they get the services required at a fair and acceptable rate.
It’s also important to introduce conventions that are related to financial service provision. The signatories to these conventions can then be published or made public. The service providers who fail to sign the conventions can then be blacklisted and also made public for people to know the operations of various financial service providers in the market at that particular time. There is also the approach of giving guidelines to the retail consumers on various services available in the market, how they can get them and from whom.
Giving the guidelines will help the consumers to make their choice from a point of knowledge and will not fall prey to those financial service providers who are not genuine or are not effective in service provision. The concept of enhancing the trust mutually between the consumers and the players in the financial market is also critical.
This will ensure the consumers are protected and the service providers get the business they need from the customers. It should be noted that there are basic principles that apply in the process of lending in the retail market. These principles should be set to protect the consumer from unnecessary expenditure or losses. Enforcement of the set regulations cannot be over-emphasised. They should be enforced and interpreted well by the judiciary and other government law enforcers like the police department. These will ensure the consumers get whatever services they need at a fair rate and justice will be seen to be done (Mudida 2003).
The regulators should also carry out consumer relations activities in a manner which is helpful, transparent, and cooperative & flexible way. The amendments made on the conditions of operation of the financial regulations should not have any elements of ambiguity. For proper enforcement of regulations, policies have to be the popular ones made on sound considerations and have to be attractive.
In coming up with the regulations people with expertise should be engaged to advice on the legal implications through their wise counsels. Platforms for complaints have to be established so that issues can be sorted out at the right time and in a proper way. Lastly, financial service regulators will have to maintain a credible public image so that they can secure trust and confidence of the retail consusmers (Golfield and Chandler 1981).
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