Chapter 8 - Financial Services Regulation and Professional Integrity

FS Regulation, Fin Crime, Market Abuse, Data Protection, Complaints and Compensation, Integrity and Ethics in Professional Practice

Why is financial regulation important?

Effective financial markets are an essential part of developed and developing economies. They fuel economic development and aid wealth creation. As a result, confidence and trust in these markets is vital; loss of confidence and trust can result in an adverse impact on customers and the economy.

Why does financial regulation exist?

The risk of monetary loss that can arise from dealing in all types of financial transactions has meant that financial markets have always been subject to the need for rules and codes of conduct to protect investors and the public.

Why were regulations implemented as markets developed?

• There grew a need for market participants to be able to set rules so that there were agreed standards of behaviour, and to provide a mechanism so that disputes could be settled readily. This need developed into what is known as self-regulation, when, for example, a stock exchange, as well as providing a secondary market for shares, would also set rules for its members and police their implementation.

• As markets, financial institutions and financial services developed, and the potential impact that they could have on both the economy and society grew, self-regulation became increasingly untenable, and most countries moved to a statutory approach and established their own regulatory bodies.

• This required governments to become involved in the regulation of financial markets. The role of the government is to establish the legal framework within which financial markets operate and how supervision of markets and participants will take place.

How were regulatory bodies established?

• By governments or other bodies sanctioned by governments to oversee the functioning and fairness of financial markets and the firms that engage in financial activity.

• The government delegates the responsibility for setting rules and supervising financial market activity to these regulatory bodies and then oversees their effectiveness.