The Regulation of Finance Service Industry

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Introduction

A monetary institution’s regulation of finances is a conscious effort to ensure proper adherence to specified requirements, guidelines, and boundaries that are set with an expectation to keep the financial institution reliable and functional. The regulation could be done through legislation or a code of conduct that may be obligatory. Basically, the regulation of finances is carried out following three basic principles, namely:

Promotion of fairness, efficiency, and maintain an orderly market.
Aid customers in retailing fair transactions; and
Improve the capabilities of business and enhance the regulatory efficiency of a financial monitor.

A monitor of finances or a regulatory body is typically responsible for regulating financial exchanges, financial service-based markets, in-country industries and firms, as well as effecting standards which the financial institutions are expected to meet-up with. The regulatory body has an authority to descend on non-compliance institutions or institutions that are lagging in meeting the laid down standards. In the United Kingdom, for instance, a body known as Financial Service Authority or FSA is empowered to conduct monetary activities as a finance regulator; and the body has been engaged with the function since 2001. Since it was established, the powers of the FSA have greatly increased, and its regulatory activities are pictorial over mortgage business and general insurance, within the period of November 2004 and January 2005. It is the expectation in this paper to discuss regulation of finance service industries, globally, under the following:

Financial services regulation.
Financial services principles;
The post economic crises prospects of financial services after the world economic crunch.

Finance Service Industry Regulation and Powers of a Regulatory Body

Typically, regulatory bodies have vast powers for enforcing of rules in carrying out investigations. This is same with finance service industry regulators who have the duty and powers to enforce rules over monetary bodies and ensure that principles are observed with high degree of consistency for the benefit and interest of consuming society. A regulatory body will usually endeavor assessing and scrutinizing risk factors of firms or their activities and ascertain the potentials of such to cause harm to consumers, market confidence, public awareness, as well as financial crime. DePamphilis considers financial services as follows:

Financial services refer to services provided by the finance industry. The finance industry encompasses a broad range of organizations that deal with the management of money. Among these organizations are banks, credit card companies, insurance companies, consumer finance companies, stock brokerages, investment funds and some government sponsored enterprises. As of 2004, the financial services industry represented 20% of the market capitalization of the S&P 500 in the United States (DePamphilis, 2008).

A financial industry service regulator is saddle with the responsibility to keep the confidence of the public in financial systems afloat; this it does through appropriate maintenance and rise of the understanding of the public about the state of regulated institutions, crime reduction and prevention, consumer protection, and fostering financial negotiations. However, it is impossible for regulator to achieve one hundred percent of regulation, due to inefficiencies and lapses. A regulatory body usually has properly documented reports on the several micros of financial systems in a country and uses same for recommending regulatory or legislative changes in cases of emergent loopholes in the systems.

And for the companies, it is the responsibility of senior managements to ensure regulatory compliances and activeness of the business and cheek managerial risks and control such internalities as Chinese Walls. Cartwright & Schoenberg have noted that:

‘This principle has the objective of preventing unnecessary intrusion by the regulator into the business of a firm’ (Cartwright & Schoenberg, 2006).

There are, certainly, confrontations to regulations which are tossed from international overlaps of financial markets and laws. It is pertinent for financials regulators in particular countries to search for international cooperation with one-another with an aim of arriving at unified internationally accepted standards. The achievement of these by regulators must be ensured while an eye is focused of maintenance of vigorous competitions, cost minimization for companies which comply with regulations, as well as consideration of innovations that can fire financial services on a good drive.

FSAs, therefore, regulates financial services industries, supervise deposits taken, monitor exchanges, monitor investments into companies, monitor clearing houses, as well as other facets of financial industries.

Financial Service Authorities and Their Responsibilities

In the U.S of A, the expression ‘financial services’ gained popularity resultant from the Gramm-Leach-Bil-Act which originated toward the end of the 1990s for the benefit merger of several kinds of firms which were functioning in the United States (DePamphilis, 2008). Naturally, firms have two clear views to this developed kind of business. According to Cartwright & Schoenberg, a particular viewpoint is upheld regarding companies:

Companies usually have two distinct approaches to this new type of business. One approach would be a bank which simply buys an insurance company or an investment bank, keeps the original brands of the acquired firm, and adds the acquisition to its holding company simply to diversify its earnings. Outside the U.S. (e.g., in Japan), non-financial services companies are permitted within the holding company. In this scenario, each company still looks independent, and has its own customers… (Cartwright & Schoenberg, 2006)

On the other hand, banks may develop a self owned brokerage barrier in an effort to market its products around its sphere of contact which has already been existent inceptively and utilize combination of the totality of its products with a singular company. In this regards, commercial banks tend to be known simply as ‘bank’. The word ‘commercial’ is made use of to qualify such banks from those which are known as ‘investment banks’; a kind of entity which does not lend funds straight to businesses, but rather support in raising funds (called bonds or debts) and stock ( also known as equity) from several other financial institutions. Primarily, banks do the following activities:

They help safe-keep money as well as permit withdrawer of the money in times when the saver needs same;
They issue checkbooks for usage in payment or settling of bills as well as enable the delivery of other payments through postage;
Grant loans;
Issue credit cards as well as process same;
Issue debit cards which are used instead of checkbooks;
Issue ATM cards and provide the machinery for it usage throughout its jurisdiction.
Carry out wire transfer services for individuals through banks;
Supports retention of order for easy payment of bills automatically;
Grant overdraft permissions temporarily for the growth of funds of the bank to catch up with expenses which are incurred every month; and
Carry deal with the likes as may be provisionally authorized.

Other Types of Bank Services Regulated by FSA

Other banks regulated by the FSA include:

Private Banks: these are banks that offer their services to limited or specify worthy individuals. In this case, an individual or a family must have a certain net worth for the service to be given same. It is more known of this kind of banks to give personal services than it is the case with the day to day retail banks.

Capital Market Banks: this are shouldered with responsibilities for underwriting outstanding amounts and equities, and supplementing the businesses of companies as well as helping out in restructuring of debts into monetary products which are prearranged.

FSA also regulate the following:

Foreign exchange services

These services are carried out by a lot of banks all over the world, and they basically include the following as stated by Harwood:

‘Currency Exchange – where clients can purchase and sell foreign currency banknotes.
Wire transfer – where clients can send funds to international banks abroad.
Foreign Currency Banking- banking transactions are done in foreign currency’ (Harwood, 2006).

Investment services

Asset management- this expression normally presents an instance where a company is ran on collectively invested funds. It also means the provision of services by another institution which has registered adequately and regarded as an investment advisor.
Hedge Fund Management- this normally has the responsibility to provide ‘prime brokerage’ services at notable investment banks for conducting marketing.
Custody services-this comprises the provision of securities as well as offering other functions that are collectively allied.

Insurance

Insurance brokerage- this insures shopping for insurance (which in general are related to property) in customers’ proxy. Lately, several internet sites are developed to deliver to customers defined prices in comparison to such services as insurance which has resulted to conflict in the sector.
Reinsurance – this has to do with selling insurance to the institutions which are responsible for selling insurances in order to secure them from hazardous losses.

The principles in the financial Services industry

An effort to enhance a capital and financial market that can be competitive and effective in several countries which will enable financial companies to generate financial markets that will be of high quality and which will meet the demands of consumers has poise a huge challenge for many economies and societies. For instance, the Japanese market has been caught in this web of difficulties. This has necessitated the need for improvement of businesses and a proper regulation of business environments to suite users and subsequently financial service providers. In this consideration, the FSA in Japan has made significant efforts to attain enhanced regulations by the presentation of a concept known as Optimal Combination of Rules-based and Principles-based Supervisory approaches (Rosenbaum & Joshua, 2009), and has had diplomatic chats with concerned financial market representatives on significant strategies that are utilizable for the effectiveness of principle-based supervisions. The FSA has hence accepted to cooperate and work in partnership with relevant stakeholders. Rosenbaum & Joshua, (2009) have stated that:

‘The “Principles” are a set of key codes of conduct or general behavioral rules that are underlying basis of statutory rules such as laws and regulations, and should be respected when financial firms conduct their business as well as when the FSA takes supervisory actions (Rosenbaum & Joshua, 2009).

The supervision which is principle based is a mechanism which agrees with principled discussed Harwood (2006); which have emphasized encouragement of efforts made by financial institutions in the improvement of self-initiative business management. In the assemblage of the principles, FSA had conducted several symposiums for idea-based interactions with several stakeholders in economy control.

FSA has also had talks with individuals in an effort to share unified views with regard to the principles in order to actualize the following:

To enable users to acquire pre-hand knowledge on market trends and have adequate consideration of the quality of services offered by finance services, conceding conscious alertness to security, and
To give clear visionary pictures to financial service providers regarding what actions they could take in instances where there is no stipulated or lay down rules or where there is lack of interpretation of ones that are existent.

Financial System Stability: Regulation and Supervision of Banks in U.S

A framework for supervision and regulation of the banking sector in the United States is carried out though Acts which foresee monetary activities, including: the act for exchange control, Banking Act, and the act of monetary laws. The Central bank is concerned with the issuance of licenses to banks in two groupings; including Licensed Specialized Banks (which are responsible for savings and developmental functions) and Commercial banks. The major variation between the two categories of banks is that commercial banks are allowed to admit public deposits through the operation of customer current accounts and is also authorized to deal in foreign exchange. This entitles the bank to be involved in wide-ranges of foreign-exchange-transactions. These functions are not identified with specialized banks. The central bank, thus, is empowered by law to carry out the following:

Granting of approvals for the establishment and closure of bank’s business outlets, bank branches as well as the entire bank;
Issuance of prudent directives, orders and determinations to banks, statutorily; and
Conducting of onsite and offsite examining of banks as well as enforcing of regulations and resuscitation of feeble banks.

The supervisory and regulatory licensing function of the central bank is overseen by the supervisory department of the bank. Bank supervisions as carried out by the Central Bank are footed on standards which are agreed upon worldwide through the commitment of a bank supervisory committee known as Basel Committee. Straub has stated that:

Under the offsite surveillance system, the financial condition of Licensed Commercial Banks and Licensed Specialized Banks is monitored on the basis of period information provided by banks on their operations. The periodic information includes weekly interest rates of deposits and advances, monthly returns on selected financial information, assets and liabilities, statutory liquid assets, quarterly returns on income and expenditure, capital adequacy, non-performing advances, classified advances and provisioning for bad and doubtful advances, investments in shares, accommodation granted to bank directors, their close relations and concerns in which a director has a substantial interest, interest spreads, half-yearly return on share ownership of the banks and annual audited financial statements (Straub, 2007)

With regard to the banking act provisions and the financial law act, the several commercial banks are licensed and equal license is granted specialized banks which are answerable to examinations which are statutory in nature, at least once in two years. A fresh onsite monitory way which utilizes the process of examination and which focuses on specifying risks identifiable with banks and properly curtailing such risk through effective managerial strategies as well as assessing of adequate resources for mitigating such risks is considered recently. This is supported by an examination-based worldwide model, known as CAMEL. CAMEL is derived from the terms capital adequacy, asset quality, management, earnings and liquidity.

Additionally, the compliance to laws and other statutory requirements by banks and the control of standards which are corporate-government related is emphasized. Situations of non-compliance to sensitive requirements and indications of flaws or any identifiable deficiencies in the state of finances, and systematic controls of banks are directed to the attention of a directorate board by the central bank in insurance effecting necessary actions.

An Example of the functionality of FSA: the PwC navigational regulatory complexity

The G20 has spearheaded the invention of stiffer and more worldwide-monitored regulations of FSAs, recently. This is done with particular attention directed in identifying and managing of risks which may develop systematically, and transpire trade incentives and also ensure protection to customers in order to enhance resolutions and recoveries. Well defined internationally accepted incentives like the Basel-Accords (Basel III) upgrade have been structure to bring about better financial market stability through improved capitalistic requirements as well as liquidity rules. It is the viewpoint of Scott that:

Other multi-jurisdiction changes have been proposed or enacted including introduction of bank levies and controls on executive compensation. The result, especially for large international FS groups, is a complex web of regulation posing fundamental challenges to existing business strategies, structures and business models (Scott, 2008).

In UK and the U.S. of A, particular regulatory metamorphosis is noted in the planning and implementation regarding financial regulations in accordance with G20’s recommendation. Emphatically, in the United States, the legislation by Dodd-Frank offers a fascinating mechanism which has ruled most of the recommendable amendments found with regulations of FS. In the UK, Europe to be specific, fresh bank, insurance, and asset managing ‘super-regulators’ are brought up from previous national regulatory committees. Thus:

EU insurers are gearing up for the move to Solvency II; other countries are likely to introduce comparable risk-based capital requirements. EU based Asset managers are facing UCITS IV, the latest stage of the EU drive to create a single market for investment funds and the AIFMD, which aims to provide more robust transparency, governance and capital requirements within the hedge fund and private equity sectors (Williams, 2010).

Sophisticated organization that are concerned with services of finance are, in recent times, considering slender compliances at how to bring about developments that will alternate or bring out attraction of operative models. The major reflections take into account effective identifications and control of risk. Thus for PwC, which is a regulator of financial institutions, the practice of regulation is necessary to project accessibility and tackle the definite, operational and fresh regulative compliant implications.

Recommendations for Financial Services

A number of recommendations were suggested by the European Commission regarding finance sectored payments for the achievement of fundamental development. According to the suggestion, states which are member and bounded by the regulations of FSA had to make sure that their financial institutions generate remuneration strategies which would minimize risk which affect staffs with impeccable consistency records and who facilitate fantastic and efficient risk-reduced managements. The recommendation brought about clear outlines on payment structure, on engineered processes and on fostering completion of remunerative procedures as well as on improvement of supervisory roles of authorities toward reviewing of policies on finance institutional remuneration. The commission thus recommended the policy for effective management.

Similarly, in affect to attain regulatory stability, McCreevy- who was a commissioner of Internal Market expressed the following view:

Up to now, there have been far too many perverse incentives in place in the financial services industry. It is neither sensible nor sane that pay incentives encourage excessive risk-taking for short term gain. The G20 agreed that the FSF’s tough new principles on compensation schemes should be implemented. The Commission is leading the way. Incentives need to be aligned with long-term, firm-wide profitability. Of course, remuneration levels should continue to be based on performance. But performance criteria should be risk-adjusted and take into account cost of capital and liquidity. Design and oversight of remuneration policies should remain the responsibility of the board and not be delegated to senior management. An increased role of supervisory authorities in the review of remuneration practices is also needed to promote sound remuneration practices in financial institutions (Yayari, 2010).

It was recommended to participating states to ensure the usefulness of the following:

Payment structure: there should be consciousness to risk by staff members on policies and this should be observed with high level of consistency and deliberate effort to bring about laudable promotions as well as enable to manage risks effectively. In this regard, institutions that are shouldered with responsibilities of handling finances should place clear balances between payments and bonuses.

The payment of the major part of the bonus should be deferred in order to take into account risks linked to the underlying performance through the business cycle. Performance measurement criteria should privilege longer-term performance of financial institutions and adjust the underlying performance for risk, cost of capital and liquidity (Yayari, 2010).

Financial institutions, by the suggestion, are expected to have the potential of reclaiming bonuses paid incase records indicate a misstated manifestation or claw-back. This is necessarily for the actualization of the following:

Governance: policies on remuneration are expected express transparency within the internal system. Such policies should be document adequate contents through a measure that avoids conflict of interest. A board is expected to be capable of overseeing remunerative operations as regarding the totality of financial institutions which is properly controlled through functional tools and through effective utilizations human resources. However, members of boards as well as other staffs who are engaged with designing and remunerative operations polices, independently.
Disclosure: these polices are expected to disclose adequate information to stakeholders. The disclosed information is expected to be as clear as possible, and should also be easy to understand.
Supervision: supervision should be ensured with the use of sophisticated supervisory mechanism within their reach of the institutions and should be applicable to laudable remunerative polices. An effort to curtail issues which may emerge from proportionality, it is advices that supervision should be done considering the state and statue of the financial institution in question as well as consider the complex nature of activities as an effort to assessing total compliance with existent principles.

The recommendation has appropriately considered effort which is already put in place by the various members and aims at promoting development through the identification of practices which best address the issue of unity at the European Union. The recommendations stretch to the several sectors of FSI as an effort to prohibit collusive factors and bring about the prevention of competitive distortion among the various wings of the financial institutions. The principle is utilizable to the totality of the staffs with impactful activities on the handling of risk. In this regard, Harwood has noted:

The Recommendation will be followed up by legislative proposals to bring remuneration schemes within the scope of prudential oversight. In June, the Commission will present proposals to revise the Capital Requirements Directive to ensure that regulatory capital adequately covers the risks inherent in banks’ trading book, securitisation positions and Strategies to win and retain B2B and B2C customers are discussed in the context of many financial services sectors, including banks, insurance companies, investment trusts and stock exchanges remuneration policies (Harwood, 2006).

By the end of a year, the commission was expected to reconsider the various recommendations in the interest of producing useful output from the experience received and consequently promote monitoring of member states.

The future of financial services after the global economic crises

Finance marketing service has taken notice of the basic function adopted by finance service marketers in making decisions and has a searchlight beamed on the basic kinds of decisions-as well as problems- which face activities of marketing through continuous reviews of their documents. This point of view has been supported by Straub who has emphasized retouch of documentation in the following words:

‘The reviews should be made more accessible and include gripping case studies to demonstrate the realities of financial services marketing in an unstable and competitive environment’ (Straub, 2007).

Conclusion

Regulation of finances of a monetary institution has been considered in this paper to be a conscious effort to ensure proper adherence to specified requirements, guidelines, and boundaries that are set with an expectation to keep the financial institution reliable and functional as well as rejuvenate the regulation which could be done through legislation or a code of conduct that may be obligatory. The paper has basically presented that the regulation of finances is carried out following three basic principles, which are namely:

Promotion of fairness, efficiency, and maintain an orderly market;
Aid customers in retailing fair transactions; and
Improve the capabilities of business and enhance the regulatory efficiency of a financial monitor.

The paper has strongly advocated for monitoring of financial institutions through machinery like FSA which is a monitor of financial transactions. A monitor of finances or a regulatory body has been noted as typically been responsible for regulating financial exchanges, financial service based markets, in-country industries and firms, as well as effecting standards which the financial institutions are expected to meet-up with. In order for the regulatory body to be effective, it must have an authority to descend on non-compliance institutions or institutions that are lagging in meeting the laid down standards. The paper has given an example of the United Kingdom, for instance, where a body known as Financial Service Authority or FSA is empowered to conduct monetary activities as a finance regulator; and the body has been in engaged with the function since 2001. Since it was established, the powers of the FSA have greatly increased, and its regulatory activities are pictorial over mortgage business and general insurance, within the period November 2004 and January 2005. A part from the FSA, Central banks in countries may be concerned regulation of financial industries; which most of the banks have been doing through the issuance of licenses to banks in two groupings; including Licensed Specialized Banks (which are responsible for savings and developmental functions) and Commercial banks.

Reference List

Cartwright, S., & Schoenberg, R. (2006). Thirty Years of Mergers and Acquisitions Research: Recent Advances and Future Opportunities.British Journal of Management, 17 (1), 1–5. Web.

DePamphilis, D. (2008). Mergers, Acquisitions, and Other Restructuring Activities. New York: Elsevier, Academic Press. p. 740.

Harwood, I. (2006). Confidentiality constraints within mergers and acquisitions: gaining insights through a ‘bubble’ metaphor. British Journal of Management, 17 (4), 347–359. Web.

Rosenbaum, J., & Joshua, P. (2009). Investment Banking: Valuation, Leveraged Buyouts, and Mergers & Acquisitions. Hoboken, NJ: John Wiley & Sons.

Scott, A. (2008). China Briefing: Mergers and Acquisitions in China (2nd ed.). Beijing: Lamang.

Straub, T. (2007). Reasons for frequent failure in Mergers and Acquisitions: A comprehensive analysis. Wiesbaden: Deutscher Universitätsverlag.

Williams, M. T. (2010). Uncontrolled Risk: The Lessons of Lehman Brothers and How Systemic Risk Can Still Bring Down the World Financial System. Mcgraw- Hill. Web.

Yayari, G. (2010). Refinements to Financial Services Regulation. Accra: Gafan.

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