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Regulation (2) (Central bank functions (control the money supply,…
Regulation (2)
Central bank functions
control the money supply
determine or influence interest rates
determine or influence inflation rates
determine or influence exchange rates
target macro-economic features such as growth and unemployment
ensure stability of the financial system
be the lender of last resort to commercial banks.
Types of regulatory regime
Self-regulatory
implemented by the people with the greatest knowledge of the market who have the greatest incentive to optimise the cost-benefit ratio
Should respond rapidly to changes in market needs
Should be easier to persuade firms and individuals to co-operate than under statutory regulation
closeness of the regulator to the industry, leading to low public confidence
may inhibit new entrants to a market
Statutory
Less open to abuse
Instils more public confidence due to government involvement
Should be more efficient if economies of scale can be achieved, e.g. grouping by function
costs and inflexibility
Outsiders may impose rules that are unnecessarily costly, inefficient and which may not acheive the desired aim
Government may be inexperienced in regulation (e.g. if regulation is being established for the first time or in new areas)
Voluntary codes of conduct
There may be low public confidence in this approach
There may be a few rogue operators who refuse to co-operate
Unregulated markets/ lines of business
Mixed regimes
Influences on policyholder expectations
Statements made by the provider, especially those made to the client in marketing literature and other communications
The past practice of the provider
The general practices of other providers in the market
State and large market participants
State can introduce monopoly companies. Tariff premium rates could be set, or rates could require approval or be subject to maximum changes. These restrictions may damage innovation and limit the number of participants.
Where a market is dominated by a small number of large participants, general levels of charges are determined by the main players.
Smaller firms can find niche markets. However, large players will monopolise the regulators' time and resources, possibly to the detriment of the smaller participants.
Regulation to treat customers fairly
Providers may be directly required by the regulator to demonstrate that they treat customers fairly.
Actuaries in statutory roles may be required to whistle blow if they believe that a provider is prejudicing the interest of the customer.