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Regulation (Reducing asymmetries of information (Requiring full disclosure…
Regulation
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Need for regulation
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Risk that if one company collapses, it can cause a systematic finacial collapse of the system.
Asymmetry of information, expertise and negotiating strength that exists between the product provider and the end customer.
Exacerbated by:
Financial transactions are often long-term in nature and can have a significant impact on the future economic welfare of individuals.
Most of the population not well educated on financial matters and find the range of products offered both complex and confusing.
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Costs of regulation
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Indirect cost
Alteration in consumer behaviour, who may be given a false sense of security or a reduced sense of responsibility for their own actions
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Moral hazard
The action of a party who behaves differently from the way they would behave if they were fully exposed to the consequences of that action
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Anti-selection
People will be more likely to take out contracts (or exercise a guarantee or option) when they believe their risk is higher than the insurance company has allowed for in its premiums (or pricing of guarantees and options).
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