Regulation of Financial Markets
BA (Hons) Business Management
Word Count: 2750
Q: Explain the main reasons why financial markets are regulated? To what extent do you think that recent problems in the financial markets are the result of too little regulation?
Since the inception of this world, people are following rules in one way or the other. Every aspect of our lives follows a pattern. The best patterns and practices are developed in to rules. If there are no rules, there will be chaos everywhere and catastrophe ready to strike at any moment. To keep our lives peaceful and in order, we follow rules. Some of them are set by us and some by law experts and regulators. Regulation is setting up of rules (Gowland, 1990). Regulations are imposed for our own protection. In the business and financial world, regulations play a vital role in the structuring of the system. Without regulations, the businesses and economies would fail. The financial world’s main reason for existence is to deal with money. Financial world comprise of stock markets, banks, insurance companies etc. The financial markets control the money in every aspect possible. This is the reason regulating the financial markets is necessary. Aims of Regulation:
Regulating the financial markets and institutions comes at a cost. It is quite expensive to develop and implement the regulations (Gowland, 1990). The regulatory bodies need to have a very strong reason to regulate the financial markets and institutions. The main reasons of the regulation of financial markets and institutions includes; the association of financial markets with investor’s money (Pilbeam, 1998). People all over the world invest money in different ways; they can invest in the stock markets, in banks or in insurance companies. To protect the investor’s money, regulations are imposed. If the financial markets and institutions are not regulated, people can lose their money all of a sudden. To prevent sudden losses and reduce the risk of losing money, financial markets and institutions are regulated. Another reason for regulating the financial markets and institutions is that they are major employers in the businesses and economic world (Howells and Bain, 2004). Financial institutions all over the world employee hundreds of thousands of people, thus plays a major role as an employer. In order to protect the employees and their jobs and to stabilise its operations, the financial institutions are regulated. Financial institutions operate multi nationally, diversifying its operations across the globe. Financial markets and institutions can be considered as a significant foreign exchange earner of the country (Howells and Bain, 2004). In order to protect the economy of the country, these financial institution and markets are regulated. Financial world is now regulated for centuries now. The facts that triggered regulation were financial crisis and market failures (Pilbeam, 1998). The first set of financial regulation was implemented after the crisis of TULIPMANIA in 1637 (Howells and Bain, 2004). TULIPMANIA (1637) was the first major crisis that hit the financial world and that triggered the inception of the regulation of financial markets and institutions (Howells and Bain, 2004). Thus regulations are implemented to prevent the financial institutions from failing. Regulation implemented help to keep the financial world stable and its operations in check. Another reason of regulation is to provide protection to investors against fraud and mismanagement (Pilbeam, 1998). Regulators make every effort to prevent fraud and take most severe action against those who commit fraud. Regulators strive to ensure fair competition and pricing for consumers, hence protecting consumer rights by regulations (Pilbeam, 1998). In the absence of regulations, financial institutions can increase the prices of financial products and services,...