Rationale of Regulating the Financial Services, Models of Regulation and Need for Regulatory Independence

Abstract

Theory suggests that the primary role of financial institutions and capital markets is to facilitate the allocation of resources in an uncertain environment across space and time. Therefore regulation of the financial sector has a crucial role to play, especially in the development of third world countries, most of whom have enormous wealth disparities between sections of their populace. A key objective of regulation is to redress information asymmetries that sometimes exist in financial services businesses usually to the disfavour of the consumer. Although most often the regulator is also the supervisor, the role of the regulator and that of the supervisor are. In most jurisdictions however, the powers to regulate and to supervise the activities of the financial services sector reside in the same institution. The regulatory framework of financial services often comprises primary regulation, secondary legislation and guidance and (policy) directives and directions issued by the regulator. This paper looks at the rationale for regulation, the different models of regulation in the financial services and what they are aimed to achieve. The paper also looks at the broad objectives of regulation even in the absence of a unified theory of financial service regulation, such as investor protection, ensuring fairness, reducing contagion, protection against malpractices and maintaining consumer confidence. The paper also analyses the pros and cons of single, twin-peaks and multiple financial regulator and why regulators need to be independent [but accountable] whilst at the same time avoiding industry capture. Although the paper discussed regulation broadly, it discusses financial services regulation in the context of the Malaŵian financial regulatory framework with a brief overview of the regulatory models in the United Kingdom and Zambia.