Why are Financial Markets Regulated?
Financial market regulations are nothing but rules and regulations that govern the financial institutions operating in the financial industry, which includes investors, sellers, brokers, etc. The prime focus is on continuous oversight and enforcement of the rules that provide stability to the financial system, which ensures fair competition, consumer protection, prevention, and reduction of financial crimes. In other words, financial regulations protect consumers’ investments, prevent financial frauds, and limits various financial risks that are associated.
From the mid-1970s, the global financial system started witnessing market-oriented reforms that led to liberalization in the system. E.g., reduction of interest rate controls, removal of investment restrictions on financial institutions and a line of business restrictions, and control on international capital movements. The market regulator in the Indian capital market is the Securities and Exchange Board of India (SEBI), which oversees compliance of rules and issues additional guidance as required.
All investors depend on the financial system in one or another way. Poorly regulated financial institutions have the potential to disturb the stability of the financial system and as a result, may harm consumers and may damage the prospects for the economy. Thus, financial regulations are important to put rules in place, to stop things from going wrong, protect & enhance the financial stability of the country, to safeguard the wider financial system and its stability, and to protect consumers by reducing the number of financial frauds or crimes.
When financial regulations are in place, it helps in improving corporate efficiency and brings down costs for consumers. For example, in India, SEBI (Securities and Exchange Board of India) reviews all aspects of the financial market, such as whether they are being implemented or not. They also go on-site to meet key decision-makers and inspect various aspects of the business taking place in the financial market.
Broadly, financial regulation can be understood by dividing it into:
- Prudential Regulation: Prudential regulation ensures that the firms have the funding to trade safely and ensures that they also have the appropriate risk controls in place.
- Consumer protection: It ensures safeguarding the rights and interests of the consumers and making sure that the unethical practices are avoided and a proper speedy redressal is set up to solve all the grievances.
To summarize, prudential regulation enables authorization, which means allowing firms to operate in the financial system only when they have fulfilled certain criteria, including governance and risk control.
Consumer protection provides a framework for firms so that they can operate effectively and fairly treat customers. A regulated firm must ensure that it acts honestly, fairly, and professionally in the best interest of its customers along with the integrity of the market.
So why are the financial markets regulated?
- Successful financial regulations help in preventing several market failures, protect the interest of investors, safeguard and promote macro-economic stability, and help in mitigating adverse effects of financial failures on the real economy.
- Having financial regulation in place ensures market transparency and safeguards the interest of investors, and hence financial markets need to be regulated.
Let us also try to understand the upcoming challenges in the Financial Market Regulation:
- Strengthening the enterprise risk governance and culture.
- Transforming the effectiveness and sustainability of compliance.
- Examining possible new approaches to manage capital and liquidity.
- Adjusting to the changing scope of consumer financial protection.
- Emphasizing cybersecurity while protecting consumer data privacy.
- Addressing pressure from Innovators and new market entrants.
- Managing compliance surveillance and financial crimes.
- Reforming regulatory reporting.
- Managing complexities of cross-border regulatory standards.
If this excites you, the CFA course is the perfect career option for you. So, what is the CFA course? The CFA course is a globally recognized course offered by the CFA Institute, USA. To know more, please feel free to contact our counsellors, who would be more than happy to assist you and help you make the right career decision. The CFA certification course is one of the most respected certifications in the finance profession. It is widely recognized and accepted for employment across the world in Banking, Investment, Private Equity/Venture Capital funds, Mutual Funds, Insurance, and companies into investment and analysis.
The CFA course syllabus includes the following:
- Ethical and Professional Standards
- Financial Reporting and Analysis
- Quantitative methods
- Economics
- Corporate Finance
- Derivatives
- Alternative Investments
- Fixed Income
- Portfolio Management and Wealth Planning
- Equity Investments
The various job roles offered to CFA candidates post-completion are Portfolio Manager, Risk Manager/Analyst, Research Analyst, Investment Banker, Private Wealth Manager, etc. Alternate career options after CFA are Data Scientist, Chief Investment Officer, Investment Consultant, Investment Strategist, Accountant/Auditor, etc. The average annual salary offered according to job profile are:
Job Profile | Average Annual Salary |
---|---|
Portfolio Manager | Rs.10.85 Lakhs |
Risk Analyst/Risk Manager | Rs.9.96 Lakhs |
Investment Banker | Rs.9.04 Lakhs |
Research Analyst | Rs.6.51 Lakhs |
Private Wealth Manager | Rs.9.06 Lakhs |
Investment Strategist | Rs.6.51 Lakhs |
Investment Consultant | Rs.9 Lakhs |
Some of the top recruiters for CFA charter holders are J.P Morgan and Co, The Goldman Sachs Group, HSBC, etc. Are you ready to become the next CFA? All the best and happy learning!
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