A Critical Analysis of the Rationale for Financial Regulation Part II: Objectives of Financial Regulation

Abstract

All debates on what the high-level objectives of financial regulation should be have ranged far and wide. As per Part I of this paper, it has already been seen, and it is generally accepted that financial regulation is an instrument of economic policy. As such, its objectives are a function of and determined by economic policy objectives. Economic policy is generally aimed at achieving economic stability and growth. Financial regulation has been found to have a significant influence on the output and productivity growth within an economy. On the other hand, financial market failures, especially those of a systemic nature, often have grave consequences on a country’s economic stability and its potential for growth. Financial market failures also have an impact on the confidence which the investing public has in a financial system. Public confidence in a financial system is fundamental for the system to be able to function properly and continue to exist. Therefore, from an economic policy perspective, the main aim of financial regulation should be that of safeguarding economic integrity and building public confidence in the financial system. Apart from the economic policy aspect, it has been held that financial regulation also has a crucial role to play in achieving consumer policy objectives and in curbing financial crime. It is widely acknowledged that financial regulation should also endeavour to protect the vulnerable users of the financial system from possible market misconduct or the fraudulent conduct of business by financial institutions. Having analysed the theories of regulation and their continued validity by reference to present developments in the policy approach to financial regulation in Part I of this paper, Part II will now outline the principle objectives of financial regulation, the rationale therefor, how they are being sustained within an evolving environment and their application in practice.