Financial Services Regulation Research Articles

Revisiting Determinants of Financial Development? The Role of Financial and Monetary Freedom: Empirical Evidence from the Asia-pacific Region

This study aims to assess what determines/improves the overall multidimensional nature of the financial development index and its sub-indices. For this purpose, we use data over the period 1998 to 2017 for 9 countries from the Asia-Pacific region. The hypothesis of no long run relationship between variables is tested via the three-panel co-integration test i.e. Kao test, the Pedroni test, and the Johansen test. We also examine the impact of these variables on each index through long-run dynamic estimation. We utilize FMOLS and DOLS for this purpose. All the three-panel co-integration tests suggest a long-run relationship among variables. Findings from long-run dynamic estimation indicate that efficient regulation of financial services and control over prices by the government significantly influences the financial depth, financial efficiency, and financial access indices. The financial freedom index measured by regulation of financial services negatively influences the indices, suggest that too much government regulation could distort the market. Also, an increasing probability of default of the country's banking system adversely affects the sub-indices of financial development. These findings suggest that too much government regulation of financial services and control over prices along with default of country banking system could worsen the country's financial development situation and vice versa. The promulgation of prudent regulatory policies by financial regulatory institutions is the need of the time to ensure full access to financial services, soundness, and stability of the financial sector.

International Economic Law's Regulation of Data as a Resource for the Artificial Intelligence Economy

This chapter for a forthcoming volume on artificial intelligence and international economic law surveys regulatory interventions through which governments seek to enhance domestic companies’ access to data: Mandatory data sharing requirements (as under the EU’s new financial services regulations), data transfer restrictions (as under India’s draft ecommerce policy), and open data initiatives (as under Singapore’s ‘smart nation’ initiative)— all seek to make more data available with the aim of spurring innovation and growth in the artificial intelligence economy. Such measures are indirectly affected by existing and newly emerging rules of international economic law. International investment law is likely to be mobilized in defense against governments that seek to mandate data sharing from private data holders, while new rules on “digital trade” are meant to ensure transnational data mobility. In sum, international economic law regulates data in favor of data-holders’ ability to retain control over data location and use and constrains states’ ability to confront asymmetric control over data.

Significant conditions of the bank deposit agreement under the civil legislation of Ukraine

In the article the author investigates the essential terms of the bank deposit agreement. In the course of the research the author analyzes the requirements to the content of the bank deposit agreement established by the Central Committee of Ukraine and special legislation, including the Law of Ukraine «On Financial Services and State Regulation of Financial Services Markets» and regulations of state regulators in the banking services market. Based on the analysis, the author concluded that the terms of the contract (in particular, essential) relate to the contract as a transaction and not as a legal relationship or document, and therefore, most of the conditions specified in special legislation are not essential, and their the absence may result not in the recognition of the contract as unconcluded, but as a basis for the application to the bank of measures of influence by state regulators of the banking services market. As essential conditions of the bank deposit agreement, established directly by law, the author considers only the subject of the agreement, and for a bank deposit agreement concluded in favor of a third party, such a condition also determines the name of the individual or the name of the legal entity. Keywords: contract, transaction, legal relationship, document, content of the contract, condition of the contract.

Using technology to support financial services regulatory compliance: current applications and future prospects of regtech

Purpose The conflict between the burden from regulations and the desire to introduce new offerings to the market is a concern for both researchers and business managers alike. Over the last 10 years significant increases in resources required to comply with regulations have been observed. The use of technology solutions to manage complex regulations (a.k.a. “Regtech”) is emerging as a potential solution to the compliance demand. This paper poses the question, “Which support do current Regtech solutions offer?”. Design/methodology/approach This study analyzed a global set of 550 providers to understand what support Regtech solutions provide. Findings The analysis shows how regulatory compliance work is supported as well as specific examples of firms providing support and which regulations are covered. Results highlight that the main focus in the current Regtech industry is on supporting internal and operations tasks rather than external and analytical activities. Practical implications Recommendations to business managers are to combine regulatory support with a clear strategic vision, carefully plan integration scenarios, and to look for the support of broader regulatory management rather than individual functions or specific regulations. Social implications If RegTech providers, financial services firms, regulators, and researchers look towards a future where the balance of proactive regulatory management and efficient compliance is achieved, there are substantial benefits for customers of the industry. The result will be increased transparency and quality in all industries. Originality/value The result from this study is one of the first specific illustrations of the nature of “RegTech,” which can serve as a basis for further research into aspects of technology and capabilities.

Cross-border crosswalk: An overview of Canadian and US banking and consumer financial services regulators

Canada and the United States are neighbours, each with its own ‘alphabet soup’ of banking and consumer financial services regulators. Many institutions in each country are under the purview of both federal and state/provincial regulators, and some institutions may be supervised by multiple financial regulators. For businesses engaged in financial services on either side of the border, it is important to understand which agencies regulate the products and services they offer and how agencies policies change over time. Understanding how local regulatory environments differ should inform business decisions. For example: There may be costs associated with expanding to a new jurisdiction as there are likely different compliance requirements. A product that is viable in one area may be untenable in another due to differing regulations (eg varying usury limits). Litigation risk may differ between jurisdictions: various US regulators can file lawsuits in federal court whereas Canadian regulators often have supervisory and regulatory powers that do not include prosecution. US companies are also often able to insulate themselves from class action liability through the operation of arbitration clauses and class action waivers. Companies seeking to do business in both the United States and Canada should consider engaging legal and expert teams during product development to harmonise where possible. Additionally, when facing regulatory scrutiny or litigation, similar harmonisation may be beneficial as well. Navigating the oversight of each agency is nuanced within each country, and one’s knowledge, experience and jargon are often specific to their area of expertise. Regulated entities’ incentives may differ due to differences in regulation or licensing requirements. Engaging with and retaining expertise (eg staff, counsel or external experts) in one country who have the tools and language to work with people in another can be valuable. To help with that, this paper provides an overview of the legal framework, financial services landscape and key regulators in Canada and the United States.

The impact of financial regulation policy uncertainty on bank profits and risk

PurposeThe purpose of this paper is to explore the impact of financial regulation policy uncertainty (FRPU) on bank profit and risk.Design/methodology/approachThis study applies dynamic panel techniques and uses the Baker et al. (2016) FRPU index and macroeconomic variables to assess FRPU’s impact on bank profit and risk using Federal Deposit Insurance Corporation call reports from Q1 2000 to Q4 2016 for over 4,760 commercial banks.FindingsThe effect of FRPU on profitability (Return on Assets [ROA] and Return on Equity [ROE]) and risk (standard deviation of ROA and ROE) produces complex results. FRPU negatively (positively) impacts profits for small and large banks (money center banks). There is a positive impact on FRPU for small and medium-sized banks, with no impact reported for the large and money center banks.Practical implicationsFindings lead to several implications for financial services regulators, investors and executives as summarized in the conclusion. It is essential to ensure that clear communication channels are open especially to small and medium-sized banks for proper strategic planning, given their greater sensitivity to regulatory uncertainty.Originality/valueThis paper contributes to the literature as follows. First, it explores the impact of FRPU on bank profits and risk using a novel index introduced by Baker et al. (2016). This news-based continuous measure presents a bank profit modeling approach that differs from traditional event study methodology. Second, a large sample of US commercial banks is used which represents an important departure from banking regulation studies.

Analysis of Credit and Liquidity Risk towards Profitability of Rural Bank (BPR) in the District of Bandung Registered with the Financial Services Authority (OJK) for 2014 to 2019

BPR is a financial institution that distributes funds to borrowers, especially to Medium, Small and Micro Enterprises (MSMEs) to increase income and improve the real sector economy. This research was conducted on 21 rural banks (BPR) in the city of Bandung, by analyzing the Non-Performing Loan (NPL) and the Loan to Deposit Ratio (LDR) on the performance of Rural Banks (BPR) as measured by using Return on Assets (ROA). Data obtained from the Financial Services Authority (OJK) and regulations issued by Bank Indonesia (BI) obtained using Eviews are rural bank financial reports from 2014 to 2019, it is found that NPL has an effect on ROA while LDR has no effect on ROA but simultaneously NPL and LDR has an effect on ROA. From the results of the Hypothesis test, it was found that the magnitude of the influence was 85.33% and the remaining 14.67% were other factors that were not examined. From the results of this study, it is hoped that OJK will be more strict in supervising BPR operations, especially in the city of Bandung and for BPR management it is hoped that it can increase ROA by channeling loans to borrowers on target so as not to increase NPL.

Методологія оцінювання стану і концентрації ринку страхування при його державному регулюванні

Методологія оцінювання стану і концентрації ринку страхування при його державному регулюванні

Regulators Nurturing FinTech Innovation: Global Evolution of the Regulatory Sandbox as Opportunity Based Regulation

The regulatory sandbox is a real world alternative to regulatory lag. Its emergence as a novel regulatory development responds to challenges faced by FinTech innovators in navigating an unwieldy regulatory landscape not designed with FinTech in mind. Regulatory sandboxes are in operation in developed countries including Australia, Canada, Denmark, Hong Kong, Singapore, Switzerland, the Netherlands, the United Arab Emirates, the United Kingdom, and the United States. Within the EU they are seen in Denmark, Hungary, Lithuania, Poland and the Netherlands. The concept has also gained traction with regulators in developing countries such as India, Indonesia, Malaysia, Mauritius and Thailand. Not only is the regulatory sandbox an experimental space for firms testing innovative FinTech products and services, it is also a novel regulatory experiment for regulators. This article advances the available literature through focusing on the contradictions inherent in the role of the regulator in administering a regulatory sandbox. It characterises the regulatory sandbox as a form of agile, opportunity-based regulation, distinguished by a regulatory approach that is concerned with actively supporting innovators in nurturing cutting-edge innovation to benefit innovators, consumers, investors, and the wider economy. This is path-breaking regulatory territory. In its provision and design a regulatory sandbox phenomenon performs a crucial positioning function in relation to a given financial system’s receptivity to FinTech business. An economic, pro-innovation agenda is at work. Distinct policy questions are therefore raised regarding the legitimate role of public gatekeeper financial services regulators operating regulatory sandboxes. The role of a regulatory sandbox in nurturing and expanding competition suggests a public interest role in the interests of consumer choice, price and efficiency rather than simply on risk minimisation. However, pressure on regulators to produce sandbox successes and to compete with other sandboxes may influence the exercise of regulatory discretion and produce regulatory distortions that affect competition in FinTech markets.

Key hurdles in the Brexit negotiations on financial services and future regulation in the UK

This article reviews the key hurdles in the Brexit negotiations on financial services as they came into sharp focus at the end of June 2020. Although the Political Declaration between the UK and the European Union signed in October 2019 clearly sets out the path of the future trading relationship in financial services based on equivalence (i.e. the granting of market access to (certain) financial services by both parties on the basis that their regulation of financial services is broadly equivalent to each other), the British and European approaches to the implementation of equivalence in a future free trade agreement are very different, and are in many ways mutually incompatible. From this point of view, the impasse reached in early summer concerning financial services reflects the broader problems of the UK and the EU reaching a free trade agreement by the end of 2020, and perhaps even for a considerable while later. While “Monty Pythonesque” horse-trading of giving UK-based financial services access to EU markets in exchange of access to British fishing waters by EU fleets cannot be ruled out entirely, the odds of not reaching agreement in financial services are shortening. This will lead to stronger competition between the UK and the Eurozone in the development of financial services, although a dash to de-regulation by the UK seems unlikely. Instead, the London market is more likely to seek a competitive edge by designing future regulation that is both more stringent but also more “stylish”.

Science-Based Regulation in Financial Services: From Deterrence to Culture

Recent regulatory responses to major adverse events have produced a range of responses, encompassing either retrospective reactions or attempts to control future behaviour. This paper juxtaposes the extremes of such responses in two models of how to regulate, which are almost diametrically opposed in their theoretical justifications. The two approaches are the legal model, based on the theory of deterrence, and the cultural model, based on behavioural science. We summarise some major examples of these models from different sectors, notably the Australian response to misconduct by banks (wholly based on deterrence) and the cultural approach to civil aviation safety (involving an open, ‘no blame’ culture that leads to necessary consequences in a ‘just’ culture). Traditional legal and economics-based theories of regulation (especially the theory of deterrence) have been re-thought in some industries and can now be based on the scientific findings from behavioural psychology and how humans behave in groups or organisations. With a focus primarily on financial services, we then discuss developments that are influenced by one or other model, illustrated by increased regulation of financial services managers, increased enforcement, changes to corporate governance, a focus on the purpose of organisations, and attempts by regulators and firms to change the cultures of the latter. We conclude that many recent initiatives conflict because they are unclear whether their underlying model is to blame, sanction, and deter or to support doing the right thing in an open and just culture. This is clear from confusion about the meaning, objectives and effects of terminology around responsibility and accountability. The evidence indicates that the legal model will have limited success in avoiding major disasters, but that the cultural model may be more effective as long as it is pursued under the right conditions. This includes understanding the meaning of accountability and responsibility in new ways. There is a need for detailed analysis of the causes of recurrent problems and of the responses that science indicates would reduce future risk.

The EU sustainable finance taxonomy regulation

In this article, we look at the Taxonomy Regulation, which entered into force in June 2020. We describe the requirements for investments and listed companies to have their economic activities labelled green, conditional on not violating safe-guards against doing significant harm to social or human rights. We find that the Taxonomy Regulation is a hybrid regulation, which aims at influencing business activities through regulation of financial services. The relevance of this article for finance research is not least to make clear the bias, or research premise, that will be introduced into any quantitative research on green premiums (the so-called greemiums) of EU financial services and listed shares and bonds after 1 January 2022, when the technical screening criteria of the Taxonomy Regulation enter into force and complete the definition of what con-stitutes sustainable or green economic activity. To a large extent, this will serve to make cross-European comparisons of greemiums (green premiums) easier as data on what is green will be based on European standards. Others might argue that legislating a definition of what is considered green or sustainable should be left to the market, for better or worse.

РОЛЬ ПРУДЕНЦІЙНОГО НАГЛЯДУ У СФЕРІ НАГЛЯДУ ЗА СТРАХОВОЮ ДІЯЛЬНІСТЮ В УКРАЇНІ

The article investigates the current state of the insurance market in Ukraine and the history of its formation. The existing problems that hinder the progressive development of the market and attract investment are considered. Attention is paid to the latest legislative state regulation of financial services markets (banking and non-banking) by one regulator (NBU) and the expediency of its introduction in the non-banking financial sector and its further role. The main levers by which Ukraine will be able to obtain a financial system that meets international standards have been identified. The focus is on the provisions of the EU Solvency ll Directive and the requirements and standards set out therein. It also substantiates the feasibility of securing prudential supervision of insurers, which defines its peculiarities and mechanisms by which it operates effectively. The experience of countries that have already introduced this type of surveillance is explored. A number of significant changes have been identified, among which are the following: transparent financial statements, new standards for service provision, extension of oversight functions of the Authorized Body, etc., which will allow for the proper protection of the rights of consumers of financial services. Purpose: to analyze the international norms and standards according to which insurers operate within the European Union. Do the research on the EU Directive (Solvency ll) and the feasibility of its implementation in national legislation. The advantages and disadvantages of prudential supervision of insurers have been identified. Methods: General and specific cognition methods have been involved in the writing of the work. Historical method, comparative-legal method, system-structural analysis method and formal-logical methods have been used as the basis of the research methodology. Results: justification for the introduction of a new transparent financial reporting system in the future; the need to create a new internal insurer risk assessment system and new capital adequacy requirements. Conclusions: A number of advantages and disadvantages of current changes and further transformation of domestic legislation in the field of insurance supervision to the best international standards have been identified. It examines what changes the insurance market of Ukraine is going through and what to expect from insurers in the coming years, what costs will have to be incurred and what they will receive as a result. The focus is on protecting the rights of consumers of financial services to prevent events occurring in the insurance market more than 25 years ago.

Providing Financial Services 'Efficiently, Honestly and Fairly': Part 2

Published in (2020) 37 Company and Securities Law Journal 382 This article is written to update the author’s earlier article published in the Company and Securities Law Journal in Australia in 2006 which examined the statutory obligation of a financial services licensee to act “efficiently, honestly and fairly” as required by s 912A(1)(a) of the Corporations Act 2001 (Cth). The article examines new caselaw since 2006 on the meaning of this obligation. The weight of authority supports interpreting the conjunction “and” to confirm that this is a single, composite and omnibus obligation rather than three separate obligations. Further, the failure of those in the financial services industry to act efficiently, honestly and fairly was cited repeatedly in the context of the evidence of widespread misconduct falling below community expectations revealed by the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry (2018/2019). Some of the limits of enforcing this law are raised, and the article concludes with an introduction to the new civil penalties in financial services regulation introduced in the Treasury Laws Amendment (Strengthening Corporate and Financial Sector Penalties) Act 2019 (Cth). These have strengthened penalties for breaches of corporate laws including this section and should enhance and will support ASIC’s new “why not litigate” approach. The Royal Commission was clear that acting efficiently, honestly and fairly is part of the right” thing to do.

The Role of Compliance as a ‘Gate-Keeper’ Function in Financial Services: Reality vs Regulatory Conception

This paper examines aspects of the role of the compliance department and the compliance officer, in the context of a range of control functions, in firms subject to financial services regulation. The issues and recommendations have global application beyond the UK. The traditional expectation is that the compliance operation advises senior management on the various regulations, and monitors and report adherence to regulatory requirements. However, this paper proposes that the compliance function needs to go further and venture beyond what some may consider its more conventional roles. Additionally, this paper questions the extent boards and regulators can place reliance on the compliance functions and the compliance officer. This will depend on a number of factors including the compliance units’ ‘authority’ within the business, their professionalism, and their ethical attitudes set within the context of the firm’s own cultures. Financial services, compliance, control functions, regulation, ‘three-lines of defence’, Senior Managers Regime, compliant culture, risk management.

RESULTS OF ANALYSIS AND FORECASTING OF THE MAIN FINANCIAL INDICATORS OF THE HEALTH INSURANCE MARKET DEVELOPMENT IN UKRAINE

In recent years Ukraine against the background of systemic crisis trying to reform socially-oriented areas of society, including voluntary health insurance, which must combine market and social burdens. Under these conditions, an important scientific and practical research is forecasting financial indicators of domestic insurance companies. Aim. Conducting analysis and forecasting of the basic indicators that characterize the financial state of development of the domestic health insurance market. Materials and methods. Research materials were selected from the official websites of the National Commission which carry out state markets regulation of financial services and the League of Insurance Organizations of Ukraine for 2009–2018 years. We used historical, analytical and comparative, systematic, logical, hypothetical-deductive, mathematical and statistical methods. Results. To forecast the financial indicators of the health insurance market in Ukraine (gross insurance premiums and payments; operations transferred to reinsurance, including non-residents; net insurance premiums and payments) for 2019–2020 years; the time interval was set from 2009 year. According to the results of the calculations, we obtained regression models for different financial indicators (6 models). With the help of the selected mathematical tools, the main financial indicators of the market development for 2019–2020 years were forecasted. The analysis of the data revealed that the highest value growth rate (%) in 2020 year will be characteristic of reinsurance operations, including those transferred to non-residents (49.06 %) and the lowest - to gross insurance payments (14,41 %). It is established that the indicator of net insurance payments since 2010 year has been steadily decreasing (from 78.19 %), and according to the forecasted data in 2019 year it may be equal to 46.77 %, and in 2020 year – 44.98 %, the trend will continue to decrease. However, this indicator since 2016 year (53.9 %) and the data forecast for 2019–2020 years are in the regulatory range (from 30.0 % to 60.0 % for different types of insurance activities). Conclusions. According to the results of the research, it is established that in spite of the financial and economic crisis since 2014 year, the domestic health insurance market is characterized by positive dynamics of growth of the main financial indicators (gross insurance premiums and payments, net insurance premiums and payments). At the same time, there is a tendency to decrease the level (%) of net insurance payments indicator from 78.19 % in 2010 year to the forecast in 2020 year – 44.98 %.

Transnational Fiduciary Law in Financial Intermediation: Are We There Yet? A Case Study in the Emergence of Transnational Legal Ordering

In most, if not all, mature financial jurisdictions, the provision of financial services has become the object of an increasingly complex body of regulation over the past few decades. Driven not least by initiatives of international standard-setters, the applicable regulatory frameworks have reached a level of convergence that, given residual differences in the applicable private law regimes governing the contractual relationships between intermediaries and their customers, is surprising. At the same time, courts (and, to some extent, national legislators) continue to struggle with the need to coordinate the applicable regulatory framework on the one hand and private law, including both contract and fiduciary law, on the other. Originating, at least to some extent, in common law principles of fiduciary law, the relevant standards for some time have made their way also into civil law jurisdictions. Financial services regulation thus presents an illustrative showcase for the emergence of a transnational legal order, in terms of the drivers for transnational consensus, the interplay between regulatory standards and private law, and the resistance of national actors against the incoming international framework. Focusing on conduct-of-business regulation for investment services, the present papers traces the origins of the process and examines its characteristics in the light of transnational legal theory.

Changing financial services firms’ behaviour through a duty of care

There have been a number of calls for regulators to impose a new and higher duty of care on regulated firms. These calls are evidence of a continuing mistrust of the financial services industry. The remedy largely rests in the hands of the latter to demonstrate that it is worthy of trust. The new duty of care will not achieve the aims of those that seek a significant improvement in the conduct of the industry. What is sought by all is a change in culture. This paper looks at the practical steps that a regulated firm can take to demonstrate its adherence to both the letter and spirit of financial services regulation and those specifically aimed at addressing cultural change. These actions include firms focusing on their strategy and business model and who, and how, they employ people and operate their processes. This includes the regulatory Senior Managers and Certified Persons Regime. It also includes steps to measure culture and emphasises the importance of avoiding self-deception.

"Regulators Nurturing Fintech Innovation: Global Evolution of the Regulatory Sandbox as Opportunity-Based Regulation"

"The regulatory sandbox is a real-world alternative to regulatory lag. Its emergence as a novel regulatory development responds to challenges faced by FinTech innovators in navigating an unwieldy regulatory landscape not designed with FinTech in mind. Regulatory sandboxes are in operation in developed countries including Australia, Canada, Denmark, Hong Kong, Singapore, Switzerland, the Netherlands, the United Arab Emirates, the United Kingdom, and the United States. Within the European Union they are seen in Denmark, Hungary, Lithuania, Poland and the Netherlands. The concept has also gained traction with regulators in developing countries such as India, Indonesia, Malaysia, Mauritius and Thailand. Not only is the regulatory sandbox an experimental space for firms testing innovative FinTech products and services, it is also a novel regulatory experiment for regulators. This article advances the available literature through focusing on the contradictions inherent in the role of the regulator in administering a regulatory sandbox. It characterises the regulatory sandbox as a form of agile, opportunity-based regulation, distinguished by a regulatory approach that is concerned with actively supporting innovators in nurturing cutting-edge innovation to benefit innovators, consumers, investors, and the wider economy. This is path-breaking regulatory territory. In its provision and design, a regulatory sandbox performs a crucial signalling function in relation to a given financial system’s receptivity to FinTech business. An economic, pro-innovation agenda is at work. Distinct policy questions are therefore raised regarding the legitimate role of public gatekeeper financial services regulators operating regulatory sandboxes. The role of a regulatory sandbox in nurturing and expanding competition suggests a public interest role in the interests of consumer choice, price and efficiency rather than simply on risk minimisation. However, pressure on regulators to produce sandbox successes and to compete with other sandboxes may influence the exercise of regulatory discretion and produce regulatory distortions that affect competition in FinTech markets."

Agreement on Home Loan (KPR) Due to Natural Disaster (Case Study in North Lombok Regency)

The objectives of this research are to analyse the obstacles that occur in the implementation of the agreement on Home Loan (KPR) when natural disaster occurs and to analyse the settlement of bad debt between the bank and the debtor when the physical KPR is severely damaged due to natural disaster especially those that occurred in North Lombok Regency. The research approach used in this study is the statute approach, conceptual approach, sociological approach, and case approach. The settlement of bad debt, between the bank and the debtor when natural disaster occurs in the North Lombok area that causes physical damage to the KPR, is that the bank rescues the bad Home Loan (KPR) by restructuring and giving a grace period in accordance with the Authority Regulation of Financial Services (POJK) No. 45/POJK.03/2017 concerning Special Treatment of Loans or Bank Financing for certain regions in Indonesia that are affected by natural disaster. Then, the debtor, in terms of settling this bad debt, does not make a written request for the rescue efforts offered by the bank. If this rescue effort is unsuccessful, the next solution, carried out by the bank on the physical Home Loan (KPR) which affected severe damage due to the earthquake in the North Lombok area, is to submit to the debtor to write-off the loan agreement.