By Molly Cyrus 
Introduction
It is imperative to establish regulatory finance in order to sustain and encompass a stable as well as transparent financial structure in the global economy. As the financial markets and products become more complex governments and international organisations have put in place measures to regulate the markets so as to minimise the risks and to safeguard investors consumers and the markets in general.
The nature of regulatory finance is comprehensive since it refers to a multitude of rules guidelines and laws that are put in place to regulate the entities and processes relating to financial markets and institutions. First the literature focuses on what regulatory finance is. It was not when it started and why as well as different types of regulatory finance the regulatory bodies across the world problems associated with regulatory finance and trends that have emerged in this field.
The globalisation of the economy is coming to the forefront and this has added even more impetus to having sound laws. This paper aims to present an analysis of the theoretical framework that forms the foundation of financial Regulation a description of the institutions involved in regulatory enforcement and prospects for the advancement of regulatory finance in the context of the financial revolution.
What is Regulatory Finance?
The concept of regulatory finance encompasses the rules laws and regulations that govern the financial markets the financial institutions and any financial activity. These regulations are put in place with the noble purpose in mind of enhancing market efficiency enhancing consumer and investor protection and avoiding a crunch. Regulatory finance covers large financial activities such as banking securities insurance and financial commodities.
Role of Regulatory Bodies in Finance
As you will discover regulatory authorities are key in the facilitation of the proper operation of financial institutions and markets to be fair transparent and efficient. These agencies also have the power to implement regulations that financial organisations ought to adhere to. They also ensure compliance through inspection and auditing activities including investigations.
Three Key Regulatory Finance Principles
The principles of regulatory finance are based on fundamentals such as stability consumer protection competition and clarity. Some of the ideas include prudential regulation which focuses on the stability of financial institutions conduct regulation which aims at protecting the customers and systemic Regulation which deals with the spread of financial crises within an economy.
Financial Regulation can be defined as the process by which the government of a country aims to control fiscal activity by directing certain new institutional forms that are meant to oversee functions related to economic and financial operations.
Evolution of Financial Regulation
Historical Background
The history of financial Regulation started in the early twentieth century when financial markets began to become highly organised and integrated. The real world financial crisis for which a classic example is the Great Depression of the 1930s also played a crucial role in bringing changes in financial Regulation by paving the way for institutions such as the SEC in America and other countries.
Major Financial Crises
All the themes of self regulation and financial crises have been the biggest causes of change. The 2008 Global Financial Crisis (GFC) was a defining event that highlighted key weaknesses in the financial regulation structure especially in mortgage backed securities and credit rating agencies. This crisis forced governments across the world to come up with changes in measures like the Dodd Frank Wall Street Reform and Consumer Protection Act in the US and the Basel III international banking standards.
Roles of Globalization and Its Effects
The interconnectivity that has been brought about by globalisation has made it difficult for the financial market to be controlled. This has made it a challenge for the regulatory bodies to coordinate across borders especially when handling cross border activities involving multinational corporations and financial institutions. The emergence of international financial centres and the cross border movement of capital require the enlargement of cooperation between domestic authorities and worldwide actors like FSB.
Types of Financial Regulation
Prudential Regulation
Supervision of integrity aims at promoting the stability of organisations including banks insurance firms and investing companies. This form of Regulation seeks to prevent failure within institutional units and system risks which comprise the financial process.
Conduct Regulation
Conduct Regulation provides information relative to the behaviour of financial institutions towards customers. This means that the firms should be free from engaging the customers in a way that is considered unfair that they give out misleading information or that they have conflicting interests.
Fraud
This encompasses activities such as market manipulation insider trading practices or providing misleading information on the financial statements.
AntiMoney Laundering (AML) and KYC Regulations
It is important to note that AML and KYC regulations are intended and implemented to counter unlawful operations including money laundering and terrorism funding. The financial institutions must have measures in place that will help the organisation confirm and identify its customers as well as report any suspicious activities. These regulations have become even more important recently due to the emergence of digital finance and cryptocurrencies.
Major Regulatory Bodies and Their Functions
United States
Federal Reserve
The Federal Reserve or Fed in short is the central bank of the United States. It is involved in monetary policy operations supervising and regulating other banks all in the name of maintaining or maintaining Financial Stability. They are involved in the determination of interest rates controlling inflation and basically bailing out financial institutions during a monetary crisis.
The SEC
The SEC or the Securities and Exchange Commission is arguably the most important securities regulatory agency in the U. S. Its main role is to oversee markets and promote fairness efficiency and disclosure. In this case the SEC is responsible for the implementation of insider trading prohibition fraud and other manipulations of securities.
Commodity Futures Trading Commission (CFTC)
The CFTC oversees the future and options markets in the United States. The commission oversees the trading activities that take place in these markets and prevents fraudulent practices and manipulations.
Comptroller of the Currency (OCC)
The OCC regulates and charters national banks and federal savings associations in the U. S. that it supervises in order to ensure that these financial institutions operate soundly and in accordance with the law and act responsively to their constituencies.
European Union
European Central Bank (ECB)
The ECB is charged with the responsibility of managing the monetary policy for the Eurozone and the responsibility of price stability. It also oversees important banks operating in the Member State within the Eurozone through the Single Supervisory Mechanism (SSM).
European Securities and Markets Authority (ESMA)
ESMA is a European supervised body that is part of the EUs legal system. It has set objectives for controlling and safeguarding investors while promoting the efficiency of the various financial arrangements in the European Union. Thus it is involved in the Regulation of member states securities and the implementation of European securities law.
International Organizations
International Monetary Fund (IMF)
The IMF also furnishes funds to countries that are in a critical position and scrutinises the world economy. It has primary responsibility in relation to the financial stability of the region by providing policy and technical cooperation as well as financial assistance to its members.
Financial Stability Board (FSB)
Thus the Financial Stability Board is the body that focuses on the supervision and reports on the developments in the global financial system. It involves the task of defining unfavourable conditions that can destabilise the financial system and defining joint actions of the authorities of member states and international organisations for their elimination.
Key areas of Financial Regulation
Banking Regulation
Banking regulation is intended among other things to protect the solvency and liquidity of banks. Some of the regulatory imperatives are capital adequacy stress testing and implementation of risk management guidelines of Basel Accords (Basel III).
Securities Market Regulation
Securities market regulation derives its objectives from the aims of investor protection and promotion of fair efficient and transparent securities markets. It comprises the Regulation of issues related to the public offering of securities trading in securities and reporting of financial information by companies with securities that are floated in the market.
Insurance Regulation
Insurance regulation is meant to mainly cover the market conduct of the insurers and the policyholders. The legal system has decreased and continues to insist on such issues as capital adequacy and pricing.
Transparent and Risk Management Compliance Standards
Credit Credit Regulation
The need to have some market control over credit and debt should be emphasised in this context due to the significance of stability in the financial market. Supervisory responsibilities include credit rating agencies consumer protection credit and risk management which are associated with a high degree of leverage in the economy.
Challenges in Regulatory Finance
Regulatory Arbitrage
This is where financial institutions take advantage of the variation in the regulations of different countries in a bid to avoid stringent regulations. This may lead to higher systemic risks due to the fact that the institution is likely to indulge in high risk business in the less regulated market.
Compliance Costs
A major impact of financial regulations is the cost of compliance especially in putting mechanisms in place for reporting monitoring and auditing. Especially for smaller businesses these costs can be very high and hence can restrict competition.
Cross Border Coordination
Several countries that have adopted different regulatory policies and enforcement have different results that may result in inefficient systems and in some cases inadequate Regulation.
Technological Disruption and Financial Regulation
As a new phenomenon Fintech and Regtech present potential and threats to regulatory finance in equal measure. Alager technologies come with new risks as they enhance efficiency in compliance and minimise costs from regulatory fines for non compliance but also bring in risks such as hacking and emerging uncertainties on new financial inventions.
Cryptocurrencies and Blockchain Technology
Cryptocurrency and blockchain technologies such as Bitcoin and Ethereum have been challenging for regulators. The decentralised structure and possibility of anonymity make them useful for a variety of unlawful purposes such as money laundering hence becoming a security threat to investors due to their high volatility. Most international regulators are in a constant search for a way to fit cryptocurrencies into the existing financial systems.
Data Privacy in Financial Regulation
This being the case several regulatory concerns have arisen with cybersecurity and data privacy being some of the most vital aspects of financial institutions move to the digital world. Attacks on financial organisations have led to negative impacts on the stability of the markets thus leading to the formulation of tight measures regarding the protection of data.
Sustainable Finance and ESG Regulation
Pressure to include ESG criteria in the decision making of financial institutions continues to increase. There are currently a lot of demands and expectations from regulators to disclose ESG risks and sustainable finance will have a major influence and impact on the design of prospects.
Increasing Global Collaboration
With the progression in the liberalisation and globalisation of financial markets there is a need for convergence in the approaches used by different countries regulating authorities. The future regulatory trends will thus focus on the international trends set by the international standards and the international cooperation between countries offered by globalisation in order to deal with risks especially those posed by the leading international financial institutions.
Nature of Artificial Intelligence (AI)
Artificial intelligence and machine learning are just around the corner to change the approach that financial institutions take in dealing with regulations. Such technologies can enable institutions to address compliance issues automatically identify cases of fraud and track risks. However they also come with new sources of Regulation amongst which are the requirements for accountability specifically with respect to AIdriven decision making.
Consumer Protection Aspect
The fields of operation of regulatory finance have however evolved in recent years due to advanced technological applications social considerations and increased global risks. The evolution of digital finance has also been characterised by high regard for consumer protection. The introduction of digital banking peer to peer lending and mobile money has increased the accessibility of finances in global markets.
Despite this it has also brought about new forms of risk that have a direct impact on the consumer including fraud data theft and predatory credit. Here the regulators are placed in a position of having to shape rules to safeguard the consumers while at the same time promoting innovation so that the Fintech firms will not be allowed to engage in malpractices like those that previously characterised the conventional financial institutions but instead be compelled to institute high standards of disclosure.
Climate Related Financial Risks
Another financial risk area that has been increasingly connected to Regulation by those in regulatory finance is climate related financial risks. Whereas earlier climate change was considered an environmental problem now it is considered to be a potential threat to the financial sector. Possible climatic changes changes in energy policy and the emergence of the low carbon economy create risks to the assets and institutions.
For this the regulators have been including climate risk measures in their supervisory models. This involves stressed testing of the banks on climate change and requiring climate related reports from the organisations with public shares thus forcing the markets to change for the better.
Complexity of Financial Products
However advanced financial products serve as regulatory issues in and of themselves. Thus such novelties as derivatives structured finance and algorithmic trading strategies create new and complex access that are hard to control and mitigate. Today there are many sophisticated analytical methods of evaluating risks. Still even they have problems functioning on the edge of stability having been exposed to their inadequacy at the time of the 2008 financial crisis.
Increasing the quality of risk management has been on the agenda of the regulators to force higher openness and better appreciation of the risks implied in financial products and services all in an attempt to adapt the regulatory framework more closely to the developments in the financial markets.
Defi Popularity & Adoption
DeFi is one of the biggest disturbances to modern regulatory finances since the idea of decentralised finance is contrary to the traditional regulatory authority. DeFi is a unique financial system based on blockchain technology that embraces financial operations that are performed without the application of intermediaries such as banks and brokers.
Applications based on decentralised blockchain systems provide an opportunity to lend borrow exchange or invest assets through smart contracts which are automated contracts coded into the blockchain. On the one hand there are opportunities for increasing the financial inclusion and efficiency of transactions through DeFi on the other there are peculiarities in their Regulation. The lack of a single governing authority harms regulators in the way they are unable to regulate the failures and scams or protect the investors.
Further a lending assembly to which DeFi appends has stability and liquidity challenges due to the use of cryptocurrencies to collateralize the loans. Capital markets regulators are at the moment struggling to decide whether and if DeFi can be brought within the regulatory circle and how the innovation can be allowed without totally regulating it with many drawing up hybrid models of Regulation that allow for a degree of decentralisation while at the same time increasing monitoring.
Impact Of Multi Party Cooperation
Another emerging feature in the Regulation of finance is the increased interconnectivity of the various financial industries as well as institutions within the government and global structures. Because there are numerous emerging financial products and services firms offering to the market and the financial products and service firms becoming intertwined in manifold ways a single financial regulatory agency may need more mastery and authority to regulate the market effectively.
Most sectors of financial Regulation are becoming important due to the fact that they require banking securities insurance and payments regulators to undertake collaboration.
Globally bodies such as FSB and BCBS are responsible for supervising regulatory activities across borders. This assists in making certain that the exact requirements govern Fintechs in more than one territory so they cannot engage in arbitrage regarding different countries regulations.
Conclusion
Regulatory finance is an important part of the country’s financial systems that helps maintain order support the rights of investors and consumers and avoid crises. In the last one hundred years there has been a dynamic shift in financial regulations due to the volatility and unpredictable market trends surge in technology solutions and usage and major financial crises around the world.
In the modern world the notion of regulatory finance looks far more confusing due to the mass of various bodies rules and interactions on the international level.