Financial Regulation And Supervision Are Equally Important

Published Date: 02 Nov 2017

protection. Discuss.

Wide diversification is only required when investors do not understand what they are doing.

What motivates investors in investing their money, rather than saving them or spending them is the safe feeling that while doing so, they will gain, not lose. To guarantee this, investors' money must be protected and safeguarded so as to reduce systematic risk. IOSCO (International Organisation of Securities Commission) is the leading organisation which regulates over 90% of world securities. This organisation ensures a better regulation which help and efficient market by, exchanging information which promotes local markets, set up standards which provide an effective surveillance of securities transactions. This document, by trying to increase high level of regulation, will also be helping investors in order to reduce systematic risk. The more the global market increases, the more there is interdependence on regulators. The IOSCO's consists of three main objectives which can be said that are closely related. This shows that when tackling one objective, in an indirect way, you will be effecting the other objective. These three objectives consists of the protection of investors, ensuring that markets are fair, efficient and transparent and the reduction of systematic risk. So basically when trying to reduce systematic risk, you will be ensuring a fair, efficient and transparent market which will help to protect the investors.

What are those actions that will increase the risk when it comes to investors' money and also may not be fair to all investors. One of these actions is insider trading. This is when someone who works within the company, has certain non-public information that would result in this person to either avoid a loss or else make a profit. This is not fair to the investor who may not know about this information and therefore would not be able to act in time. Also the misuse of clients assets may damage the company's reputation with the investors. The investor has to know where his investments are going and on how much risk is his investment being invested. A company cannot just use the investor's money the way it wants to no matter what the return will be. The disclosure of information is what really help the investors to know what is going on with the company and whether to keep investing or withdraw the money. In disclosure, one has to say that the information has to be correct and not misleading. Another important aspect regarding investment is who should give the advices and services regarding investment? Only those people who have the required license and are authorised to give the required service regarding investment should do so. Investors when investing their money should take care to listen to and take advice from these authorised people. Standards are very important in order to supervise and safeguard investors' decisions. These standards will guide on how to treat the investors and not to mislead them into taking unnecessary risk.

Up to now, I have only discussed the supervision of investors but financial regulations are also important for investor protection. These regulations are there to be as a guide in order to try to avoid as much as possible the risk of failure. Sometimes regulation is not enough to prevent failure of a business, but it can be used to try to limit as much as possible the situation. The regulation must also be prudent in such a way as to try to limit risk taking. This type of regulation existed for a long time but become more effective after the financial crisis. The fact that huge banks where taking huge risks with the investors' money, brought with it huge turmoil in the investing business. The collapse of huge companies like Lehmann brothers, showed the need for tougher prudential regulation. One can also add that mismanagement of investors' money or even the collapse of a financial institution may bring with it global mayhem. Once again we can refer to the Lehmann brother case, where the US government did not want to bail the bank so as to give a lesson to other bank not to take huge risks. If the government bails all the banks out when they are on the brink of collapse, then this would motivate banks to take huge risks, knowing that if the gamble pays off, they would make huge profits and if it does not, then there are the banks which would bail them out. In the Lehmann case, the central bank wanted to give a lesson to all banks that it would not help them and this decision in my opinion backfired and had other repercussions which went global and effected all banks in the world. The fact that a lot of people lost their investment, discouraged most investors in investing their money in the first place and also these investors lost their belief in banks. The regulation and supervision therefore helps so the investors would know where they are investing, how risky is their investment going to be and whether they are paid the interests according to the risk taken.