FINRA, the Financial Industry Regulatory Authority, recently commented that the government has been spending huge amounts of money due to consumer distrust for the financial industry. A lot of resources have been spent trying to regulate the industry, and to protect the investor. Indeed, protecting the investor from financial risks is no easy task. It involves educating the public about the risks involved, and setting up regulatory tests to assess financial practitioners.

The setup to undertake this challenge is remarkable. FINRA itself has 2,800 staff, regulates the practice of 4,900 professional firms with over 150,000 branch offices, and watches over 650,000 registered securities representatives. So why is such a huge operation necessary to deal with the financial turbulences?

They call it the “financial crisis” because it is indeed a crisis. Whenever a large corporate appears in the headlines as having breached the faith of its investors, the confidence of the public is shaken, and the market plunges southwards. It could take months, sometimes years, for the confidence to be rebuilt. For instance, the case of Mr. Madoff had often been cited as a prime example. For years, he had run and operated a multi-billion dollar ponzi scheme. Of course, he alone cannot be fully responsible for the turmoil in the financial markets. But the disclosure was untimely. The investors were directly affected. And public confidence plunged deeper than before. Such incidents help explain why there is a need for strong regulation.

Investors have questioned why such activities can escape the detect of regulatory bodies such as Finra. That is because the authorities have no jurisdiction over investment adviser operations. The jurisdiction only covers broker-dealer operations. Seeing that there is a loop-hole, the corporation capitalized on it and took advantage of the situation.

The authorities see this as a good opportunity to expose the cracks in the system. Already, reforms discussions have been underway to try to come up with solutions to seal these cracks. The goal of these discussions is simple – to achieve a modern regulatory system that works better than before, and to restore investor confidence and prevent similar problems from arising.

This all sounds simple in theory. But in reality, it requires a lot of effort and resources to execute. The regulatory bodies have to sit down to examine the needs of the investor advisers. Examinations will be used to regulate the advisers, but they are meant to be used as a mechanism to provide stability in the financial industry.

There is also a need to identify various areas that need to be regulated, such as Hedge Funds. Till today, hedge funds are still largely unregulated. But with assets over $1 trillion, there is a lot at stake. Without trust, capital cannot flow efficiently from one to another, and economic dividends is lost. That is the regulatory cost of distrust.


Other Post: