Table of Contents
- What Is Financial Regulation?
- Why Financial Regulations Are Important
- Types of Financial Regulations
- Types of Financial Institutions
- What Is a Financial Regulator?
- How Are Financial Institutions Regulated?
- The Most Common Financial Regulatory Bodies
- How Financial Regulators Help Banking in the Way We Know Today
- FAQ
At both federal and state levels, financial institutions are governed by laws that protect consumers against unfair and unscrupulous treatment in the banking and finance sectors. In addition, guidelines are in place to combat fraud and monopolistic behavior, helping to ensure the smooth running of the free-market economy.
Granted, catastrophic historic events — such as the 2008 global financial crisis — occur despite the oversight of robust financial regulatory agencies. Because of this, laws and regulations are constantly being examined and updated to finesse the banking and finance legal framework.
Read on to understand more about finance watchdogs, their roles, and how regulations work to protect the public and the economy from fraud and illicit practices.
Key Points
• The U.S. has a broad set of laws and regulations that oversee the banking and finance sectors, aiming to protect consumers and maintain a healthy economy.
• There are many government agencies and organizations that regulate different areas, including stock exchanges, listed companies, asset management, and financial services.
• Regulators work to ensure fairness in disclosure, standards, competition, and rates or pricing.
• While regulations protect consumers and keep the banking and investment sectors fair, some believe too many rules may stifle innovation and create a drag on the economy.
• Lawmakers and agencies continue to add and adapt regulations for new technologies and conditions.
What Is Financial Regulation?
Financial regulation is a collection of laws, rules, and policies set by governing institutions. These are designed to keep your money safer. Specifically, they aim to maintain confidence and stability in the financial system by eliminating fraud and monopolistic behavior.
In the United States, governing bodies try to balance the need for oversight with a free-market economy, which can be a challenging endeavor.
Why Financial Regulations Are Important
Without regulations, consumers have no protections. They might be subject to fraud, sold bad mortgages, and charged extremely high interest rates and fees on credit cards.
For example, the Truth in Savings Act requires banks to disclose standard information, such as interest rates and fees, that customers can use to compare deposit accounts.
Laws and policies prevent companies from gaining too much market control and stifling competition, which threatens the free market economy. Large companies could create monopolies or duopolies, which allow them to control prices. Regulations also prevent financial institutions from taking risks that put consumer funds in jeopardy.
But some believe too much regulation could also be a threat since prices are largely determined by supply and demand in a free-market economy. Competition among suppliers tends to keep prices in check as each tries to grab market share.
Some also suggest that if regulations become too onerous and costly, companies may not have the flexibility and funds needed to create innovative products.
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Types of Financial Regulations
Different agencies focus on the safety and soundness of products and services, transparency and disclosure, standards, competition, and rates and prices for different entities. Here’s a closer look at some of the most important regulations to be aware of:
• Financial Services Regulations: Banking and financial institutions must follow specific guidelines to ensure a functioning banking system. These rules are enforced by the Federal Reserve Board, the Office of the Comptroller of the Currency (OCC), the Consumer Financial Protection Bureau (CFPB), and the Federal Deposit Insurance Corporation (FDIC).
• Stock Exchange Regulations: Laws and rules for stock exchanges ensure that the pricing, execution, and settlement of trades are fair and efficient.
• Listed Company Regulations: Listed companies (public companies) are required to prepare quarterly financial statements and submit them to the Securities and Exchange Commission (SEC) and their shareholders. Investors use this information to inform their trades.
• Asset Management Regulations: Financial advisors and asset managers must follow strict rules set by financial services regulatory bodies so that clients are treated fairly and not defrauded. Any company that provides investment advice is considered an investment advisor, and the SEC oversees investment advisors with $100 million or more in assets under management (AUM).
Importantly, deposit accounts and brokerage accounts are generally regulated by different federal agencies and by different regulations. This is because investments in a brokerage account are subject to a higher risk of loss, including the potential loss of the principal investment.
Bank deposit accounts and brokerage accounts are also insured differently. Bank accounts may be insured by the Federal Deposit Insurance Corporation (FDIC), while brokerage accounts may be insured by the Securities Investor Protection Corporation (SIPC), but not by the FDIC.
Recommended: What Is a Fiduciary Financial Advisor?
Types of Financial Institutions
There’s a wide variety of financial institutions in the U.S., some of which you may be familiar with. Here’s the rundown:
• Central banks, like the U.S. Federal Reserve, watch over the country’s monetary policy.
• Retail banks are probably what most people are familiar with. These are banks where the general public can have checking accounts and savings accounts, loans, and other financial services.
• Commercial banks are similar to retail banks (above), but they serve the business community. Large banks may act as both commercial and retail banks.
• Credit unions are similar to banks, but they are nonprofits, and members are part owners of them. They offer the same kind of services as banks but may tailor themselves to specific communities.
• Community development financial institutions (CDFIs) are financial institutions that work to build financial knowledge, services, and wealth in communities that are less advantaged.
• Savings and loan associations are organizations that may use savings deposits to create housing loans.
• Mortgage companies offer home loans and may also manage commercial real estate.
• Insurance companies help both businesses and individuals protect themselves from property loss and may provide services such as loans.
• Brokerages manage securities trading (say, stocks and exchange-traded funds, or ETFs), which are regulated, though not insured by the Federal Deposit Insurance Corporation (FDIC), as mentioned above.
• Investment companies function by issuing securities to both businesses and individuals who seek to raise capital.
What Is a Financial Regulator?
A financial regulator is an organized governmental or formal body that has the jurisdiction to oversee other entities, such as banks, stock markets, and asset managers. Their mandate is to ensure fairness, protect the public and institutions from fraud, and facilitate a well-functioning financial sector.
Examples of financial regulators of banks are the Federal Reserve, the Office of the Comptroller of the Currency (OCC), and the Federal Deposit Insurance Corporation (FDIC).
How Are Financial Institutions Regulated?
Banks and financial institutions are regulated by the Fed, the OCC, the CFPB, and the FDIC, while asset management companies and stock exchanges answer to the Securities and Exchange Commission (the SEC) and the Financial Industry Regulatory Authority (FINRA). Also worth noting: Individual stockbrokers, investment bankers, and other professionals likely need FINRA securities licenses. State agencies also may enforce regulations on financial institutions, notably insurance providers.
Each of these organizations requires documentation from financial institutions and companies that shows compliance with laws. For example, companies listed on an exchange have to submit periodic financial statements to the SEC. If they fail to do so, they may be charged with “Failing to Comply” and may lose the ability to trade their shares on the stock market and be forced to pay penalties.
Recommended: FINRA vs. SEC: How Are They Different?
The Most Common Financial Regulatory Bodies
The following is a list of the more recognized regulatory agencies and a brief description of what each one does.
The Federal Reserve Board (FRB)
The Fed is the central bank of the United States. As such, it ensures the U.S. economy functions effectively. The Fed is in charge of monetary policy and has the power to increase or decrease interest rates or to instruct banks on the quantity of reserves they must maintain. The Fed also monitors financial systems and their impacts, facilitates efficient settlement of U.S. dollar transactions, and upholds laws that protect consumers.
The Federal Deposit Insurance Corporation (FDIC)
The FDIC was created by Congress to support the U.S. financial system. The FDIC insures deposits and monitors financial institutions and their compliance with consumer protection laws. The FDIC also manages bank failures, though they occur very rarely. In the event of the failure of an FDIC-insured bank, FDIC provides up to at least $250,000 per depositor, per FDIC-insured bank, for each account ownership category.
The Consumer Financial Protection Bureau (CFPB)
The CFPB is a relatively new agency that implements and enforces federal consumer financial law. CFPB regulations protect consumers by making sure financial products and services are fair, transparent, and competitive.
The National Credit Union Administration (NCUA)
The NCUA was created by Congress in 1970. It insures consumer deposit accounts with most credit unions with up to $250,000 of share insurance, per member-owner, per credit union. Enforcement tools include administrative orders and fines.
The Securities Exchange Commission (SEC)
The SEC strives to maintain the public’s trust in the capital markets by insisting on fair practices. Various acts have been passed over time, including the Securities Act of 1933, the Sarbanes-Oxley Act of 2002, and the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.
The Commodity Futures Trading Commission (CFTC)
The CFTC was created in 1974 to oversee commodity trading in the agricultural sector. Commodity trading has been subject to government regulation since the 1920s. The CFTC supervises and monitors commodity traders and market activity. The commission investigates and prosecutes wrongdoers and educates customers about their rights and how to avoid fraud.
Recommended: What Are the Differences Between FDIC and NCUA Insurance?
How Financial Regulators Help Banking in the Way We Know Today
The banking and financial systems operate well under current regulation, but what about digital banking? While digital banking is a fairly recent innovation, existing banking laws and regulations apply to online banks as well as brick and mortar banks. In addition, certain regulations also apply to non-bank digital start-ups and fintechs.
There are some regulatory frameworks, however, designed at least in part for digital banking, whether that’s done through a traditional bank with digital services or an online bank.
For example, the Electronic Fund Transfer Act (Regulation E) helps to protect customers from the fraudulent or incorrect digital transfer of funds from one bank account to another, whether the transaction involves a digital bill payment, a peer-to-peer money transfer, a direct deposit, or withdrawing money from an ATM.
Know Your Customer (KYC) legal requirements, which require financial institutions to verify the identity of customers and assess their risk to help prevent money laundering and other financial crimes, may be met through various digital methods, such scans of government-issued IDs, database verifications, or through an app. An electronic signature is also a way for customers to validate transactions remotely.
Recommended: Online Banking vs Traditional Banking: What’s Your Best Option?
The Takeaway
Financial services regulatory bodies, including the Fed, the FDIC, and the SEC, oversee the banking and finance sectors in the United States. State agencies also play a role. Though many people may not be aware of the details, these regulatory bodies have jurisdiction over stock markets, commercial and retail banks, investment banks, and asset managers. Their mandate is to ensure fairness for consumers, to ensure entities comply with fraud protection rules, and to protect the financial sector and the free-market economy.
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FAQ
Who regulates financial institutions in the United States?
In the United States, financial institutions are regulated by the Fed, the Office of the Comptroller of the Currency (OCC), the Federal Deposit Insurance Corporation (FDIC), the Securities and Exchange Commission (SEC), the Financial Industry Regulatory Authority (FINRA), the Consumer Financial Protection Bureau (CFPB), the National Credit Union Administration (NCUA), and the Commodity Futures Trading Commission (CFTC). State agencies also enforce regulations on financial institutions, especially insurance providers.
What are regulators in finance?
Finance and banking regulators are state- and government-appointed bodies that protect the safety and fair treatment of consumers. They also ensure smooth operation of the finance and banking sectors, the backbone of the economy.
Who regulates investment banks?
U.S. investment banks are regulated by the Securities and Exchange Commission (SEC). For regulatory purposes, investment banks were declared separate from commercial banks following the passage of the Glass-Steagall Act of 1933.
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