Uses of Self-regulation

Self-regulatory bodies exist in industries such as financial markets. These regulatory bodies are commonly known as self-regulating organizations (SROs). SROs are non-governmental organizations that possess the authority to create and implement independent industry and professional regulations and standards.

Unlike the case of standard market self-regulatory bodies, government departments and agencies recognize and empower SROs. They, as such, have the capacity to deliver in their mandate. Note, however, that they are independent and do not rely on government funding. An example of an SRO is the Financial Regulatory Authority (FINRA) in the US, which enforces rules and federal securities rules.

Role of SROs

The purposes of SROs vary from one country to another. In some countries, such as the US, SROs have regulatory power, while in some other countries, they are rarely recognized as independent regulators. In fact, in some countries, they are non-existent. Although SROs are private organizations, they are not insulated from government-imposed regulations.

Some of the functions of SRO include:

1. SROs act as a watchdog to protect against fraud or unethical practices by market participants.
2. Some SROs come up with conditions that must be met to be a member, such as having a specific educational background.
3. They educate market players on the appropriate business practices. For example, an SRO may assist investors by providing information on how investments work and guiding them on the methods of reducing risks related to financial markets.

Question

The leading newspaper in a country reports on a regulatory institution that has been granted autonomy by the government and further empowered by a statute. However, the regulatory body is not financed by the government. The regulatory body reported by the media is most likely to be a (an):

1. Independent regulator.
2. Government agency.
3. Self-regulatory organization.

Solution

The correct answer is C.

Self-regulators are given authority by the government and are provided power by statutes. They, however, finance themselves (from the money collected from the companies they regulate).

Reading 10: Economics of Regulation

LOS 10 (e) Describe uses of self-regulation in financial markets.