LLAW6093B Chap.8 Regulated Activities and Regulatory Strategies
Regulated Activities and Regulatory Strategies
The perimeter question
The second part of the syllabus begins by asking how activities come to be designated as regulated, with crypto-assets as the seminar case, and the third part covers conduct of business regulation and prudential regulation. The background reading supplies the vocabulary for all three: it treats regulation as a set of strategies, each chosen to serve a goal that answers a market failure.
Deciding what falls inside the perimeter is itself the first of those strategies, because it controls who may enter an activity at all.
A method in four questions
Ask what function the activity performs, which failure it creates, which goal that failure threatens, and then which strategy should respond and on whom the duty should fall.
The rule-design chapter still applies to the answer: a perimeter drawn as a bright line is easy to follow and easy to avoid, and a perimeter drawn as a standard fits more cases but tells firms less in advance.
Seven strategies sorted two ways
The reading's strategies are entry, conduct, information, prudence and governance, which apply from the start of an activity, and insurance and resolution, which apply only when something goes wrong.
Each can be aimed at users, at individual firms or at the sector as a whole.
The reading presents them as a heuristic for escaping separate silos for banking, securities and insurance rather than as a legal classification.
Every tool has a cost elsewhere
Licensing raises barriers that competition policy tries to lower, more entry into banking can reduce the profits that restrain risk-taking, product restrictions reduce the variety of contracts, and uniform portfolio rules push firms into the same assets.
Insurance and rescues create moral hazard, which is why resolution regimes try to place losses on creditors rather than taxpayers. The syllabus cases on a rogue trader, a long-running investment fraud and capital rules for small-firm lending are all easier to analyse once the relevant strategy and its side effect are named.
What this chapter covers
- 01
Designating regulated activities
- 02
Function, failure, goal and strategy
- 03
Ex ante and ex post strategies
- 04
User, firm and sector obligations
- 05
Entry controls and conduct of business rules
- 06
Disclosure, prudence and governance
- 07
Insurance, rescue and moral hazard
- 08
Resolution by sale or write-down
Worked example · free
Pick the strategy for a conduct scandal
- 3Name the failures involved.
- 3Match strategies to each failure.
- 2Identify a limit of those strategies.
Key terms
- Entry Regulation
- Rules that control who may carry on an activity at all, including licensing, participation limits and structural restrictions.
- Conduct of Business Rules
- Rules governing how firms deal with clients, hold client assets and manage conflicts of interest.
- Product Regulation
- Limits on which financial products may be offered to which investors, amounting to regulation of contract terms.
- Structural Restriction
- A limit on the scope of a firm's business designed to reduce systemic risk or conflicts of interest.
- Macroprudential Regulation
- Prudential rules aimed at the connections and correlations between firms rather than at the soundness of each firm alone.
- Moral Hazard
- The incentive to take more risk created when someone else is expected to bear the losses.
- Bail-In
- A resolution technique that writes down or converts creditors' claims so that they, rather than taxpayers, absorb a failing firm's losses.
Regulated Activities and Regulatory Strategies FAQ
How should a regulator decide whether a new activity needs regulating?
By asking what the activity does, which market failure it creates and which goal that failure threatens, and only then choosing a strategy. An activity with no failure behind it has no claim to regulation, and one drawn by label rather than function invites firms to move around the line.
What is the difference between ex ante and ex post strategies?
Ex ante strategies, such as licensing, conduct rules, disclosure, prudential rules and governance requirements, apply from the moment an activity begins. Ex post strategies, namely insurance and resolution, apply only once a firm is in distress or has failed.
Why is licensing described as a way of enforcing other rules?
Because keeping the licence is conditional on complying with the other firm-level rules, the ultimate sanction becomes closing the business. Licensing also adds its own screening, such as fit and proper checks on owners and managers.
Exam move
Draw a grid with the seven strategies down the side and user, firm and sector across the top, then place every case from the later seminars in a cell. Gaps in your grid show which strategies you have not yet seen applied, which is where to read next.
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