Chapter 8

How Investment Firms are Regulated

8.1 INTRODUCTION

In all major economies, firms that play a part in the investment process have their activities monitored by one or more regulators. Regulators should not be confused with central banks, although in some countries the regulator and the central bank may be the same organisation. The precise way in which firms are regulated differs from country to country, although within the European Union, most regulations are harmonised. At a global level, regulators and central banks meet in supranational bodies such as the Basel Committee, which harmonises some aspects of regulation from a global perspective.

From an IT perspective, within the business applications used by investment firms, there are a number of functions that behave in the way they do because regulatory requirements have been built into their design. This matter is discussed further in section 8.3.6.

This chapter provides a brief overview of regulation from a global perspective, and then focuses on the main aspects of European, and then United Kingdom, regulation. Note that some authorities (such as the BIS – see section 8.3.1) refer to regulation as “supervision”, and in this chapter the two terms have the same meaning unless otherwise stated.

8.2 OBJECTIVES OF REGULATION

The objectives of financial regulation can be summarised by looking at those of the UK regulator, the Financial Services Authority (FSA). The FSA’s four specific and equal objectives are:

  • Maintaining ...

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