The regulation of financial institutions is a form of supervision that requires all financial institutions to meet certain requirements and to follow defined guidelines in order to maintain the integrity of the respective financial service.
The purpose of regulating financial institutions is to ensure that they are all operating equally and effectively, in order to provide the best service they possibly can. The goals of regulation are:
- To maintain the confidence of consumers in the financial market
- To maintain the financial stability of the institutions, as well as the stability of the economy
- To ensure the appropriate level of protection for consumers
- To reduce the overall amount of financial crime, such as fraud, schemes and risk
The regulation of financial institutions can be done either by government organizations or non-government organizations. The actual act of regulating the financial institutions can come in the form of supervision of stock markets (to ensure that the trading of stocks is being done legally), supervision of listed companies (and other market participants that trade goods and services), supervision of investment management and supervision of banks and other financial service providers (for the safety of the general public). This type of regulation does vary from country to country, as well as the governing bodies that do the supervising.
By regulating financial institutions, it is ensured that market transactions and non-market transactions are going smoothly, as well as eliminating the rise of fraudulent schemes that would poorly affect the economy.