People need to diversify their investment in various financial products to ensure safety and growth of their portfolio. There many financial products that customer is supposed to select from to make a wise financial decision. These financial products include banking and loan, investments, credit and loans, and insurance. Individual and household are expected to be able to take care of their financial well-being. Moreover, the customers’ ability to access these financial services helps in improving market integrity, promote financial stability, drive competition, and boost economic growth. The emergence of the new technology has altered provision of financial products since these services are accessible from all over the world. This has increased the risk involved while conducting the financial transactions between financial products insurer and the consumer of financial product hence the only way to do this is to put rule and regulation to guide the financial contracts. Due to these risks involved the government and additional governing bodies, including state laws, securities laws should formulate policies that will ensure that clients are protected from the fraud that might be happening in the industry .
Selling financial products is not easy. It is surprising on how many excuses can be found due to lack of success selling process. Some individuals might say that nobody is buying is purchasing the financial product in down market. Others differ with this, stating that those prospective customers who are capable of the purchase of a financial product are reluctant in putting their money in a financial institution. The truth of the matter is the problems that originate from lack of market discipline caused by financial product sellers that try to compete with products that their customers believe they are outdated . For instance take for example financial product providers such as insurance companies. Brokers receive the sales commission for insurance products. As such, you may find that those commissions are half of what the insurance company paid while moving the product. In the end, the person who ends up paying for such fees during contacting is the customer, and this is the person who needs to be protected. With regulation of the insurance industry, such exploitation has been minimized.
Secondly, another reason why the contract for the sale of financial products requires tougher regulation is the essential objectives of consumer protection which cannot be fulfilled without proper management. Consumers are key players in financial product and hence need protection. The first objectives are transparency where consumers understand the prices, the risk involved and terms and condition. The second objective is risk mitigation whereby financial product providers implement realistic steps of identifying, monitoring and mitigating customer risks such as fraud .
The third goal, the fair treatment which stipulates that financial product on offers are not unsafe and the conduct of financial service providers and the conduct of their agents and employees is not abusive. Lastly, we have effective recourse that requires financial product service providers solve queries, complaints efficiently. To achieve all these objectives, all relevant bodies including the government sets out rule and regulation to safeguard financial consumers wellbeing and makes sure that all the goals through consumer protection have been achieved.
Third, responsible risk taking rules means that financial products should ensure they thrive in the long run in case they terminate their business shortly, they should have a structure of paying bonuses to their fraternity. Financial product contract should cater for future risks that may be experienced and which may affect consumers directly. For example, banks operate in a condition of fractional liquidity reserve. The vast majority of banks liabilities are redeemable on demand. This means that any depositor should have access to the money whenever he/she wants. However, sometimes banks have found themselves in a situation that they cannot fulfill such need due to harsh economic crisis or mismanagement of depositor’s funds. In such a case, financial contract has been regulated to ensure that all depositors are compensated, and one of the measures is taking putting the bank under receivership. You can imagine the problems that consumer may face if such situation happens in the banking sectors .
The other reason why the contract for a sale of financial products needs tougher regulation can be seen in the insurance industry. Economists believe that the role of the government is correct the failure of the market. In the insurance industry, the likely failures may be as a result of imperfect information. In such a case, the customers that require protection are not able to observe the behavior of insurance companies. For a life insurance customer, this may be essential because of a long time between when a contract is bought and when the payout might take place. Also, there is no efficient way to discipline the insurance company. For instance, a life insurance consumer is no able to punish the company that is behaving badly through the exchange of the long-term policy for one with another insurer. Therefore, it is necessary for the government and other relevant bodies to regulate and take appropriate measures to bar insurance company’s actions policies that reduce the value especially when it comes to a value of life insurance contracts.
Benefits of financial sector regulation
Consumers benefit from well-functioning financial institutions in various ways. One, they can overcome their short term financial constraints since they can borrow and acquire their basic needs such as goods and services, financial assets, and property. Second, consumers are protected from many risks through insurance. People who have insurance cover tend to live a more enjoyable and fulfilling life since they know in case of a disaster, they will not be constrained to overcome them. Third, the institutions give the consumers a platform to economize their need for cash through the opening of the different store of value such as current accounts and payment of instruments such as credit card. Lastly, the financial institutions give consumers an opportunity to have a lifetime financial security by providing them with saving accounts to save money for consuming after retirement. The organization that deals with policies formulation should be keen enough to ensure that all these benefits are awarded to the consumer. Regulations formulated are with the aim of ensuring that market does not fail to address these advantages and ways of compensating customers who will be affected if a bank collapses .
Caprio, G. (2013). Financial Regulation after the Crisis. Retrieved from http://www.lse.ac.uk/fmg/workingPapers/specialPapers/PDF/sp226.pdf
Brown, G. (2013). Why we need tougher regulation of our financial system. Retrieved from http://www.telegraph.co.uk/news/politics/gordon-brown/4990812/Gordon-Brown-Why-we-need-tougher-regulation-of-our-financial-system.html
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Financial Services. Retrieved from http://www.europarl.europa.eu/RegData/etudes/etudes/join/2014/507463/IPOL-IMCO_ET(2014)507463_EN.pdf