Why the Financial Sector Needs Regulation
Financial service providers play a key role in the growth of a country, making it necessary to regulate them. The amount of money in circulation at any given time dictates the cost of goods and services. The government has to work with banks and other institutions to keep lending rates in check. Regulators can control how much money is in circulation by drawing interest rates and lending to commercial banks. If the amount of money in circulation is above a certain limit, the value of currency will drop. While if it is below a certain limit, consumers will have little money to spend.
Regulators exist to protect customers from exploitation by service providers. Bankers and other players in the finance sector start their businesses to make money. When left unregulated, they will charge high-interest rates for loans given to customers. It falls within the responsibility of the regulator to set a maximum interest rate. Exceeding this interest rate will cause a bank to be penalized as a breach of regulation. If interest rates are too high, it means that consumers will spend more paying their loans. Such a scenario will result in a reduction in spending power slowing down circulation of cash.
The purpose of regulation in finance is to ensure that all unethical practices are eliminated. Without an oversight body, institutions would resort to unethical practices in an effort to make more profits. Regulators offer a platform for clients to launch complaints against these financial institutions. If cash that was entrusted to a service provider is mismanaged, the client has a working framework to follow up on. This improves reliability in banking circles because there is an assurance that all cash deposits are in safe custody. Trust makes things run in finance, and a client will trust an institution such as a brokerage firm with the reputation it carries.
Having a regulator in the banking space builds healthy competition among institutions. When these institutions are properly regulated, new investors can afford to venture into the sector. In unregulated markets, huge corporations will run smaller businesses out of business in an effort to monopolize the market. Regulation ensures micro-institutions get a fair chance to build and grow. Having many options improves the options that customers have, making it easier to access cash. Many players on the field ensure that customers get the best rates as they compete. The ideal setup has different players offering different services that their customers need.
Without a government to regulate all businesses that involve cash, illegal activities would thrive. Investors will be inclined to go into fields that offer maximum returns to make more profits. It is the work of the authorities to limit how much criminal activity these businesses are involved in. Through proper control, the risk of funding for illegal activities can be reduced. To boost security and the overall safety of the community, businesses have to be monitored. Failure to put up rules on how cash transactions are handled would be a huge mistake that would harm the economy.