FINANCIAL SERVICES SECTOR AND ECONOMIC REGULATION

Financial Services Sector and Economic Regulation

Financial Services Sector and Economic Regulation

Introduction

Economic regulation, a form of government intervention designed to influence the behaviour of firms and individuals in the private sector. Other forms include public expenditures, taxes, government ownership, loans and loan guarantees, tax expenditures, equity interests in private companies and moral suasion. Defined as the "imposition of rules by a government, backed by the use of penalties, that are intended specifically to modify the economic behavior of individuals and firms in the private sector," regulation in general is aimed at narrowing choices in certain areas, including prices (airline fares, minimum wages, certain agricultural products, telephone rates), supply (broadcasting licences (Bagehot, 2000), occupational licensing, agricultural production quotas, pipeline certificates "of public convenience and necessity"), rate of return (public utilities, pipelines), disclosure of information (securities prospectuses, content labelling), methods of production (effluent standards, worker health and safety standards), standards for products or services (safety of children's toys, quality of food products, Canadian-content requirements in broadcasting) and conditions of service (requirements to act as a common carrier or not to discriminate in hiring or selling goods and services).

Governments

Governments use economic regulation to improve the efficiency with which society's resources are allocated, to alter the distribution of income and to achieve broad social or cultural goals. Improving economic efficiency may involve the regulation of monopolies, which by restricting output and raising prices may restrict the production of the socially optimal amount of goods or services (Bagehot, 2000). Regulation may be used in situations in which costs are not paid by those responsible, eg, the social costs of extensive pollution caused by private firms. Because of interdependencies in the utilization of collectively owned resources, government management is necessary to prevent the overexploitation of such renewable resources as fish, whales and forests; and to prevent overcrowding of the broadcasting spectrum.

Government also imposes regulations to alter the distribution of income partly to prevent monopoly profits and certain kinds of price discrimination, which were the justification offered for the regulation of both the railways in the 19th century and the UTILITIES early in the 20th century. Regulation was an attempt to prevent unjust discrimination and to ensure that consumers were charged "fair and reasonable" rates, terms still used in regulatory statutes. Regulation may also be used to reduce the speed of economic change and the redistribution of income through administrative processes, a justification based on the notion that the public is generally averse to risk and that the marketplace, with its sometimes abrupt changes, unfairly distributes income. Finally, regulation may be used to confer benefits on certain customers at the expense of others (Manning, 2000).

Social and Cultural Regulation

Regulation has been used extensively in Canada in the pursuit of social and cultural goals, including nation building through the provision of transportation infrastructure and the promotion of national unity and cultural identification (broadcasting and Canadian-content regulations. There have also been attempts to increase domestic ownership of business enterprises by restricting foreign ownership in certain sectors, eg, ...