What is financial regulation?
Financial regulation refers to the rules and laws firms operating in the financial industry, such as banks, credit unions, insurance companies, financial brokers, and asset managers must follow. However financial regulation is more than just having rules in place – it’s also about the ongoing oversight and enforcement of these rules.
The Central Bank of Ireland regulates and supervises over 10,000 financial service providers operating in Ireland. Since 2014, the responsibility for supervising banks is shared between the Central Bank of Ireland and the European Central Bank (ECB).
Most of the laws governing the financial system are made by politicians in the House of the Oireachtas or the European Union. The Central Bank then oversees how these rules are complied with, sometimes issuing additional guidance. These rules have strengthened significantly since the financial crisis
Why is financial regulation important?
All of us depend on the financial system in one way or another. For example, savers rely on banks to have their money available when they need it. Businesses need to be able to borrow to maintain and develop their business. Consumers taking out a mortgage or insurance may need to get advice on the best product for them. In the case of insurance companies, policyholders rely on getting claims paid when something goes wrong.
Poorly regulated financial institutions have the potential to undermine the stability of the financial system, harm consumers and can damage the prospects for the economy. That’s why strong financial regulation is important – to put rules in place to stop things from going wrong, and to safeguard the wider financial system and protect consumers if they do go wrong.
How does financial regulation work?
Ensuring firms have the funding to trade safely, have the appropriate risk controls in place and are appropriately governed is known as “prudential regulation”.
Ensuring firms treat customers fairly from the sales process to how complaints are managed, is known as “consumer protection”.
An important part of prudential regulation is authorisation. We call this our “gatekeeper role” and means we only allow firms to operate in the financial system once they have fulfilled a number of criteria, including governance and risk control.
Consumer protection rules are also in place. These spell out how firms must treat their customers when selling them financial products. So for example, a regulated firm must ensure that it “acts honestly, fairly and professionally in the best interests of its customers and the integrity of the market”.
This work examines the role of central banks and financial supervisors in greening the financial system. It is now clear that an effective policy framework for mobilising sustainable finance involves strong real economy signals (e.g. in agriculture, buildings, energy, transport) and effective deployment of public finance, as well as the alignment of the rules that govern the financial system with climate action and sustainable development. This involves the rules governing financial system stability, prudential risk management, financial conduct, market creation and monetary policy.
This program seeks to support ambitious action by financial regulators through academic research, policy analysis and dialogue with practitioners.
Work focuses include:
Conducting primary research on the links between environmental performance, financial performance and regulatory implications.
Chairing the International Network of Sustainable Financial Policy Insights, Research and Exchange (INSPIRE), a platform to commission robust and innovative research in this area.
Building a global database of financial policy and measures on climate change and sustainability, together with UN Environment.
Why is this work important?
Over the past five years, an increasing number of central banks and financial supervisors have begun to acknowledge their role in responding to climate risks and helping to scale up green finance. Over 30 central banks are now members of the Network for Greening the Financial System, for example.
The bulk of the world’s financial regulation, however, has been designed and implemented without explicit consideration of climate change and sustainable development. Extensive work is still needed to translate the growing acknowledgement of the links between sustainability factors and financial regulation into actual changes in the conduct of central banking and supervision.