Financial markets are subject to numerous forms of regulation from a variety of regulatory agencies. The goal of this oversight is to ensure that financial markets operate with a minimum of fraud and to provide a fair, transparent marketplace for investors and businesses alike. In lieu of this patchwork regulatory framework, a country can choose to centralize regulation in one body, an approach with both advantages and disadvantages.
Disadvantage: Lack of Specialization
One of the main disadvantages of having a single body regulate financial markets is that it makes it more difficult for this body to specialize in particular regulatory aspects in the way that multiple entities are better able to do. For example, a single regulatory body would have to issue and enforce regulations on such diverse areas of the financial market as consumer credit cards and the exchange of commodities futures.
Disadvantage: Lack of Checks and Balances
Having a single financial regulatory body can make it difficult to institute effective checks and balances on the agency's power. This is because when a single regulator is given unchecked power, the potential for abuse increases exponentially. By having multiple regulatory bodies, those being regulated are assured that different agencies can check each other and step in when one agency is overstepping its purview.
Having a single body regulate the financial markets can be very efficient, as all financial regulation is managed under a single framework rather than being farmed out to multiple agencies. This approach has proven effective in other government agencies. For example, the Internal Revenue Service handles all functions related to collection of federal taxes, and this system is more efficient than dividing the task among several agencies.
Perhaps the main advantage of a single, large financial regulatory body is that no gaps in coverage or areas of lax enforcement would exist caused by two or more agencies splitting regulation, with neither providing much oversight over the other. With a single regulatory body, everyone would know exactly which agency is in charge of regulating financial markets at all times, providing an incentive for that agency to regulate correctly.
- "Economics"; Roger A. Arnold; 2009