The Regulatory Architecture

4.1 Classification by Purpose 

Regulations can be grouped into three main types based on their objective :

  • Structural Regulations: Determine the types of activities that different institutions are permitted to engage in. These are often “demarcation lines” between sectors (e.g., separating commercial banking from investment banking).

  • Prudential Regulations: Cover internal management relating to capital adequacy, liquidity, and solvency. Examples include minimum net worth requirements .

  • Investor Protection Regulations: Aim to protect investors by demanding larger disclosure of information to correct information asymmetry .

4.2 Classification by Scope 

Regulations operate at different levels:

  • Macro Level: Legislation enacted by parliament (e.g., Banking Regulation Act, Securities Contracts Regulation Act).

  • Micro Level: Rules, guidelines, and regulations issued by regulators that govern operational issues.

  • Self-Regulation: Code of conduct issued by industry associations to govern members’ activities and settle disputes .

4.3 The Regulatory Ladder

A hierarchy of regulatory levels exists :

  1. Government (Parliament)

  2. Legislation (Acts of Parliament)

  3. Institutions (Bodies established by an Act of Parliament)

  4. Regulators (The regulatory agencies with authority)

  5. Regulations (The detailed rules issued by regulators)

  6. Self-Regulation (Industry bodies and professional associations)

 
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