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Financial regulation is the process in which an authoritative commission oversees the various laws and statutes that dictate how banking companies can perform business. While most of these rules were put in place to protect consumers from illegal banking practices, they also serve to ensure that lending institutions remain within the state and federal guidelines that allow for them to be licensed. A large part of financial regulation is locating and prosecuting the businesses that operate outside of the law for personal gain, which seems to happen quite often.
Even though the guidelines for financial regulation vary by region, they are almost always designed to give consumers and businesses alike a fair way to exchange and invest money. Investors may be familiar with the term "insider trading," which indicates when a person or company uses firsthand knowledge that is not available to the public in order to make a profit. While it may seem unfair to punish these types of investment tips, almost every financial regulation authority seeks to keep a level playing field for everyone.
Another large aspect of financial regulation is determining the fairness of the way banks lend money. Many regions have limits on the amount of interest that can be charged annually on a loan, and some financial institutions may attempt to bypass this stipulation by adding excess fees or other expenses. When abuse of the system is discovered, it often results in a substantial fine for the violating party, and severe cases can result in the revocation of the operating license within that locality. Other types of financial regulation dealing with consumer loans are the repayment terms, when collection attempts can be made, and what litigation processes are available to lenders.
Consumers are equally held responsible when it comes to financial regulation, and banks will often help the authorities prosecute offenders when any type of fraud is conducted. For example, criminals are known to participate in a technique known as "kiting," which essentially means moving money to and from several accounts at once in order to remove more funds than were deposited. This criminal act is made possible because financial regulation dictates the maximum amount of time that a consumer's deposit can be held before it is made available for spending, and scam artists manipulate the system so that the funds will become available before the bank realizes that fraud occurred. Financial regulation is designed in many areas to protect both the consumer and the financial institution equally, but unfortunately, there are often members of both parties that seek to exploit it.
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