The potential benefits of the regulation of financial services are something that can just be studied if the implications on the markets without the regulation are observed according to a report by Oxera (2006).
Without the regulation of financial services one can expect the economy and hence the market to suffer from the market failures. This may be due to several reasons. According to the report by Oxera (2006), the consumers may suffer because of the asymmetric information present about a financial product. The producers may also be unaware of all the information provided by the financial producer. As a result, there would be imperfect information in the market. Obviously this scenario would be beneficial for the providers of information (positive externalities for the providers of information), yet it would affect the producers and consumers badly. Consumers may lose confidence in all the firms even if one firm takes advantage of the imperfect information. These factors would also lead to the market failure.
Another reason why the regulation of financial services is important because without it the market failure caused would lead to many risks since market failure is closely linked to risks. These risks may include operational risks, financial risks and systematic risks. The severity of the market failure according to Oxera’s report (2006) can also be detrimental to the incentives of the participants in the market. The consumers may lose confidence in the firms and the firms may feel exploited at the hands of the financial providers. Consequently there would be a loss of incentive. The regulation of financial services is hence very important.
The regulation of financial services leads to an increased amount of information about the market. This means that the there is an optimal fit for the consumer between what they need and what they buy. There is an increased choice available to the