Regulatory Regimes - April 2022 Paper One Q1

[Bill SD]

Hi, The Examiners Report (April 2022 Paper One Q1) includes that: an outcomes-based "regime is not normally considered suitable for developing countries/markets …relies on sufficient expertise of the regulator to specify the outcomes, sufficient resources of the regulator to monitor and punish poor outcomes, and sufficient understanding and resources of the companies to meet the outcomes…A combination of systems (e.g. part outcomes-based, part rules-based) may be best."

I have 3 questions:
Q1: How would a 'combination' address the disadvantages of an outcomes-based regime for a developing country?

Q2: Wouldn't a (prescriptive) rules based regime potentially be harder for firms and regulator in a developing country? Eg. Appreciate there's less judgement necessary but firms would need dedicated compliance teams & regulator requires extensive supervisory teams to ensure each part of pricing, reserving and capital setting processes meet the prescriptive rules; instead of just ensuring a positive outcome for shareholders, policyholders etc.
And so arguably freedom of action (with perhaps a principles-based regime) wouldl best suit a developing country.

Q3: Where is principles-based regulation covered in the Core Reading/Acted notes and would it have similar ads/disads to an outcome-based regime? For example, 1990s UK regulation and EU Solvency II was intended to be principles-based (although of course, Solvency II can be heavily prescriptive for many topics, especially once consider the many 'levels' of regulation/guidance like Delegated Regulation, EIOPA Guidelines, Supervisory Statements etc)

 

[Tim12345]

I had the exact same thought process.
I also thought that since the core reading is so limited on prescriptive vs outcome based - how would we be expected to know that outcome based regimes are not suitable for developing countries? This is quite a leap to expect students to deduce this in the exam without having prior industry experience with regulations in various economies

 

[James Nunn]

Hi

To respond to the questions raised by Bill SD above:

Q1: A combination approach would enable the best of both worlds - prescription in area where expertise is lacking and freedom (to ensure efficient markets etc) where there is sufficient expertise (and more change is likely) - ie could this method could fit the situation better than either extreme and thereby avoid disadvantages of both extremes.

Q2: Good points and similar to the Advantage points made in the solution. (This is a discuss question so pros and cons is a good approach.)

Q3: Section 7 in chapter 3 of the course notes (starting on page 17) covers forms of regulation then advantages and disadvantages. I'd suggest re-reading this then practicing more regulation exam questions to get more comfortable in this area.

Regarding Tim12345's point, I don't feel that any significant industry experience is needed. You would need to think about the characteristics of developed vs developing markets. "Developing" suggests new which suggests a lack of experience; it also suggests that things may be more changeable over time. "Developed" suggests established and that it must have been around for a while and could be expected to be more stable with less future change. This should give you want you need to think about the suitability of different types of regulation.