Functional Regulation Meaning Criticism Other Types

Functional Regulation: Meaning, Criticism, Other Types

Functional Regulation

Functional regulation aims for supervisory regulation of a company’s products and services by qualified, independent parties. This approach involves specialized entities overseeing the functions, products, or services of an organization. It is the opposite of institutional regulation, which focuses on the structure of the organization.

Key Takeaways

– Functional regulation supervises an organization’s products and services.

– Qualified agencies are responsible for functional regulation.

– Critics argue that functional regulation failed in the 2007-2008 financial crisis.

– In the United States, functional regulation is influenced by political climates.

– Institutional regulation oversees entire institutions.

Understanding Functional Regulation

Functional regulation governs an organization’s products and services, while institutional regulation governs the organization as a whole. For example, a bank with multiple financial products and transactions may be overseen by multiple regulatory bodies.

Functional regulation ensures specialized supervision and protection of consumer interests. For instance, state insurance commissioners oversee insurance companies, while the Securities and Exchange Commission (SEC) regulates securities underwriters.

In the United States, banks and financial institutions are regulated by multiple bodies, such as the SEC, the Financial Industry Regulatory Authority (FINRA), the Commodities Futures Trading Commission (CFTC), state securities regulators, and insurance commissioners.

Criticism of Functional Regulation

Functional regulation monitors and adapts to evolving financial products, services, and operations. However, critics blame a failure to update the regulatory system for the 2007-2008 financial crisis. They also highlight functional regulation’s vulnerability to political influences and reactive nature to past crises.

In the U.S., functional regulation is subject to changes based on political preferences, which may lead to instability. For example, regulations put in place by one administration may be undone by the next, as seen in the efforts of the Trump administration.

Functional Regulation vs. Institutional Regulation

Functional regulation focuses on supervising products and services, while institutional regulation pertains to rules governing entire institutions, including banks. The Federal Reserve, for example, regulates specific banks based on its rules.

Why Is Functional Regulation Important?

Functional regulation protects consumers using products like bank accounts and commodities. It ensures qualified oversight by experts in specialized fields.

The Difference Between Functional and Institutional Regulation

Functional regulation oversees products and services, such as bank accounts and financial transactions. Institutional regulation, however, monitors entire organizations.

Agencies Involved in Functional Regulation

Agencies involved in functional regulation include the Securities and Exchange Commission, the Financial Industry Regulatory Authority, the Commodities Futures Trading Commission, state securities regulators, and insurance commissioners. Some of these agencies may also engage in institutional regulation.

The Bottom Line

Functional regulation is crucial to govern the products and services offered by companies. Qualified agencies provide oversight to protect consumer rights and interests.