A Theory of Financial Services Competition, Compliance and Regulation

44 Pages Posted: 12 Feb 2015 Last revised: 19 Mar 2015

Bryane Michael

University of Hong Kong Faculty of Law; University of Oxford

Joseph Falzon

Department of Banking & Finance - University of Malta

Ajay Shamdasani

Thomson Reuters

Date Written: February 12, 2015

Abstract

Do financial regulation advisors help their clients become more profitable? In this paper, we present a model where financial service firms may add to their own compliance teams or hire outside compliance advisors. We derive the conditions under which a financial services firm will want to hire a compliance services company, and show how much money they should spend. Financial services firms in competitive locations like Hong Kong and Singapore will particularly benefit (at least in the short run) from their services. We also show that their advice may lead to an embarrass de riches – whereby the lower compliance costs and higher profit advantages they confer may lead to more regulation. Regulators may furthermore tighten regulation – with the expectation that financial service firms will adapt somehow. We present a fresh perspective on the Menon Hypothesis, deriving conditions under which financial regulations help the competitiveness of an international financial centre. We provide five potential policy responses for dealing with ever ratcheting financial regulations.

Keywords: compliance industry, banking regulation, optimum regulation, compliance capacity

JEL Classification: G18, G24, K40

Suggested Citation

Michael, Bryane and Falzon, Joseph and Shamdasani, Ajay, A Theory of Financial Services Competition, Compliance and Regulation (February 12, 2015). University of Hong Kong Faculty of Law Research Paper No. 2015/001. Available at SSRN: https://ssrn.com/abstract=2563981 or http://dx.doi.org/10.2139/ssrn.2563981

Bryane Michael (Contact Author)

University of Hong Kong Faculty of Law ( email )

Pokfulam Road
Hong Kong, Pokfulam HK
China

HOME PAGE: http://web.hku.hk/~bmichael/

University of Oxford ( email )

South Parks Road
Oxford, Oxfordshire OX1 3QY
United Kingdom

HOME PAGE: http://users.ox.ac.uk/~scat1663/

Joseph Falzon

Department of Banking & Finance - University of Malta ( email )

Malta

Ajay Shamdasani

Thomson Reuters ( email )

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