Regulatory Agency

What They Are + How They Ensure Compliance

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In a perfect economy, everyone would participate fairly—but that’s unfortunately not the reality. Some participants deliberately abuse the way the financial system works to unfairly get ahead. Others unethically take advantage of other participants lacking the required knowledge to make informed financial decisions. Still, others pursue reckless monetary policies that subject customers, or even the whole financial industry, to undue risk.

This is why there are regulatory agencies. These are organizations established to make and enforce rules regarding human activities—including finance—to ensure they aren’t overly risky, give adequate value to their clients, and provide enough information for customers to make smart choices.

So what is the purpose of regulatory agencies, especially with regard to finance? And which regulatory agencies provide general oversight for the banking industry and other financial services? The answers are below.

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What are Regulatory Agencies?

A regulatory agency is an organization designed to manage some area of human activity through a set of rules and licenses. It’s usually created to enforce standards of safety and quality across an industry. In other cases, it’s created to protect consumers in industries that have low competition.

Regulatory agencies can be created by governments to manage certain business sectors, or by entities within an industry itself to maintain public trust.

In terms of AML compliance, the function of regulatory agencies is to establish standards across the financial industry towards two connected objectives. The first is to ensure that all assets passing through the financial system come from legitimate sources, and are not being sent to unlawful people or groups. The second is to prevent any proceeds of crime from entering the financial system and being made to look legitimate.

While regulatory agencies may have varying degrees of power, there are regulatory agencies in many different industries, and even in subsections of that industry—for example, in the financial services industry, regulations may be slightly different for Fintechs, Credit Unions, and traditional banks.

What is the Primary Purpose of Regulatory Agencies?

The purpose of regulatory agencies is to protect the public’s health, safety, property, and overall interests. In most cases, this involves setting, enforcing, and publicizing licensing requirements, quality standards, and conduct rules across an industry. The goal is to give people enough information for them to both avoid unreasonable risk—whether it’s related to managing risk associated with fraud, AML compliance, or the banking industry in general—and make informed decisions regarding which products and services they choose to consume.

What Do Regulatory Agencies Do?

Regulatory agencies achieve their objectives through a number of different functions. These include:

  • Creating and enforcing requirements that entities under their jurisdiction must follow
  • Developing, revising, and enforcing technical, quality, and safety standards for member entities
  • Laying down expectations of proper conduct for member entities
  • Managing licensing systems to denote entities that are registered
  • Conducting inspections and audits to ensure registered entities remain compliant
  • Undertaking investigations and hearings into potential compliance violations
  • Issuing fines and other penalties to non-compliant registered entities
  • Resolving disputes between member entities

Examples of things that financial regulatory agencies specifically do include:

  • Controlling the purchase and sale of certain securities
  • Ensuring financial institution customers are treated fairly and honestly
  • Preserving the value of customer assets in a bank, in case the bank fails
  • Protecting investors from market manipulation
  • Investigating fraud and other abusive trading practices
  • Maintaining transparency in how trades and payments are cleared
  • Training, testing, and licensing financial service professionals
  • Overseeing the dispute process between investors and brokers

Government Regulatory Agencies

Government regulatory agencies are those that are established by legislative bodies on a federal, regional, or local level. Their purpose is to translate laws regarding how organizations should ethically operate into practical requirements that businesses need to follow.

The US has what is known as a dual-banking system, with financial oversight split between federal regulatory agencies and state regulatory agencies.

State regulators are responsible for licensing, overseeing, and enforcing penalties against local banks. But they are also responsible for supervising money services businesses and other non-bank financial services, such as insurance. This allows them to use their knowledge of local community situations and needs to craft regulations that not only ensure financial institutions are operating legally and ethically but also promote economic development in the area.

Federal regulators, meanwhile, provide an overall framework for addressing risks common across the US financial industry. This includes insurance for depositor assets if a bank fails; consumer protection against fraud and other illegal or unethical financial practices; and ensuring the US economy remains stable.

Many US financial regulators have some degree of independence from the government. We’ll briefly discuss that below.

Independent Regulatory Agencies

An independent regulatory agency is an oversight committee created by a federal government and given similar rule-making, moderation, and enforcement authority. However, its mandate gives it a certain level of autonomy from the current ruling administration. Notably, its leaders are appointed for fixed terms, and can’t be removed from their positions without cause.

Independent regulatory agencies also tend to have staffing structures that limit how many employees can be appointed from the current administration. This leaves more room for impartial experts in the agency’s field of jurisdiction, as opposed to politicians who may have partisan goals.

How Do Independent Regulatory Agencies Influence the U.S. Government?

Independent regulatory agencies influence the US government by providing it with non-partisan assistance in the administration of certain industries. In other words, they ensure that parts of the economy are not directly controlled by the government’s executive branch. This helps to drive the US economy with sound economic policies, free of political influence.

A List of Important Government Regulatory Agencies in Banking and Finance

Some of the key US government regulatory agencies for finance are the following:

  • Federal Reserve System: The central bank of the US that regulates the American financial system and monetary policy. It also oversees some regional and thrift banks, as well as branches of foreign banks operating in the US.

  • Federal Deposit Insurance Corporation (FDIC): Provides limited insurance on bank depositors’ assets in case a bank fails. Also supervises regional banks that don’t fall under the purview of the Federal Reserve System.

Note that other countries have their own regulatory government agencies for banking and finance. Some examples include:

International Regulators & Watchdogs

For the most part, there aren’t any international bodies that have legal authority over any one country’s financial sector. However, there are organizations where national financial regulators meet to discuss and set standards for monetary policies.

The guidelines they come up with sometimes become benchmarks for federal regulations in participating countries if there is enough buy-in from these independent countries.

A List of Important International Regulatory Agencies in Banking and Finance

Some notable international agencies that help to set standards for financial regulation include:

  • Bank of International Settlements (BIS): Acts as a “central bank for central banks” to help facilitate foreign currency exchanges, valuable commodity reserve management, and international financial stability.

  • Financial Action Task Force (FATF): Sets international standards for the prevention of financial crime, particularly in the areas of money laundering and terrorist financing.

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Stay compliant with financial regulatory agencies using Unit21’s tools

Whether they’re independent or not, federal banking regulatory agencies create and enforce finance industry requirements that carry the weight of law behind them. So financial institutions need to comply with these rules in order to avoid fines, reputational damage, loss of certification, and even jail time for culpable individuals.

Unit21’s platform simplifies compliance management for financial institutions. Our end-to-end solution facilitates suspicious activity reporting for AML, and more. Contact us for a demo.