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A Theory of Financial Services Competition, Compliance and Regulation

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  • Michael, Bryane
  • Falzon, Joseph
  • Shamdasani, Ajay

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.

Suggested Citation

  • Michael, Bryane & Falzon, Joseph & Shamdasani, Ajay, 2015. "A Theory of Financial Services Competition, Compliance and Regulation," EconStor Preprints 107400, ZBW - Leibniz Information Centre for Economics.
    • Handle: RePEc:zbw:esprep:107400
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    Cited by:

    1. Michael, Bryane & Wojick, Dariusz & Arner, Douglas W. & Tong, Wilson & Lin, Chen & Zhao, Simon, 2015. "What Determines M&A Legal and Financial Advisors’ Competitiveness in an International Financial Centre: Using China’s Going Out Policy as a Natural Experiment," EconStor Preprints 110603, ZBW - Leibniz Information Centre for Economics.

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    More about this item

    Keywords

    compliance; financial law; compliance capacity; optimal regulation;
    All these keywords.

    JEL classification:

    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • K40 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior - - - General

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