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Regulation – How Does It Affect Is in Financial Services Sector

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Regulation – How Does It Affect Is in Financial Services Sector

History provides us with plenty of lessons on the efforts of the failure of financial instuitions, of consumer ignorance being exploited through the sale of inappropriate securities, pension plans, and mortgages. Arguably, regulation has been essential today, given the increasingly transnational nature of financial markets. Another factor is the growth of large multinational organizations, now possibly more powerful than some nations. They pose particular risk and regulatory problems because they can both create and manage risk on a global scale. Crises can have a catastrophic international effect. Anticipating risks have been an integral part of the risk regulation, and management practices of organizations. Regulation is about managing risk not eliminating the underlying practices.

In the 1980's and 1990's there were extensive financial deregulations as countries relaxed credit and interest rates and general legislation. Financial institutions regulations began to be implemented with the growth in technology, as there was a deregulation of the old ways and new regulations introduced. Although there was now adequate legal protection for debtors and creditors, laws were weakly enforced and this led to the rouge trading practices.

Such lax controls came to head in a number of financial scandals that came public. None more so than the collapse of Barrings bank by Nick Leeson. The Nick Lesson scandal with Barings bank is another example of a lack of regulation in the financial services sector. Leeson is a former derivatives broker for Barings Bank. His unsupervised unauthorized speculative trading caused the collapse of Barings Bank, the United Kingdom's oldest investment bank, for which he was sent to prison. He was basically gambling on the value of markets with all sums of Barings bank funds. He was then able to hide his losses from these bad trades in a special account. Details of this account were never transmitted to the treasury office and or risk control offices of Barings Bank headquarters Management at Barings Bank also allowed Leeson to remain Chief Trader while also being responsible for settling his trades, jobs usually done by two different people. This made it much simpler for him to hide his losses from his superiors. No new regulation was introduced in the aftermath of the collapse but it was awake up call for all financial institutions around the world.

One of the largest corporate scandals in recent history was that of the Enron scandal. The Enron scandal had to do with them trading in energy futures, due to deregulation, and being able to manipulate the market and make massive profits. However, with shady accounting practices, executives getting more than they deserved, and corrupt auditing Enron were able to hide billions of debt from failed debt from failed deals and projects. It was the perfect storm for disaster. In the end, Enron shared price fell from over €90 in 2000 to less than €1 in November 2001. The company failed and went bankrupt along with the loss of thousands of jobs and investors money.


The Enron scandal was the main reason along with other corporate and accounting scandals that led to the introduction of the Sarbanes-Oxley Act (SOX) which was passed in 2002 to strengthen corporate governance and restore investor confidence. The legislation is wide ranging and establishes new or enhanced standards for public company Boards, Management, and public accounting firms. SOX contains eleven sections, ranging from additional Corporate Board responsibilities to criminal penalties.

The act is so concise and far reaching that the impact on companies has led some to remove their stock from public trading in order to shield themselves from the high costs that would result from the massive system changes they were facing. Other companies have created new systems that are Sarbanes – Oxley compliant or even creating new computer languages to handle the regulation that are outlined in the act.

SOX does not directly regulate Information Technology. However, IT is the backbone of the financial processes that the law regulates. Section 302 requires that the CEO, CFO and an attesting public accounting firm certify the accuracy of financial statements and must certify that statements fairly present the operations and financial condition of the issuer. It also requires that material information that is used to generate reports be retained and made available to the public. This directly affects the IT and security departments because it is primarily IT systems that generate these periodic reports and which control e-mail, the main method of communication within most organizations. These systems must remain secure and reliable.

Section 404 is the most pertinent section within Sarbanes-Oxley to issues surrounding information

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