Tag Archives: Mordan Federal Financial Services Act

Financial Services Act (outline proposal)

Full title: “Federal Financial Services Act of JD 2464388.5”

Short title: “Financial Services Act (2035)”

Outline contents:

Book 1 General provisions

Book 2 The Authority for the Financial Markets

Book 3 Banking

-Title 1 General provisions

-Title 2 Consumer and Investment banks

-Title 3 miscellaneous

Book 4 Credit

-Title 1 On the types of credit and monetary loans

-Title 2 Credit Unions

-Title 3 Peer-to-peer lending services

-Title 4 Pawn brokers

Book 5 Insurance services

-Title 1 General provisions

-Title 2 Insurance companies

-Title 3 Insurance markets

-Title 4 Types of insurances

-Title 5 Reinsurance

-Title 6 Miscellaneous

Book 6 Securities

Book 7 Derivatives

-Title 1 General provisions

-Title 2 Trading in derivatives

Book 8 Financial intermediaries

Book 9 Asset management and mutual funds

Book 10 Currency trade

Explanation:

The general purpose of this act is to regulate financial markets. Though financial markets have faced severe criticism, and to a largely extent this had been justified, they are an essential part of a modern economy. Nevertheless financial markets need strict regulation in order to prevent them from becoming a parasitic sector of society. Regulation of the financial markets aims at furthering public interests.

The general provision sections primarily contain definitions. Before one could regulate banks, insurance companies, stock trading and so on, one needs to define these terms before hand.

This act does not deal with accountants. They are not a part of the financial industry, and will be subject of another act.

Ad book 2: The Authority for the Financial Markets (AFM) is the governmental agency charged with the enforcement of this act. For its job the AFM has the power to impose fines, to revoke licenses, and to arrest people for violation of this act. Its activities are partially funded by the revenues generated by the Federal Financial Transactions Tax (FTT).

Ad book 3, 5 and 6: On of the basic principles of the law on banking and on insurance: is the strict separation between banking and insurance, and the strict separation between consumer and investments banks. Another basic principle is that consumer banks and insurance companies should be consumer cooperatives. See also here.

Ad book 6 and 7: Securities and derivatives are two separate financial instruments, hence both require a separate treatment. Securities include shares and bonds, and entail direct investment in businesses. Derivatives include a variety of instruments such as options and futures. They are invented to manage risks, but are mostly used for a type of gambling.

Ad book 8: This book deals with persons who make it their profession to sell financial products of third parties to consumers. The main principle of the law on intermediaries is the prohibition of commission. Since intermediaries have to serve their consumers, they should be paid by their consumers and not by the companies whose products they sell.

However, it does not deal with real estate brokers. They are covered by another act.

Ad book 10: The provisions of this book are aimed at controlling speculative currency trading and protecting the economy against large-scale speculation.

money

Banking reform

Intro and recapping

In part two of our series on monetary reform we briefly discussed the role of banks within the Mordan banking system. There we argued against fractional reserve banking, and to distinguish between on demand deposits and time deposits. The difference between these two types of deposit, is that in the former case the account holder can withdrawn his money from this deposit at any time, whilst in the latter case the account holder deposits his money to the bank for a certain period of time, during which he can’t withdraw his deposits.

Subsequently, we argued that banks should only allowed to lend the money from the time deposits, but not from the demand deposits. In technical terms we can see that time deposits are loans, more precisely a mutuum, from savers to the bank. And demand deposits are just money given to the bank for save keeping.

In this post we will give a further discussion of the Mordan banking system.

What are banks?

The term “bank” covers a whole lot of different kinds of financial institutions, hence it’s necessary to specify several types of banks. First we should make a distinction between retail and investment banks. Retail banks offer financial services to consumers rather than to corporations. Investment banks are usually involved in raising capital for corporations in other ways than by providing loans.

Retail banks offer a wide ranges of services to consumers and businesses: save keeping of money, facilitating financial transactions, accepting savings from and providing loans to the public. It’s perfectly possible to separate these functions in separate banks, saving banks typically only perform the last two function. And we can also imagine a bank which only accept demand deposits and facilitate transactions (in return for a fee), we could call such bank a transaction bank.

Many retail banks also offer asset management to wealthy clients, but we believe that asset management should be separated from the ordinary banking.

Organization of the new banking system

We propose a strict separation between investment banks and retail banks. This means a total ban on so-called universal banks. Practically investment banks are prohibited from offering retail banking services, and vice versa. In order to maintain this prohibition investment and retail bank should not be allowed to be united in any way.

Besides we also propose a strict separation between banking and insurance companies (we will cover insurances in another post). It’s nowadays a common practice for banks to sell insurance policies in addition to their banking services, this is mostly only for the purpose of raising more revenue for the bank. We believe that it’s in the interest of the consumers if banking and insurances are clearly separated from each other.

Currently most banks are stock companies, owned by their shareholders. Consequently banks have more incentives to serve the interests of their shareholders rather of the interests of their clients. Therefore we propose that all retail banks should be run as consumer cooperatives, i.e. only cooperative should be able to obtain a retail banking license.

Not only is this proposal in line with our commitment to a cooperative economy, but also because a cooperative bank is owned by its own clients, such a bank will pursue the interests of its clients. Additionally cooperative banks are by their very nature protected against hostile take overs. Hostile take overs have a disruptive effect on the financial sector and hence on the economy.

The obligation of being a cooperative will not apply to investment banks or asset managers.

Supervision

Of course these rules have to be enforced, there we propose the establishment of the Mordan Financial Services Authority (MFSA). This supervisory agency will be separate from both the National Monetary Authority and the MFK. The MFSA will supervise the entire Mordan financial sector, it will license banks and can retract those, and quite importantly it will have the authority to arrest bankers for noncompliance with the law.

Related topics

Space settlements and monetary systems. Part 1

Space settlements and monetary systems. Part 2

Space settlements and monetary systems. Part 3

A Cooperative Economy

The Federal Credit Bank

The Problem of Taxation. Part One

The Problem of Taxation. Part Two

Life insurance policies

Unfortunately it’s a common trope for people to kill their relatives or spouses, just in order to collect the insurance policy. In this post we will propose some rules aimed to deter people from killing people for the reason mentioned above.

1. Only the person whose death is covered by the policy is allowed to purchase a life insurance policy, provided that this person is an adult and mentally competent.

2. The maximum benefit which the insurance company is allowed to pay is equal to five times the annual income of the person who purchased the policy, at the time of purchase.

3. All life insurance policies have to be registered by the national financial authorities, in order to prevent people from buying multiple life insurance policies.

Ad 1. Too often someone purchase a life insurance policy on another person, possibly without the knowledge of this individual, only with the intent of of killing the insured. Since a life insurance policy is typically purchased to compensate the next of kin for the loss of income as a result of the death of the insured, there’s no reason to insure those who are not economically active.

Ad 2. Even if a life insurance policy is purchased in good faith, a beneficiary might be tempted to kill the insured for financial gain. By putting a limit on the benefits to be paid, the incentive to kill someone for financial gain is reduced.

Ad 3. In order to prevent people from circumvented rule 2 by purchasing multiple life insurance policies, it’s necessary that there’s a central registry of such policies. When a person wants to purchase a life insurance policy, the insurance company is obliged to check whether the applicant has already purchased such policy, if so the new application has to be refused.