2.5a Regulation to Increase Tax Compliance & Control (Part 1)

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Do curso por The Hong Kong University of Science and Technology

FinTech Security and Regulation (RegTech)

3 classificações

The Hong Kong University of Science and Technology

FinTech Security and Regulation (RegTech)

3 classificações

Our primary goal is to help you to understand RegTech and to become more confident and persuasive in your ability to analyze and make recommendations to executives within the finance industry regarding how to react to these changes, e.g. Regulations to crypto-currencies like BitCoin & ICO. This MOOC on RegTech offered by HKUST presents the views of several professors from the top business school in Asia as well as perspectives from industry professionals. HKUST has been ranked for many years as the number one EMBA program in the world, as the number one Finance program in Asia, and as the top MBA program in Asia by multiple independent rating and review journals and surveys. This course offers the combined strengths of HKUST in Business, Finance, and Technology as one the world's leading academic institutions on an important area of technology and business innovations. For students from outside Asia, this also gives an insight into changes happening in the most advanced FinTech markets of the world, since Asia leads worldwide in FinTech adoption and creative innovations. This course "FinTech Security & Regulation(RegTech)" is part of the HKUST-Coursera FinTech specialization. There are 3 other courses in the specialization including FinTech Foundations and Overview, FinTech Risk Management, and FinTech Innovative Disruption: Implications for Society. The FinTech specialization will be launched in Fall 2018, stay tuned!

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Risk Management & Government Control

In this module, we explore some of the tools government use to regulate financial markets and discuss potential challenges for FinTech innovators in complying with these regulations. Some basic terms commonly used in finance such as AML & KYC are defined and described. We examine the role of different government agencies as well as alternative social objectives that influence the development of regulations over time.

2.4a Government Regulation to Protect Consumers (Part 1)9:32

2.4b Government Regulation to Protect Consumers (Part 2)7:20

2.5a Regulation to Increase Tax Compliance & Control (Part 1)8:55

2.5b Regulation to Increase Tax Compliance & Control (Part 2)7:26

2.6a Insurance, Risk Management, and Controls to Protect Society (Part 1)9:39

2.6b Insurance, Risk Management, and Controls to Protect Society (Part 2)4:35

Conheça os instrutores

Theodore Henry King CLARK
Associate Professor
Information Systems, Business Statistics and Operations Management Department

Welcome back to our course on Fintech Security and Regulation.

In this session, we're going to talk about regulations as a way for

governments to increase tax compliance and control.

Now, earlier in a prior session,

we talked about AML and KYC,

and one of the goals of these concepts or regulations is to

encourage greater tax compliance or to be able to monitor and audit for tax compliance,

and that's part of the reason for regulation,

but there is more that governments want to control than just tax.

Government control extends beyond tax.

They would like to be able to understand what's happening in the economy.

They'd like to know how big is the GDP,

how much economic activity is taking place,

how successful are some industries and others.

They want reporting, they want better control of the economy in general,

of employment, they want to know a lot of information.

They want to be able to exert control,

for example, like interest rates.

If they say the economy is growing too fast or there's inflationary pressures,

we'd like to be able to use regulation as a tool to slow down the economy.

This might happen with the Fed for example

increasing interest rates and that's a very visible thing.

What's less visible is the government can use regulation as a way to

increase economic development or slow down

economic development by increasing the amount of capital that banks have to have,

increasing their reserve requirements,

putting on restrictions as to how much people can borrow,

for example, in the United States.

Regulators have recently said,

we used to have government guarantees of loans that limited how much

customers could pay out of their household income and

qualify for a Fannie Mae or Freddie Mac loan,

federal homeowners assistance, or VA, Veterans Administration loans.

We say a borrower can't have more than

30 or say 35 percent of their income go in household payments,

go into mortgage payments.

That restriction has been increased recently to allowing

up to 50 percent of your income be used

for your mortgage payments because real estate prices are increasing.

It's the argument and poor people can't buy a home if they're

limited to only a third of their income going to their mortgage payments.

We also used to say that you can't have a loan for more than 30 years,

and at least in some markets,

there are now home loans where you're paying

interest only for a long period of time or you are having

a 50-year amortization on the loan so that you can buy a more expensive home

with the same monthly payments but you are paying it off very fast at all if at all.

So by reducing regulations or weakening regulations,

we can allow more people to buy a home,

that's in theory good for consumers although some of them might be overextending

themselves and it's good for the economy and for construction and for jobs,

and so we want to encourage that.

But it might make the economy more at risk of a downturn.

Someone loses their job and

50 percent of their income is going to their mortgage payments,

then they're not going to be able to make those mortgage payments.

Now, you might argue they're not going to be able to make a third either.

But let's say there are two income household.

If a third of their two incomes is going to

home payments and one of the two loses their job,

they might be able to survive.

They might be able to keep their home.

If they have two income household and both incomes are needed to have

50 percent of their income going to mortgage payments and one of them loses their job,

then they're not going to keep their home.

This isn't going to work,

the numbers just don't add up,

and so risk goes up.

In banks, we can reduce the reserve requirement.

As a regulator we can decide how much reserve do banks need.

Now, if banks had a 100 percent reserve,

well, there's not much need for regulation.

There's not much risk.

There is no problem, but a bank with

100 percent reserve of all their deposits will never make money.

That sounds like a really stupid banking practice and so we'll often say,

well, we want you to have 10 percent reserves or

five percent reserves or 20 percent reserves.

The higher the reserve,

the less likely a bank is to fail.

So you'd like that in terms of safety for society.

The lower reserve, the more likely a bank is to lend more aggressively.

The more stimulating it is to the economy and the better it is for

short-term economic development but the more

likely it is that something will meltdown or some sort of crisis will happen.

Sometimes, banks will find creative ways to move investments or

move transactions off their balance sheet so that

risk becomes less visible and less regulated.

Regulators don't necessarily like that and we'll see in our case study at

the end of this module where lower regulations,

weaker regulations, more flexible

regulations and more off-balance sheet creative financing

of assets led to a financial services meltdown in 2008,

which was bad for the global economy.

So we don't really want to encourage too much risk taking

because that's expensive for tax [inaudible] to bail out institutions.

It's bad for investors.

It's bad for consumers who lose jobs and lose their home

and so this is generally not viewed as a good thing, too much risk.

The outcome of that after a lot of

profit for some people is a lot of pain for many people,

and so that's a concern.

So regulators want more control,

and in some economies,

regulators have enormous controls.

They have large reserve requirements.

They have large down payments required.

In Hong Kong, if you want to buy a house,

you have to put 30 percent down payment

and banks are limited as to how much they can allow you to borrow

as a percent of your verifiable income and that

makes the housing market relatively stable.

There have been some crashes and some ups and downs.

It's not immune to that but not of the magnitude that we've had in

US financial markets where borrowers were able to get

much more leveraged and the risk got much higher.

We didn't see financial institutions in

Hong Kong going under as a result of the financial crisis.

They had pain, but a lot of that pain related to their investments

and subsidiaries in the US and in other markets not necessarily the Hong Kong market.

So regulators were able to limit the downside of lack of control,

but there's some limit as to how fast can your economy grow if you have

those relatively harsh or tough standards and restrictions.

It may slow down economic growth and regulators may say,

actually, we're doing just fine, we're growing enough.

Let's not prime the pump more.

But regulators do like control.

They'd like to know what's going on and they like to be able to tax what's going on.

In fact, it's interesting because in many Western societies like the US,

we think of the Internet and the information age

as an opportunity to gain freedom from regulations and controls.

Information is free or information should be free and

cyberspace is a less regulated Wild West type domain,

but that's not always true.

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