The financial services consumer protection in the commercial banks, capital markets and insurance business has been secured through the deposit protection, investor protection and policy holder compensation funds.
Having regard to the structure and objectives of these funds, critically analyze how they have dealt with the twin problems of adverse selection and the moral hazard.
Structure and objectives of the funds
Deposit protection fund was established under section 36 of the banking act of 1985 and managed by the deposit protection fund board. The board was established as a deposit scheme to provide cover for depositors and act as a liquidator of failed member ...view middle of the document...
Section 23 of the same goes ahead to state its application which among others include: to meet payments in respect of insured deposits. The membership of the fund is found under section 24 of the act, which states that any institution licensed by the central bank shall be deemed to be a member of the fund from the date its granted the license and also all the institutions which at the commencement of the act I licensed by the central bank.
Section 27, deals with the contributions by institutions and an institution license by the central bank is expected to contribute to the fund such annual amount and at such times as the corporation may determine. The amount to be contributed is also set out and also under section 27(4) it states that where the affairs of an institution are detrimental to its interests or that of the interests of the depositors the corporation may increase the contributions of that institution beyond the prevailing rate and also there is a penalty for failure to pay contributions.
Section 28 on the other hand deals with the amount paid has protected deposits at an aggregate of ksh 100,000 or such higher amount as the corporation may from time to time determine. This is the same even where a depositor holds more than one account.
The investor compensation fund
This is established under section 18 of the capital market act. Its purpose being that of granting compensation to investors who suffer pecuniary loss resulting from failure of a licensed stock broker or dealer to meet his contractual obligations and paying beneficiaries from collected unclaimed dividends when they resurface. All those licensed are under an obligation to pay certain amounts to the fund. This fund is regulated by the capital market authority established under the act.
Policy holder compensation fund
This is established under the insurance act at section 79, and it’s governed by the policyholders’ compensation fund regulation. Its functions arose after the insolvency in the insurance industry. Only after an insurer has become bankrupt and a policy holder lodges a claim does the obligations of the fund arise. The primary objective of the fund is to protect the interest of the policy holders especially in the event of the bankruptcy of the insurance company. The fund is established under regulation four to be managed by a board of trustees under the control of the minister. The regulations provide the maximum compensation payable by the fund upon a claim and shall be ksh 100,000, this is under regulation 13. The fund is financed by contributions collected from member companies and policyholders
ADVERSE SELECTION AND MORAL HAZARD AND HOW THESE FUNDS DEAL WITH THEM
These two problems are caused by information asymmetry; where you find that one of the parties to a financial transaction possess more information as compared to the other. It has been said that the two are differentiated at the time they occur. Whereas adverse selection occurs before a financial...