Regulated Entity

Regulated Entity refers to those sectors, industries, and businesses that follow a set of regulations explicitly established for them to operate on and ensure compliance. The regulated entities fall under the umbrella of a regulatory body that oversees everything associated with these entities.

In finance, regulated entities are crucial to maintaining the stability and integrity of the whole finance sector. Without regulations, there would be no supervision, and banks, financial institutions, and insurance companies would have no guidelines to follow and no one to answer for their actions. It would bring more risk and a lack of faith.

• A regulated entity definition refers to a recognized entity that follows a set of rules and regulations and is answerable to a regulatory authority that oversees every aspect of its operations.
• Simple examples of regulated entities in finance are commercial banks, insurance companies, and financial institutions.
• Regulated entities are more trusted and are expected to comply with the set framework. The opposite of these are unregulated entities, and consumers generally feel unsafe dealing with them.
• Before engaging with any entity in any form, people should check whether it is regulated and authorized or not.

A regulated entity is any company, firm, market, or entity that is legally registered and regulated by its industry standards, policies, rules, and regulations. A regulatory body manages every industry, sector, market, or business. This body or office holds complete control and authority over establishing rules, giving licenses, permits, and certificates, and creating policies and standards for the underlying industry. Each belonging to that industry has to follow and comply. A regulated entity is an authorized entity, which means the regulatory body has undertaken its operations.

In case it fails to comply with rules and regulations or is involved in unfair practices, activities, and ill-treatment of consumers. Legal actions can be taken against them by filing a complaint with the proper authorities. It is one of the core reasons why people trust regulated entities over unregulated ones.

In modern finance, there are multiple trading platforms, online applications, and website portals that thousands of people use on a daily basis. It also includes hefty transactions and sharing critical information with different parties. If any of these platforms, banks, or financial institutions are not regulated, there is a high risk of data privacy and financial loss with no authority to report it. Regulated entities are well established, well known, easy to find, and share a substantial goodwill and market reputation.

Below are hypothetical and real-world examples to understand the concept in a better way -

Example #1

Suppose a small village near London. A group of friends started a small bank and publicized it among the local community. People start believing in these people. The friend set up an office on bank-like premises, and initially, the villagers started believing them. A few opened bank accounts and deposited a reasonable amount of money, which a group of friends was using.

But when one of the young bloods of the village doubted this whole setup. He checked on the bank for its credibility. It was all a setup; there was no banking license, no registration, no authority, and no supervision. The group of friends ran it like an unregulated entity. When the people who opened bank accounts tried to complain about this to the proper regulatory authorities, they replied that no such bank ever existed. Finally, the villagers took the help of the local police to catch the culprits.

Example #2

In August 2023, the Securities and Exchange Board of India (SEBI), which is the regulatory body of the Indian stock market, took its first formal step to disrupt the revenue model for unregistered finance influencers. SEBI has strictly announced that it does not wish for regulated entities, agents, and market intermediaries to get involved with any unregistered entity.

In a consultation paper, SEBI proposed that the association of regulated entities like mutual funds and brokerage firms shall not have any direct or indirect relationship with the unregistered entities and, more importantly, the finance influencers. The sole reason for this is that such influencers operate as unregistered entities, attracting people with catchphrases, clickbait, and motivating content only to increase their likes, followers, and social media traction.

The importance of regulated entities are -

• Regulated entities are trusted, and people like to involve themselves with them instead of unregulated firms.
• In finance, regulated entities serve as authorities to monitor operations and set regulations and guidelines for companies and other entities.
• With regulated entities, consumers would trust banks, financial institutions, and agencies as it applies to consumer protection and fair treatment.
• It helps in reducing systematic risk and does not let companies operate with no monitoring or responsibility.
• If a consumer is not happy with this entity, they can go to the concerned regulatory authorities for grievance and complaint.

 Regulated and unregulated entities differ significantly in their adherence to oversight and compliance. Let us understand them clearly.

• The government and the regulatory authorities recognize regulated entities. In contrast, an unregulated entity has no authority over them and operates autonomously.
• Regulated entities are trusted and have substantial goodwill and reputation. In comparison, an unregulated entity has low trust, and people most likely avoid dealing with them.
• With regulated entities, consumers can expect fair treatment and no issues such as being involved in potential frauds and scams. On the contrary, unregulated entities are more likely to commit financial scams.
• If a consumer is not happy or satisfied, there is a regulated entity complaint process that they can register with the concerned authorities. In the case of unregulated entities, this is not possible because there is no regulatory body present.

This article has been a guide to Regulated Entity and its meaning. Here, we explain the concept along with examples, comparison with unregulated entity, & importance. You may also find some useful articles here –

• Regulatory Compliance
• Foreign Financial Institutions
• Self- Regulatory Organization