A Study on the Regulation of Financial Promotion and the Protection of Investors
Date Issued
2010
Date
2010
Author(s)
Lin, Jia-Huey
Abstract
Since the international financial integration and the technological advancement in communication, derivative financial instruments have become more international, complex, and risky. In most cases, without proper explanations and recommendations provided by financial institutions or financial advisors, ordinary investors would not be able to realize the complicated financial structure of the instrument and the risks associated with it. Moreover, financial institutions and their agents hold important information pertaining to the financial products, and therefore would have advantages when dealing with their clients. They may be motivated to promote or sell unsuitable financial instruments to their clients for their own benefits, such ascommissions or performance objectives. In order to prevent mis-selling scandals and protect investors, it is important for the government to promulgate laws and regulations against inappropriate and unsuitable promotion and to limit the range of purchasers for certain financial products.
The recent Lehman Brothers bankruptcy has left investors with Lehman structured notes holding worthless investments. Many of the investors in Taiwan have tried to file claims against the brokers who sold them these structured notes as conservative and safe investments. However, since structured notes are not classified as “securities” under Article 6 of the Securities and Exchange Act, financial institutions that promote and sell such instruments are under very low level of supervision. In addition, according to the Securities Investor and Future Trader Protection Act, Securities and Futures Investors Protection Center cannot take up such claims because these investors do not satisfy the definition of securities investors under the Securities and Exchange Act. Thus, it can be seen that not only are the existing regulations on financial promotion insufficient, but the current securities investor protection scheme is also unable to effectively assist investors in claiming compensations.
Nowadays, financial conglomerates have become an important part of the financial landscape. Such conglomerates which combine banking, security, trading and insurance within one organization not only blur the boundaries between different financial sectors, but also create new challenges for regulators. Since the increasing degree of cross-sector consolidation necessitates closer cooperation, the traditional supervision structure, which was organized along sectoral lines, must be reorganized to result in efficient regulation and supervision of financial conglomerates as well as for firms operating in a single sector. To this end, the unification of financial services laws by legislation is a must. Moreover, firms or individuals violating relevant laws and regulations must bear the same consequences in order to prevent the regulatory arbitrage and unfair competition. The sanctions for breach of the restriction on financial promotion should also be expanded so as to enable regulatory authorities to order violators to make improvements in the first instance and impose high administrative penalties on them. For continuing contraventions, the regulator may also impose penalties on a regular basis or suspend the sales of all or any part of the financial instruments.
Besides increasing the effectiveness and intensity of the supervision on financial institutions, a complete scheme for providing financial protection to investors should be established in order to maintain market confidence. Relevant disputes should be resolved primarily through the use of alternative dispute resolution (ADR) and under the directions of a single institution to save time and money. If a dispute is not resolved through ADRs and the parties file a lawsuit, an independent, adjudicative body, such as the Financial Services Tribunal, should be established to adjudicate upon breaches of the rules of professional conduct.
Subjects
financial promotion
Financial Services and Markets Act 2000 (FSMA)
Financial Services Authority (FSA)
authorisation
fiduciary duty
know your customer
suitability
Financial Ombudsman Service (FOS)
Financial Services Compensation Scheme (FSCS)
Financial Services and Markets Tribunal (FSMT)
Type
thesis
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