week 5 Flashcards
capital markets?
=> primary market:
- investors buy directly from the issuing company
=> secondary market:
- securities are traded after the company has sold its offering on the primary market
- investors trade securities among themselves
types of investment products?
- shares
- bonds
- derivatives
- packages retail investment products
- crypto assets
3 main types of investment services
- execution-only
- investment advice
- portfolio management
major challenge for conduct of business regulation?
=> how to empower and protect retail investors at the same time?
- give characteristics of financial markets:
–> complexity
–> uncertainty
–> fragmentation
–> ungovernability
–> dynamism
regulatory dilemma?
the more you regulate, the less room there is for innovation
investment product lifecycle?
- investment product is a contract
- NOT tangible
- first, they need to be developed (product development)
- then, they are distributed to consumers (product distribution)
- consumers were using them (product ‘use’)
- then, contract terminates (product ‘termination’)
3 main building blocks of conduct of business regulation on the continuum between ‘soft’ and ‘hard’ paternalism?
- disclosure regulation => ‘soft’ paternalism
- distribution regulation => middle ground between both
- product regulation => ‘hard’ paternalism
product disclosure regulation => regulatory tools?
=> information requirements:
- form
- content
- provision
distribution regulation => regulatory tools?
=> a general duty of loyalty
=> information requirements:
- form
- content
- provision
=> know your customer rules
=> third-party commission ban
product regulation => regulatory tools?
=> ex ante product authorization
=> product governance:
- oversight of product development processes
=> ex post product intervention: e.g.
- a ban on the marketing of certain products to retail investors
- a total product ban
product governance?
- the processes, policies, and controls that companies implement to ensure their products are designed, developed, distributed, and monitored in a way that meets regulatory requirements, protects consumers, and aligns with business objectives
- an investment firm which manufactures financial instruments for sale to clients should maintain, operate and review a process for the approval of each financial instruments before it is marketed or distributed to clients
- the product approval process should:
–> specify an identified target market of end clients within the relevant category of clients for each financial instruments
–> ensure that all relevant risks to such identified target market are assessed
–> the intended distribution strategy is consistent with the identified target market - NCAs may permanently prohibit or restrict the marketing, distribution or sale of financial instruments or a type of financial activity or practice
- European Securities and Markets Authority (ESMA) may adopt temporary product intervention measures
what is FinTech?
technology-enabled innovation in financial services that could result in new business models, applications, processes or products with an associated material effect on the provision of financial services
what is sustainable finance?
process of taking due account of environmental, social and governance (ESG) considerations when making investment decisions in the financial sector, leading to increased longer-term investments into sustainable economic standardized and comparable data
FinTech opportunities?
- ensure efficient supply of accurate ESG data from firms and their translation into standardized and comparable data
- increase access to sustainable financial products and services for retail investors
FinTech risks?
=> retail investor protection:
- information asymmetries/imbalance of bargaining power
- lack of sufficient data protection
- price discrimination
- financial exclusion
(potential) regulatory tools for promoting sustainable finance within?
=> product disclose regulation
=> distribution regulation
=> product regulation
limits of regulatory standards => problem of indeterminacy?
=> standards are inherently indeterminate
- particularly open-ended standards
=> causes of indeterminacy
- the nature of the language
- inability of rule-makers to anticipate all future events and possibilities
- rule-maker’s reliance on others for their application
limits of regulatory standards => problem of interpretation?
=> standards need a sympathetic audience:
- a purposive interpretation can ameliorate some of the limitations of standards
- but the purpose of the standard could be defeated if it is interpreted literally
=> standards need an informed audience
- those who apply the standard should have a shared understanding of its context
limits of regulatory standards => problem of inclusiveness?
=> standards are generalizations
=> generalizations are simplifications of complex events, objects or courses of behavior
=> the risk of over- or under- inclusiveness
enforcement modes?
=> 3 kinds:
- public enforcement
- private enforcement
- hybrid enforcement
public enforcement?
=> supervision and enforcement of regulatory standards by public authorities through public law means:
- administrative law
–> designed to ensure ex ante compliance and deterrence
–> preventing non-compliance and ensuring compliance
- criminal law
–> aimed at punishment, but may also have a deterrent effect
strengths and weaknesses of public enforcement?
=> strengths:
- concerned with the public interest
- information gathering powers
- the ability to adjust the enforcement strategy to achieved the desired level of deterrence
=> weaknesses:
- limited capacity to enforce given e.g. budgetary or staff-related restrictions
- the risk of regulatory capture
- the high public costs involved (particularly in criminal law)
what is compliance?
=> a matter of instant conformity?
=> an open-ended and long-term process which may take years to attain?
- can argue that it depends on the regulatory standard at hand
–> ensuring waste-management = might require a dialogue between the regulatees and the regulated (takes more time)
–> speed regulation on the highway = more direct
3 occasions for regulatory conversations?
=> guidance and waivers as to the application of rules in primary legislation
=> supervised rule formation for a particular firm
- a dialogue between a particular firm and a regulator
=> monitoring and enforcement
2 ‘ideal’ enforcement styles?
=> a penal style:
- enforcement is reflective: a matter of determining what harm was done, detecting the lawbreaker and fixing the appropriate sanction
- accusatory and adversarial (law as a threat)
=> a conciliatory style:
- enforcement is prospective: a matter of responding to a problem and negotiating future conformity to standards
- reliance on bargaining with regulated entities to attain compliance
enforcement styles on the continuum between punishment and persuasion?
- relevant factors: legal design; task environment; political environment; leadership
=> penal style = punishment
=> conciliatory style = persuasion
enforcement pyramid as a compromise?
=> when to punish; when to persuade?
- licence revocation
- licence suspension
- criminal penalty
- civil penalty
- warning letter
- persuasion
concerns about the enforcement pyramid?
=> in being exclusively concerned with the effectiveness of enforcement in securing public goals, the pyramid is not entirely in line with constitutional values: e.g.
- procedural fairness
- proportionality between the severity of punishment and the seriousness of the offense
=> constitutional values as constraints on law as a threat
private enforcement?
=> enforcement of regulatory standards by private parties through private law means
- functions ex post
- seeks to provide compensation, but may also have a deterrent effect
=> by whom?
- individuals (individual enforcement)
- groups (collective enforcement)
=> where?
- before civil courts (judicial enforcement)
- before alternative dispute resolution bodies (extrajudicial enforcement)
strengths and weaknesses of private enforcement?
=> strengths:
- a combination of compensation in the pursuit of private interests (interpersonal justice) with deterrence in the pursuit of public goals
- an extra check on the integrity and competence of public enforcement authorities
- financed by private parties
=> weaknesses:
- driven by the private interests:
–> private parties may lack incentives to sue
- insufficient information gathering capacity
hybrid enforcement?
=> involvement of regulatory agencies in the provision of private redress
=> 2 models of the relationship between administrative enforcement and private law remedies within the agencies’ operation:
- complementarity
- integration
complementarity model?
- agencies may facilitate private redress indirectly by using or threatening to use their administrative sanctioning powers or powers to initiate redress settlements and/or to bring a collective action for damages before civil courts
- deterrence and compensation complement one another
- the institutional separation between agencies and civil courts along the lines of deterrence and compensation is preserved
integration model?
- agencies may secure private redress directly
- compensation is integrated into administrative enforcement which thus serves both deterrence and compensation
- the institutional separation between agencies and civil courts along the lines of deterrence and compensation is abandoned
