One of the most important rationale of capital markets regulation is to provide an adequate level of investor protection. Due to the importance of such a rationale, its treatment cannot be fleeting or superficial. Emerging markets securities laws often chronically suffer from lack of attention to addressing important aspects of investor protection.
In a previous series of articles, the necessity of juridical consistency between the general law (socio-religious) and pro-Western specific laws (secular) was addressed as the starting point of any serious attempt at methodologically overhauling Jordanian capital markets laws. However, after having reconciled the juridical risk posed by the conflict between general and specific laws, it then becomes highly urgent that Jordan move in a structured regulatory manner to take a deeper look at the theme of investor protection.
In this context, it is vital to make sure that the provisions of any proposed legislation comply with maintaining an adequate degree of investor protection before they are presented to the Jordanian Parliament. We need not also remind ourselves that capital markets regulation does not only aim at providing rules on market trading in terms of securing operational markets. Rather it exceeds this objective to include questions relating to both systemic stability as well as investor protection.
Any meaningful discussion of the role of investor protection in capital markets must touch upon the different types of investors in terms of retail or institutional. It also must explain (if not justify) the grounds on which added statutory protection is granted to retail investors — as opposed to not according the same level of protection to institutional ones. Furthermore, any rounded discussion of this theme must also address the “reasonable” demands of investors, in the sense of against which investors are protected. For, no regulatory regime can be realistically expected to protect investors from all risks associated with investment.
But such a discussion cannot be conducted in the abstract and one needs to look in more detail at the philosophy of a Western regulatory agency in order to demonstrate in practical terms the central importance of the theme of investor protection in advanced economies. In this context, no complete examination can be complete without considering the regulatory “tools” used to control (and influence) market participants and achieve investor protection — at both the micro and macro levels.
For its part, capital markets regulation cannot be isolated from wider legal questions relating to transfer of property rights, corporate and civil liabilities, contractual relations, etc. It regulates and supervises primary (new issues markets) and secondary trading activities. Indeed, capital markets regulation prime objectives lie in the protection of the interests of investors and suppliers of financial services (micro level), as well as the maintenance of systemic stability of the financial system (macro level).
It is not always feasible to separate the rules designed for maintaining securities markets at the operational level from the rules devised to protect those who invest in such markets — the investors. Yet one may argue that investor protection is one of the most important objectives of securities regulation in the sense of providing a system of adequate protection that maintains investors' confidence in the integrity of securities markets.
But one must hasten to add that inasmuch as capital markets regulation aims at protecting the investor, it also equally attempts at achieving allocative efficiency. This is done through, inter alia, maintaining the integrity of the payment system, imposing minimum standards, enhancing market rules on supplying and evaluating information, promoting the safety and soundness of financial institutions and devising extra measures to control risks undertaken by financial institutions.
However, it must be stated at the outset that investors' need for protection vary, depending on whether they are retail or institutional. An important argument for according added statutory protection to retail investors (i.e., vis-a-vis institutional ones) is justified by what is termed as the absence of “repeat orders” in the sense of not making frequent investment contracts. This is seen as limiting retail investors' learning experience when compared to the experience gained by institutional investors.
Disadvantages of asymmetric information also has a greater adverse impact on (less experienced) retail consumers, as opposed to institutional investors who (by virtue of their profession) are better adept at utilising it. Other grounds include lack of the ability to monitor suppliers of financial services by individuals, the limited skill and knowledge by lay individuals to enter into complex financial contracts and that the balance of power between retail and institutional investors vis-a-vis suppliers of financial products tilts heavily towards the latter.
On the other hand, the specific need for protecting the consumer has, inter alia, been justified on “catastrophe”, information and the fiduciary role of institutions. Catastrophe refers to the likely significant financial consequences suffered should consumers' investments founder. Lay consumers normally have limited access to information concerning the nature and costs of contracts and are equally unable to assess the often sophisticated risks which they undertake. The fiduciary role of financial institutions is seen in the sense of consumers not buying financial products for immediate consumption and that, more often than not, they entrust others to handle them on their behalf. — ( Jordan Times )
By LuÌayy Minwer Al-Rimawi
The writer is a part-time lecturer in law at the London School of Economics
© 2000 Mena Report (www.menareport.com)
