The increased legal awareness for investor protection is often attributed to the rapid development of the capitalist system which has moved from protecting rights mainly associated with land and property ownership into other forms of ownership. More specifically the gradual decrease in immediate ownership and the growth of intermediated credit and property relations, largely characterized by lack of direct personal control, fuelled the necessity of creating parallel (protective) legal systems.
However, providing protection to investors is not necessarily restricted to state or public law. It can be found in 'private legal systems' or equally rules issued by private self-regulatory bodies, regardless of whether such rules or systems are premised on statutory or contractual bases. In this respect the protection of investors is found in a diverse range laws including company law, agency law, trust law, criminal law, civil law, law on negligence, securities regulations, etc.
Moreover, the theme of providing investor protection is not exclusive to regulatory discourses on emerging markets. It is also important in Western regulatory contexts. Such a theme was, for example, specifically highlighted in the influential 1995 Securities and Investment Board's report, Regulation of the United Kingdom Equity Markets. [See Regulation of the United Kingdom Equity Markets: Report by the Securities and Investment Board, the Securities and Investment Board, June 1995 London.] The report stated that in order to achieve and retain investor confidence, a regulatory system must achieve equitable treatment, confidence in the integrity of the market and confidence that all steps will be taken to safeguards against market abuse.
It further elaborated that: First, market users must be confident that they are treated equitably in the sense that no one group of market participants should use the market to the disadvantage of another. Secondly, there must be confidence in the integrity of the price formation processes. This means that regardless of the method by which market users choose to deal, they must be able to do so in the confidence that quoted prices, so far as practicable, reflect the full extent of market activity at the time of the transaction.
Thirdly, market users should always be confident that all reasonable steps will be taken to maintain the safeguards against market abuse and that adequate measures (effective and timely) will be undertaken in order to punish abusers. [For a follow-up on this report, see also Regulation of the United Kingdom Equity Markets, Market Views:
A Digest of Responses to SIB's Discussion Paper, the Securities and Investment Board, June 1995 London.] More recently, the UK Financial Services Authority (FSA) has set its prime objectives to maintain market confidence, promote public awareness, protect consumers and reduce financial crime. [See the new Financial Services and Markets Act which gained royal assent in June 2000 and is expected to be enforced in the second half of 2001.]
On the objective of improving consumer protection, the FSA identified the 'principal' risks as: (1) prudential risks (e.g.: institutional collapse); (2) bad faith risks (e.g.: fraud, failure to disclose material information, misrepresentation); (3) complexity or unsuitability of risks (e.g.: not understanding or unsuitability of investment contracts) and; performance risk (e.g.: failure of investments to deliver desired returns). [See Financial Services Authority: A New Regulator for the New Millennium, FSA (January 2000), pp.5-9.
Yet while the FSA committed itself to 'identifying' as well as 'reducing' prudential risks, bad faith risks, together with 'some' aspects of complexity/unsuitability risks, it nevertheless considered itself not responsible for protecting consumers from performance risks. Concerning the latter risk, however, the FSA saw its role accomplished by achieving the complementary objective of public awareness in which it seeks to ensure that consumers have better understanding of risks and opportunities.
Concerning the tools of regulation and in its attempts at influencing the conduct of market participants, capital markets regulation adopts a number of tools and techniques including disclosure, registration, exclusion, monitoring, and authorization through licensing and recognition. For its part, the Financial Services Authority (FSA) has elaborated on the tools it uses. First, principal tools for influencing consumers in general: disclosure; consumer education and public awareness building; complaints- handling machines and ombudsman service; compensation scheme; public statements; and product approval.
Secondly, principal tools for influencing the industry as a whole: training and competence regime; rule making; market monitoring; sector-wide projects; and international activities (i.e.: working with international working groups to bring information sharing, understanding specific firms, regulators and markets, and promoting best practice.) Thirdly, tools to influence the behavior of institutions: authorization of firms; use of injunctions and prosecutions; supervision of firms; investigation; intervention; discipline and restitution of loss. ― ( Jordan Times )
By Lu'ayy Minwer Al Rimawi
The writer is a part-time lecturer in law at the London School of Economics
© 2000 Mena Report (www.menareport.com)
