CFA Institute calls for a stronger regulatory framework to empower investors to act in cases of financial misselling or malpractice
A new CFA Institute study, Redress in Retail Investment Markets, makes six recommendations for how retail investors can help to address malpractice in the financial markets. In the context of recent EU legislation designed to improve market integrity and curb misselling, the recommendations improve upon the traditional approach to supervision – which focuses only on punishing misconduct through fines – by empowering retail investors and users of financial services to seek compensation when they are harmed by misconduct, putting investors’ interests first.
Redress in Retail Investment Markets explores existing best practices and regulatory frameworks in Europe, Asia and the Americas. Investor redress refers to the enforcement of the rights of retail investors and users of financial services, including their demands for compensation for harm caused by misconduct. Effective mechanisms for investor redress have a central role to play in the revised Markets in Financial Instruments Directive (MiFID II), which the European Commission and the European supervisor (ESMA) are currently working on implementing. The new Commission and Parliament will be called to pay increasing attention to this dossier, at a time when the policy-making agenda shifts from financial stability to investor protection.
Mirzha de Manuel Aramendia, director of capital markets policy at CFA Institute and co-author of the report, comments: “Despite recent regulatory reform, misselling remains a top concern for investors and in many countries, supervision has so far largely ignored redress and focused only on fining misconduct. Effective redress is central to enhancing market discipline, investor trust and participation in the financial markets. This study explains how, with the appropriate mechanisms in place, investors will be able to seek compensation in a fast and cost-efficient manner.”
Redress in Retail Investment Markets sets out the following recommendations for European and national authorities to increase the availability and quality of redress mechanisms in retail financial markets:
- Ensure retail investors can access “out-of-court” alternative dispute resolution (ADR) by setting up industry-wide schemes with the ability to issue binding decisions and where participation is compulsory for services providers.
- Provide guidance on the application of the consumer ADR Directive to financial markets.
- Increase transparency to foster awareness and comparability between schemes and jurisdictions.
- Strengthen the financial dispute resolution network (FIN-NET) with the capacity to monitor ADR schemes across the EU and to aggregate and publish all relevant information.
- Enable the relevant public authorities to set up special-purpose ADR schemes in cases of mass detriment to investors.
- Develop a common supervisory approach in Europe regarding the monitoring of complaint handling, cooperation with ADR schemes, and the exchange of information.
Kurt Schacht, CFA, managing director at CFA Institute, comments: “A financial industry that better serves society must provide effective tools for investors to enforce their rights when faced with malpractice — especially as individuals increasingly rely on market solutions for their retirement incomes. The future of finance hangs, to a great extent, on delivering effective redress mechanisms for investors."
CFA Institute is the global association of investment professionals that sets the standard for professional excellence and credentials. The organization is a champion for ethical behavior in investment markets and a respected source of knowledge in the global financial community. The end goal: to create an environment where investors’ interests come first, markets function at their best, and economies grow.