Regulatory Challenges Posed by Investor Protection
| DOI | https://doi.org/10.1108/eb025911 |
| Date | 01 February 1999 |
| Published date | 01 February 1999 |
| Pages | 366-369 |
| Author | Shiraz Mahmood |
| Subject Matter | Accounting & finance |
Journal of Financial Crime — Vol. 6 No. 4 — Financial Regulation
Regulatory Challenges Posed by Investor Protection
Shiraz Mahmood
This paper considers the recent evolution of the
British regulatory system and discusses what, in
the author's opinion, may become some of the
challenges that face regulators, thus ultimately affect-
ing the effectiveness of investor protection, as we
move into a new millennium. However before
examining the aforementioned matters it is worth
considering the bases for investor protection and
how it benefits financial markets.
THE BENEFICIAL EFFECTS OF
INVESTOR PROTECTION UPON
FINANCIAL MARKETS
Investor protection is the cornerstone upon which
regulation of the financial services industry was
built and if it ceased to be a legitimate concern one
could argue that the
raison
d'être of
financial
regulators
would be removed. Although investor protection is a
very broad umbrella under which one could examine
a wide range of detailed matters, there are three
overriding factors, applicable to financial markets
generally, which necessitate the need for regulators
to ensure that investors are protected.
First, prudential regulation safeguards against sys-
temic risk, thereby ensuring that investors have con-
fidence that should they invest in the financial
markets their money will not be lost as a result of
the financial system collapsing. Without investor
confidence in the stability of the financial markets,
such markets would lose the capital they need to
attract and the economic impact of such a scenario
would be crippling for any market economy.
Secondly, investors must be confident that the
financial markets are a honest and safe place to con-
duct business. Furthermore investors must have
access to adequate mechanisms to seek redress in the
event of a loss arising from the improper action of
a market participant. Regulators by authorising
market participants act as a check upon those seeking
to conduct investment business, ensuring that only
those who demonstrate honesty and integrity and
are fit and proper are allowed to offer financial
services to the consumer. With regard to redress,
regulators invariably have mechanisms in place
which allow an investor to complain and seek redress
against market participants should the case merit it.
Regulators have also in the past taken market partici-
pants to the law courts in a bid to protect the
investor."
Thirdly, economic theory dictates that for markets
to work efficiently there must be equality of informa-
tion for all market participants; this is not possible in
real terms. However the regulatory, investor protec-
tion-based requirements imposed upon firms in
respect of disclosing information to investors and
ensuring that investments are suitable for investors
allow investors to make informed decisions while
also allowing the markets to operate more efficiently
in line with the efficient market hypothesis.
In light of the aforementioned arguments it is
apparent that financial regulation has benefited finan-
cial markets. By providing investor protection regu-
lators have assisted in enhancing investor confidence,
which is a prerequisite for economically healthy
financial markets.
RECENT DEVELOPMENTS TO
FINANCIAL REGULATION IN THE UK
The Financial Services Act 1986 ('FS Act') was the
first new piece of investor protection legislation in
Page 366
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