Another way of observing the vulnerable position of investors on capital markets (when compared with market consumers) is when one looks at the various legal protection accorded by law to the latter category. In this respect, one observes that consumers of merchandise goods are protected by general contractual and tortious (non- contractual) remedies that are found in the general law or Common Law.
Moreover, reasons for giving investors on capital markets (purchasers of financial products) added protection also stems from the fact that consumers of merchandise goods find remedies in many statutory provisions. Such statutory provisions often make compliance with description, merchandizability, being 'fit and proper' for a particular purpose, etc., implied terms of the contract of sale. For example the British 1979 Sale of Goods Act makes the conditions that goods shall comply with their description [Sections 13 (1) and (2)], merchandizability [Section 14 (2)] and that goods should be fit and proper for particular purpose [Section 15 (2)(c)] as implied conditions of the contract of sale.
However, one must mention here that there is nothing (in theory) that prohibits purchasers of financial products from recoursing to tortious, contractual or statutory remedies. Yet it is often impractical for investors to rely on the general protection of the law. In this respect, 'certain factors' have been identified to differentiate between merchandise and financial securities transactions, most important of which are the nature of the seller in both transactions and that financial products are 'intricate' merchandise.
Indeed capital markets regulation is predicated on the premise that general legal rules (especially in light of the principle of caveat emptor) are not adequate on their own to protect unsuspecting financial investors and additional specific intervention by the law is needed. Additionally, sellers of merchandise goods are not expected to disclose to the consumers certain information within the context of an ordinary sale contract.
Hence the added statutory to protect investors embodied in many laws and regulations. But what is the justification for such added statutory protection? On the prevention of dishonesty, it is argued that 'sharp' fraudulent practices will not normally be sufficiently addressed by general law and that 'prevention is better than cure'. With regard to informational problems, it is assumed that information (as a public good) will often be insufficiently supplied, justifying intervention to 'compel' disclosure to enable investors to make informed calculations on risk and return.
Moreover, as 'experience goods' (which differ from 'search goods' such as clothing), information in an investment context cannot generally be evaluated in advance by lay investors, rendering them particularly vulnerable to the skill and probity of financial advisors.
It is also important to point out that capital markets regulation should not be viewed as paternalistic in terms of attempting to protect investors from all conceivable risks.
When pondering the question "against what exactly is the consumer protected?", the answer has typically been that protection should be granted against market imperfections. In this sense, the parameters of remedying market imperfections are confined to avoiding dishonesty, market fraud, manipulation, misrepresentation, potential conflict of interest and abuse arising from agent-principal relations, inadequate (or asymmetrical) information, etc. [Some writers refer to market imperfections as 'market failure'.]
The question of what is reasonable for a consumer to demand has exhaustively been raised in the literature. But it is appropriate here to recap Llewellyn's succinct projection of customers' 'reasonable' demands from a regulatory system: (1) provision of relevant information before a contract is entered into; (2) presumption of integrity by supplier of a contract; (3) assurance of contracts and ability to fulfil liability at all time; (4) a reasonable degree of competence in the supplier of contract; (5) good products at reasonable and fair prices; (6) good advice when advice is sought; (7) an agent serves the customer's interests not merely their own; and (8) some measure of compensation should the contract founder.
Yet the regulatory remedy to the above eight 'reasonable' demands from a regulatory system is as follows: (1) Placing disclosure requirements; (2) Authorization and supervision; (3) Capital and solvency requirements; (4) Training and certification; (5) Rules on competition; (6) Specific rules on professional suitability; (7) Conflict of interest arrangements; and (8) Protection funds.
However, although Llewellyn's 'schema' enumerates the bulk of consumers' 'reasonable' demands and proposed regulatory response, it is nevertheless criticized on a number of grounds. First, it does not mention consumers' need for protection from fraud and malpractice and possible regulatory response through introducing specific anti-fraud and insider dealing provisions. Secondly, it also ignores consumers' need for a flexible legal system that grants them access to effective civil and public remedies should they be subjected to malpractice. ― ( 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)
