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Conflicts of interest in the provision of investment services to retail clients: costs and benefits analysis of the current European regulation

Gobbo, Giulia (2009) Conflicts of interest in the provision of investment services to retail clients: costs and benefits analysis of the current European regulation. Advisor: Enriques, Prof. Luca. pp. 230. [IMT PhD Thesis]

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Abstract

The thesis focuses on the problem of conflicts of interest's exploitation between investment firms and their retail clients in the provision of investment services in light of the new European rules of the Markets in Financial Instruments Directive (Directive 2004/39/EC) and its level-2 measures (Commission Directive 2006/73/EC and Commission Regulation 1287/2006) - collectively, 'MiFID' - as interpreted by CESR's recommendations. I analyse MiFID from a cost-efficient point of view, and seek to answer the question whether such regulation addresses the problem identified in a way that the costs it entails are offset by its benefits, where the same benefits cannot be otherwise achieved at a lower cost. Intuitively, from Intuitively, from the point of view of investors, the more rights they are granted, the 'better' the regulation is; nevertheless, the same cannot be held from a cost-efficient point of view. A regulation which accords overprotection to some investors does not add anything to their protection, while clearly adding to the intermediaries' costs of compliance, which firms might well spill onto investors. Moreover, overprotection in the field of investment services adds to the costs from another point of view: since it risks hampering the fast and smooth flow of resources for the financing of businesses, it might constrain the efficient allocation of economic resource. I evaluate MiFID in light of the libertarian paternalistic approach to regulation, which can accommodate for the existence of different players on the market and for the biases and limits of the regulator as well. Under this approach the regulation should embed both libertarian and paternalistic components, and make them interact in a way that the rules are able to correct the mistakes of the biased players (minimise the costs of errors) while less than proportionally increasing the possibility that rational players are hindered from taking the right decisions (minimise the costs of the missed right decisions), net of the implementation costs. I also read MiFID in light of the findings as to the best (value maximising) balance between rules and standards l he tightening of the provisions appears to be a normal development of any regulation: the more an area of law becomes established, and the more the volume of litigation increases, the more it is cost-efficient to bear the fixed cost of devising a detailed regulation Nevertheless, if the rate of obsolescence of a regulation, the complexity of the legal environment and the cost of coordination of the new rules with the previous ones are high, the adoption of rules becomes too costly, as compared to its benefits. I find that MiFID adopts a quite paternalistic approach, which leaves it in the hands of intermediaries to surrogate for investors' decisions. This is set as the default rule for a considerable vast number of investors, not all of which are likely to share the same need for protection. Where it features a more libertarian approach -and in particular where it aims at bringing investors' informed consent in the foreground - two failures can be detected. First, MiFID seems wary as to the 'type' of the clients on the market: it assumes the existence of, sometimes, rational - albeit asymmetrically informed - investors; sometimes, boundedly rational investors. Clearly, the same measure cannot serve both. Second, a close analysis of the detailed rules which aim at emphasising clients' consent shows that, in reality, investors are given little possibility to truly understand -and consent to – transactions. I also find that the regulation only limitedly leaves open the possibility to opt-out from the mandatory system, and to thereby compensate its failures. This is not to say that MiFID does not mark a progress as compared to its, forerunner, the Investment Services Directive, of which I also give account. Financial markets are a lively and evolving environment, which currently present some distinctive trends: the increasing substitutability of products sold by intermediaries, and the spreading out of distance means of communication, above all. In light of these trends, I also verify whether MiFID, together with other pieces of regulation (mainly related to UCHS and insurance products), are adequate to protect clients against conflicts of interests exploitation. On this matter I find that, were it not for important national responses, some potentials for exploitation would be left 'uncovered' the current interaction among different pieces of regulation. Some works still need to be accomplished: the European regulation should increase the pace at which it gives response to the innovations related to the products and the marketing techniques: they are needed in order to ensure integrated markets which are safe and sound for investors who rely on intermediaries to circulate their resources.

Item Type: IMT PhD Thesis
Subjects: H Social Sciences > HB Economic Theory
PhD Course: Economics, Markets, Institutions
Identification Number: 10.6092/imtlucca/e-theses/42
Date Deposited: 11 Jul 2012 15:37
URI: http://e-theses.imtlucca.it/id/eprint/42

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