CFA Institute makes case for improved investor redress options

CFA Institute makes case for improved investor redress options

CFA Institute makes case for improved investor redress options
Many don’t like to admit it, but the Great Recession of 2008 trashed the trust many retail investors have in capital markets. The surfacing of various scandals over the past few years, the wiping out of assets, has left many investors wondering if their money is safe. This is a dangerous fact for anyone making a living in markets—the CFA Institute has launched an initiative to help rebalance that trust.

In an interview with WP, Bob Dannhauser, head of global capital markets policy at the CFA Institute, explained that repairing the damage to public trust in capital markets is key to preserving the stability of the industry. “Creating an appropriate ‘investor redress,’ including compensation for harm caused by misconduct, is critical,” says Dannhauser.  “It gets back to investor trust. If investor trust isn’t trust isn’t there, the industry is in trouble.”
The CFA Institute conducted a survey in 2013 asking about levels of trust. The results were not good.  Just 53% of retail investors said they could express a level of trust in the managers who service them. “That is a damning indictment,” says Dannhauser. “As individuals increasingly rely on market solutions for their retirement incomes…The future of finance hangs, to a great extent, on the ability to deliver an effective redress mechanism for investors.”

The CFA Institute just released a study, Redress in Retail Investment Markets, that makes six recommendations for how retail investors can help to address malpractice in the financial markets.
  1. 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.
  2. Provide guidance on the application of the consumer ADR Directive to financial markets.
  3. Increase transparency to foster awareness and comparability between schemes and jurisdictions.
  4. 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.
  5. Enable the relevant public authorities to set up special-purpose ADR schemes in cases of mass detriment to investors.
  6. Develop a common supervisory approach in Europe regarding the monitoring of complaint handling, cooperation with ADR schemes, and the exchange of information.
“It’s not that complicated. This is something that we need to take seriously in terms of preserving the sanctity of capital markets. We think capital markets are important. The way to live comfortably after the income-producing years requires investments in capital markets. But if there is a reluctance to trust markets with savings…especially when people can’t afford to live independently….we are in trouble,” says Dannhauser.  “The last thing we need now in a time of pokey economic growth. If investors think markets are rigged…if they think the system is tilted against them, this industry is in trouble Effective redress is central to enhancing market discipline, investor trust and participation in the financial markets.”

He points out that in many countries still have fragmented, decentralized approach. Canada is an example of that. These fragmented approaches, however, mean that the average retail investor is at a disadvantage when it comes to information about how to go about arriving at redress. “Countries need a single point of entry. You have to have effective access to a resolution mechanism to make any effect at all,” says Dannhauser.  “For an investor to take on the system, they have to feel the odds aren’t stacked against term. Canada is somewhere in the middle on this. You have to have independence in the process.”

As it is, here in Canada, some providers can choose to engage, or not, in the redress mechanism. The OBSI, which issues non-binding judgements and is dependent on damages to reputational risk as a way of enforcing compliance, are not working. “I would have thought the threat of reputational damage would have been more effective. But it’s not enough if trust is to be restored. This is an important strategy for firms. I think smart firms are saying ‘let’s make redress easy for clients’ as a way of building their own business strategy. Firms that stood up and did the right thing look good. I think some progressive firms are realizing that. Any firm with substantial business is going to run into issues. How firms deal with issues when they arise is the important piece.”