Source: https://pt.b-ok.org/book/844109/23142c
Timestamp: 2019-10-14 20:54:14
Document Index: 572357799

Matched Legal Cases: ['Art. 3', 'Art. 5', 'Art. 10', 'Art. 14', 'Art. 43', 'Art. 44', 'Art. 47', 'Art. 49', 'Art. 55', 'Art. 56', 'Art. 94', 'Art. 95', 'Art. 153', 'Art. 251', 'Art. 257', 'Art. 3', 'Art. 3', 'Art. 12', 'Art. 13', 'Art. 15', 'Art. 2', 'Art. 4', 'Art. 12', 'Art. 12', 'Art. 12', 'Art. 6', 'Art. 6', 'Art. 1', 'Art. 2', 'Art. 2', 'Art. 2', 'Art. 2', 'Art. 3', 'Art. 4', 'Art. 5', 'Art. 7', 'Art. 7', 'Art. 11', 'Art. 13', 'Art. 13', 'Art. 13', 'Art. 18', 'Art. 18', 'Art. 18', 'Art. 19', 'Art. 19', 'Art. 19', 'Art. 19', 'Art. 19', 'Art. 19', 'Art. 19', 'Art. 19', 'Art. 19', 'Art. 21', 'Art. 21', 'Art. 21', 'Art. 21', 'Art. 22', 'Art. 22', 'Art. 27', 'Art. 32', 'Art. 48', 'Art. 50', 'Art. 51', 'Art. 52', 'Art. 53', 'Art. 57', 'Art. 58', 'Art. 59', 'Art. 62', 'Art. 4', 'Art. 8', 'Art. 9', 'Art. 16', 'Art. 17', 'Art. 20', 'Art. 22', 'Art. 22', 'Art. 23', 'Art. 26', 'Art. 26', 'Art. 27', 'Art. 27', 'Art. 27', 'Art. 27', 'Art. 27', 'Art. 27', 'Art. 27', 'Art. 29', 'Art. 29', 'Art. 29', 'Art. 29', 'Art. 29', 'Art. 30', 'Art. 30', 'Art. 30', 'Art. 30', 'Art. 31', 'Art. 31', 'Art. 31', 'Art. 31', 'Art. 32', 'Art. 33', 'Art. 34', 'Art. 35', 'Art. 35', 'Art. 38', 'Art. 38', 'Art. 41', 'Art. 42', 'Art. 44', 'Art. 44', 'Art. 44', 'Art. 46', 'Art. 5', 'Art. 5', 'Art. 6', 'Art. 6', 'Art. 14', 'Art. 24', 'Art. 1', 'Art. 1', 'Art. 1', 'Art. 4', 'Art. 4', 'Art. 27', 'Art. 28', 'Art. 28', 'Art. 28', 'Art. 28', 'Art. 37', 'Art. 44', 'Art. 44', 'Art. 47', 'Art. 77', 'Art. 79', 'Art. 91', 'Art. 97', 'Art. 98', 'Art. 99', 'Art. 108', 'Art. 2', 'Art. 2', 'Art. 3', 'Art. 7', 'Art. 49', 'Art. 43', 'Art. 56', 'Art. 5', 'Art. 44', 'Art.\n47', 'Art. 55', 'Art. 94', 'Art. 95', 'Art.\n4', 'Art. 4', 'Art. 19', 'Art. 19', 'Art. 18', 'Art. 21', 'Art. 22', 'Art. 3']

How to Protect Investors: Lessons from the EC and the UK (International Corporate Law and Financial Market Regulation) | Niamh Moloney | download
Principal How to Protect Investors: Lessons from the EC and the UK (International Corporate Law and Financial..
How to Protect Investors: Lessons from the EC and the UK (International Corporate Law and Financial Market Regulation)
As governments around the world withdraw from welfare provision and promote long-term savings by households through the financial markets, the protection of retail investors has become critically important. Taking as a case study the wide-ranging EC investor-protection regime which now governs EC retail markets after an intense reform period, this critical, contextual and comparative examination of the nature of investor protection explores why the retail investor should be protected, whether retail investor engagement with the markets should be encouraged and how investor protection laws should be designed, particularly in light of the financial crisis. The book considers the implications of the EC's investor protection rules 'on the books' but also considers investor protection law and policy 'in action', drawing on experience from the UK retail market and in particular the Financial Services Authority's extensive retail market activities, including the recent Retail Distribution Review and the Treating Customers Fairly strategy.
ISBN 10: 0521888700
ISBN 13: 9780521888707
Baixar (pdf, 5.00 MB)
The Multilaterization of International Investment Law (Cambridge International Trade and Economic Law)
retail1956
investor1490
investment1253
investors1002
disclosure914
regime885
fsa883
risks799
regulation783
commission721
markets685
mifid632
ucits618
consumer597
regulatory537
directive507
retail market471
cesr404
firms366
retail investor346
securities343
retail investors315
investor protection307
funds288
trading255
execution254
european commission251
consumers250
prospectus249
per cent247
fund234
retail markets222
consultation214
supervision214
sales205
investment advice200
schemes194
structured191
insurance176
asset174
suitability173
investment products173
transparency172
border172
difficulties166
highlighted166
investor education160
enforcement159
supervisory159
disclosures147
strategies144
advisers143
ibid142
redress141
diversification137
A Treatise on Phytochemistry
Stay off the Skyline: The Sixth Marine Division on Okinawa - An Oral History
Laura Homan Lacey
As governments around the world withdraw from welfare provision and
promote long-term savings by households through the financial markets,
the protection of retail investors has become critically important. Taking
as a case study the wide-ranging EC investor-protection regime which now
governs EC retail markets after an intense reform period, this critical, contextual and comparative examination of the nature of investor protection
explores why the retail investor should be protected, whether retail investor
engagement with the markets should be encouraged and how investorprotection laws should be designed, particularly in light of the financial
crisis. The book considers the implications of the EC’s investor-protection
rules ‘on the books’ but also considers investor-protection law and policy
‘in action’, drawing on experience from the UK retail market and in particular the Financial Services Authority’s extensive retail market activities,
including the recent Retail Distribution Review and the Treating Customers
Fairly strategy.
niamh moloney is a professor in the Law Department of the London
international corporate law and
Recent years have seen an upsurge of change and reform in corporate law and
financial market regulation internationally as the corporate and institutional
investor sector increasingly turns to the international financial markets. This
follows large-scale institutional and regulatory reform after a series of
international corporate governance and financial disclosure scandals exemplified
by the collapse of Enron in the US. There is now a great demand for analysis in
this area from the academic, practitioner, regulatory and policy sectors.
The International Corporate Law and Financial Market Regulation series will
respond to that demand by creating a critical mass of titles which will address the
need for information and high-quality analysis in this fast developing area.
Professor Niamh Moloney, London School of Economics and Political Science
Professor Howell Jackson, Harvard Law School
Professor Marco Becht, Professor of Finance and Economics at Université Libre
de Bruxelles and Executive Director of the European Corporate Governance
Institute (ECGI).
Professor Brian Cheffins, S. J. Berwin Professor of Corporate Law at the Faculty
of Law, University of Cambridge.
Professor Paul Davies, Cassel Professor of Commercial Law at the London
Professor Luca Enriques, Professor of Business Law in the Faculty of Law at the
Professor Guido Ferrarini, Professor of Law at the University of Genoa and
Honorary Professor, Faculty of Law, University College London.
Professor Jennifer Hill, Professor of Corporate Law at Sydney Law School.
Professor Klaus J. Hopt, Director of the Max Planck Institute of Comparative
and International Private Law, Hamburg.
Professor Hideki Kanda, Professor of Law at the University of Tokyo.
Professor Colin Mayer, Peter Moores Professor of Management Studies at the
Saı̈d Business School and Director of the Oxford Financial Research Centre.
James Palmer, Partner of Herbert Smith, London.
Professor Michel Tison, Professor at the Financial Law Institute of the University
of Ghent.
Andrew Whittaker, General Counsel to the Board at the UK Financial Services
Professor Eddy Wymeersch, Chairman of the Committee of European Securities
Regulators (CESR); Co-Chair of the CESR-European Central Bank Working
Group on Clearing and Settlement, and part-time Professor of Commercial Law,
Lessons from the EC and the UK
Information on this title: www.cambridge.org/9780521888707
© Niamh Moloney 2010
978-0-511-67557-7
978-0-521-88870-7
The retail investor and the EC
The importance of the retail markets
The retail markets and the EC
1. The development of a retail market agenda
2. Scope: the reach of EC investor protection law and policy
3. Beyond the cross-border context
4. But room for local ‘law on the books’ and for ‘law in action’: the
5. Examining retail investor protection through the EC lens
Who is the EC investor?
1. Characterizing the target of investor protection
2. The average EC investor: an elusive target?
3. Investors or consumers?
The financial crisis and EC retail market policy
Designing a retail investor protection regime
Why intervene in the retail markets? Encouraging the empowered
investor, shielding the irrational investor or supporting the trusting
1. Characterizing investor protection
2. The retail investor as an agent of public policy and the
empowered investor
3. The irrational and uninformed investor
4. The trusting investor
The risks of retail market intervention
1. Regulatory and retail market agenda risks
2. Regulation and the retail markets: ‘laws on the books’ and ‘laws in
action’
3. Responding to the drivers of retail market engagement
4. Centralization risks
How to intervene on the retail markets?
1. The regulatory toolbox and self-regulation
2. Achieving retail market outcomes
3. Principles-based regulation and the retail markets
4. Evidence-based policy formation and rule-making
5. Controlling risk-taking and segmentation techniques
6. Diversification
Product regulation and the retail markets
1. The EC and product regulation
2. The benefits of CIS product regulation
3. The risks of CIS product regulation
4. An integrated model
The UCITS investor protection regime and product regulation
1. Inbuilt diversification and liquidity
2. Inbuilt governance: the depositary and the management
The UCITS III product and design risks
1. The UCITS III regime
2. UCITS III and the risks of facilitative product design
3. Beyond UCITS III: alternative investments and product
4. Beyond product regulation: the product provider and the
provider/distributor relationship
Structured and substitute products
1. The substitute product market and structured products
2. A segmented product regime and its risks
3. Developing a response
Investment advice and product distribution
Intermediation, its risks and regulation
1. The benefits of advice
2. The risks
3. Regulating advice
Scope of the advice and product distribution regime
1. The advice and distribution regime
2. MiFID’s scope: a wide range of instruments and services
3. MiFID’s scope: the pivotal investment advice definition
4. MiFID’s scope: supporting access to advice?
5. MiFID’s scope: the nature of investor protection ‘on the books’
III. Regulatory design choices
1. Regulatory design choice (1): maximum harmonization
2. Regulatory design choice (2): principles-based regulation
3. Regulatory design choice (3): shaping firm conduct and the
eclipsing of disclosure
IV. Regulatory technique (1): the fairness principle and ‘law in action’
1. The fair treatment principle
2. The risks of ‘fairness’
3. Fairness and the TCF model: ‘law in action’
4. The implications of the TCF model
V. Regulatory technique (2): marketing risks
1. Marketing risks
2. Delivery-specific protection: online and distance contacts
3. Horizontal protection: consumer protection directives
4. Investment-specific protections: MiFID
VI. Regulatory technique (3): quality of advice and suitability
1. Suitability and objective advice
2. The suitability regime: suitability and appropriateness
3. Suitability ‘in action’
VII. Regulatory technique (4): conflict-of-interest management
1. Conflict-of-interest risks
2. MiFID and retail market conflict-of-interest risk
VIII. Regulatory technique (5): the investment firm/investor contract
IX. Segmentation risks
1. The UCITS regime
2. Structured and substitute products
X. Advice or sales? Addressing the ‘right risks’
1. Delivering high-quality investment advice
2. Incentive and commission risks: advice or sales?
3. MiFID and commission risk
XI. Fee-based investment advice: segmenting regulated advice
1. Delivering independent investment advice: the UK Retail
Distribution Review and other international experience
2. An EC model?
XII. Access to mass market advice and the sales problem
1. Access to advice
2. A mass market advice regime and MiFID: generic advice
3. Access to advice and the UK experience
4. The EC and access to advice
Disclosure and EC investor protection
1. The retail market disclosure regime
2. The investor understanding problem
3. The risks of disclosure
4. Disclosure ‘in action’
Investment product disclosure (1): the UCITS regime
1. Designing CIS disclosure: the challenge
2. The EC laboratory
Investment product disclosure (2): the substitute products
1. A fragmented regime
2. Developing a response
Disclosure in the distribution and advice context
2. General investment firm and services disclosure: MiFID
Article 19(2) and (3)
3. Conflicts of interest and commissions
Promoting access to trading
1. Better diversification and lower trading costs
2. The risks and execution-only services
Investor protection in the trading process
1. A matrix of rules
2. Best execution
3. Trading and issuer disclosure
Education and governance
1. Investor education
2. Building an investor education strategy: the UK example
3. Investor education and EC retail market policy
Retail investor involvement in policy formation and law-making
1. Retail investor involvement
2. Retail governance and the EC
3. Improving investor governance
4. CESR and the retail markets
Supervision, enforcement and redress
Public supervision and enforcement in the retail markets
1. Public supervision and enforcement in the retail markets
2. The EC regime
3. Risks to the retail markets
4. CESR, the retail markets and supervisory convergence
5. Investor compensation schemes
Investor redress
1. Access to justice and the retail investor
2. Direct retail investor action
PREFACE AND ACKNOWLEDG MENTS
This book is concerned with the protection of retail or household investors.
The retail markets can be something of a Cinderella in financial market
regulation. The regulatory challenges can be humdrum but intractable, the
retail constituency quiescent and unhelpful to the beleaguered regulator,
and the empirical and analytical pyrotechnics of law and finance and of
law and economics, typically applied to financial market regulation, often
overlook this area; behavioural finance is, however, now taking up some
of the empirical heavy lifting. But, as governments withdraw from welfare
provision and promote stronger long-term household saving, the retail
markets have become of central importance; to borrow a phrase from law
and finance, they ‘matter’. So does investor protection regulation and how
it is developed and designed.
This book accordingly addresses three questions. Who is the retail
investor (chapter 1)? Why should that investor be protected (chapter 2)?
How should protection be designed (chapters 3–8)? It considers whether
investors are best characterized as empowered, irrational or trusting, and
considers the implications for regulatory design. Its case study is the massive EC harmonized regulatory regime for Member States’ retail investment markets which provides a rich case study of investor protection law
‘on the books’. But effective retail market protection depends heavily on
‘law in action’, which remains largely the preserve of the Member States.
The book’s main case study for domestic ‘law in action’ is the UK and, in
particular, the retail market activities of the Financial Services Authority.
A note on the European terminology used is necessary. The book is
largely concerned with the internal market aspect of the European Union
and so generally refers to the European Community, the EC and the EC
Treaty. At the time of writing, the Lisbon Treaty had not been ratified by all
the Member States. If the Treaty comes into force, the relevant EC Treaty
provisions will not change in substance, but will be incorporated into the
new Treaty on the Functioning of the European Union, and references to
the EC or European Community in this book should be read as references
to the EU or European Union.
This book entered its final stages against the backdrop of the financial
crisis. In the maelstrom, as regulatory and governmental attention focused
on safety and stabilization, retail investor interests have been largely overshadowed. Household wealth has, however, been destroyed, investor trust
has been badly shaken and the policy drive to encourage stronger marketbased saving seems quixotic, at least at first glance. Nonetheless, as this
book argues, the difficult task of designing an effective investor protection system and of supporting household engagement with the markets
must go on. Much greater evidence is needed on how investors think
and behave (chapter 2). Hard questions concerning the degree to which
investors should be allowed to access more complex products must be
answered, particularly given the losses related to structured products over
the crisis (chapter 3). Disclosure, the great panacea of modern investor
protection, seems all the more a troublesome device (chapter 5). As discussed in chapter 7, the voice of the retail investor, however ill-informed
and erratic that voice may be, has been largely absent from the policy
debate on the crisis. This must change.
The book aims to state the law and major policy developments as at
31 May 2009 although it has been possible to make some very brief references to subsequent major developments. A number of these are revealing as to the direction of the policy debate on retail investor protection.
Most notably, perhaps, the Obama Administration’s blueprint for regulatory reform (Department of the Treasury, Financial Regulatory Reform
(2009)), which took as a key objective the protection of consumers and
investors from financial abuse, includes significant institutional reform in
the form of a new Consumer Financial Protection Agency which will share
responsibility with the Securities and Exchange Commission for protecting consumers of financial services. From an EC perspective, much can
be learned from the emphasis being placed on the Agency’s gathering of
‘actual data about how people make financial decisions’. Otherwise, there
is dishearteningly little evidence of any attempts to gather meaningful data
on how household investors reacted to the crisis; the European Commission’s 2009 Eurobarometer survey on the crisis was limited to a survey
of reaction to the EU’s general efforts (Standard Eurobarometer (EB 71),
Europeans and the Economic Crisis (2009)).
Institutional reform has also been a major theme of the EC response
to the crisis, although here the retail interest was not the driving factor
(chapter 7). The Commission’s September 2009 proposals for a European
System of Financial Supervisors and, in particular, for a central European
Securities and Markets Authority (which followed the Commission’s May
2009 Communication on supervision and the agenda-setting de Larosière
Report) promise much for better pan-EC prudential supervision. But the
impact on retail market law-making is not yet clear, although the proposed Authority will have the power to adopt binding technical standards
(endorsed by the Commission). Some efforts are, however, being made
to engage the retail sector with the Authority’s work through enhanced
consultation procedures (via a Stakeholders Group). The proposed Joint
Committee of European Supervisory Authorities may also lead to better
cross-sectoral law-making, although institutional segmentation between
the banking, insurance/pensions and securities sectors persists in the new
model. The initial failure to engage with the retail sector during the important de Larosière discussions remains disheartening (chapter 7). The crisis
has, however, galvanized FIN-USE, the EC’s forum for the consumer interest in financial services, to produce a number of papers, significant by their
very adoption, on the crisis (including FIN-USE, The Future of Financial
Services Supervision (2009)). Otherwise, and perhaps reassuringly given
persistent governance and evidence-gathering weaknesses, there was little
in the way of knee-jerk reaction, with the 2009 Commission Communication on the treatment of substitute investment products emerging
from a discussion which pre-dated the crisis, although the crisis may have
encouraged the Commission to adopt what is a relatively radical reform
Similarly, in the UK, prudential and stability matters have been to the
fore, although the FSA did proceed with the next stage of its massive
Retail Distribution Review in June 2009, presenting specific reform proposals designed to address persistent and entrenched conflicts of interest
in the commission-based UK investment advice and product distribution
industry (Consultation Paper 09/18). The proposals broadly reflect the
FSA’s final thinking on the Review in 2008 (chapter 4). Investment advice
concerning a broad range of substitute ‘retail investment products’ will be
segmented into ‘independent advice’ and ‘restricted advice’. ‘Independent
advice’ must be unbiased, unrestricted and based on a comprehensive
and fair analysis of the relevant investment product market. Advice must
otherwise be labelled as ‘restricted’, including where a firm advises only
on proprietary products. A new adviser charging model will apply to all
investment advice; the current commission-based system will be prohibited. A new professional standards regime for all investment advice will
also be adopted.
Overall, however, there is little evidence of a policy concern, post-crisis,
to rethink how investor protection is delivered. The dominant assumptions
concerning investor empowerment, investor competence and the investor’s
carrying of market risk remain in place.
The completion of this book was supported by a Research Leave Award
from the Arts and Humanities Research Council which I very gratefully acknowledge. Cambridge University Press, in particular Kim Hughes
and Daniel Dunlavey, oversaw the book’s production with great courtesy and efficiency. I would also like to thank the many people from
whose work I have learned; in particular, I owe a great deal to Professors Eilı́s Ferran, Guido Ferrarini, Klaus Hopt, Howell Jackson, Donald
Langevoort, Stephen Weatherill and Eddy Wymeersch, whose scholarship
has inspired me.
My greatest inspiration is my wonderful husband, Iain. This book is
Alpine Investments BV v. Minister van Financiën [1995] ECR I-1141 (Case C-384/93)
91, 233
Antonio Testa and Lido Lazzeri v. Commissione Nazionale per la Società e la Borsa
(Consob) [2002] ECR I-10797 (Case C-365/00) 17
Commission of the European Communities v. Federal Republic of Germany [1986]
ECR 3755 (Case 205/84) 91
Gut Springenheide GmbH and Rudolf Tusky v. Oberkreisdirektor des Kreises
Steinfurt – Amt für Lebensmittelüberwachung [1998] ECR I-4657 (Case C-210/96)
92, 115
Estée Lauder Cosmetics GmbH & Co. OHG v. Lancaster Group GmbH [2000] ECR
I-117 (Case C-220/98) 92
Société Civile Immobilière Parodi v. Banque H. Albert de Bary et Cie [1997] ECR
I-3899 (Case C-222/95) 91
Verein gegen Unwesen in Handel und Gewerbe Köln eV v. Mars GmbH [1995] ECR
I-1923 (Case C-470/93) 446
TABLE OF TREATIES AND LEG ISLATION
EC Treaty and EC legislation
Art. 3 . . .
Art. 5 . . .
Art. 10 . . .
Art. 14 . . .
Art. 43 . . .
Art. 44(2)(g) . . .
Art. 47(2) . . .
Art. 49 . . .
Art. 55 . . .
Art. 56 . . .
Art. 94 . . .
Art. 95 . . .
Art. 153(1) . . .
Art. 251 . . .
Art. 257 . . .
Consolidated Life Assurance Directive 2002/83/EC . . .
Deposit Guarantee Directive 1994/19/EC . . .
42, 442
Distance Marketing of Financial Services Directive 2002/65/EC . . .
201, 226, 228, 233, 249, 255, 289
Art. 3(1) . . .
Art. 3(4) . . .
Art. 12 . . .
Art. 13 . . .
Art. 15 . . .
8, 14, 21, 40, 57,
E-Commerce Directive 2000/31/EC . . .
7, 227, 334
Injunctions in the Consumer Interest Directive 1998/27/EC . . .
Art. 2 . . .
Art. 4 . . .
Insurance Mediation Directive 2002/92/EC . . .
Art. 12(1) . . .
Art. 12(2) . . .
Art. 12(3) . . .
16, 201, 236, 253, 255, 276, 339
253, 339
Investment Services Directive 1993/22/EC . . .
7, 203
Investor Compensation Schemes Directive 1997/9/EC . . .
42, 63, 441, 442
Legal Aid Directive 2002/8/EC . . .
Market Abuse Directive 2003/6/EC . . .
364, 366, 369, 403
Art. 6 . . .
Art. 6(3) . . .
Markets in Financial Instruments Directive (MiFID) 2004/39/EC . . .
10, 13, 14, 15,
17, 19, 22, 24, 25, 27, 52, 57, 89, 102, 106, 110, 111, 112, 113, 114, 126, 130, 132, 133,
151, 186, 190, 195, 199, 200, 201, 202, 203, 204, 207, 209, 213, 223, 233, 236, 241, 252,
253, 254, 255, 256, 263, 265, 272, 286, 288, 293, 295, 315, 346, 357, 388, 389, 409, 419,
Art. 1 . . .
Art. 2(1)(c) . . .
Art. 2(1)(h) . . .
Art. 2(1)(j) . . .
Art. 2(2) . . .
206, 275, 286
Art. 3(2) . . .
Art. 4(1)(4) . . .
Art. 5(5) . . .
Art. 7 . . .
207, 276
Art. 7(2) . . .
Art. 11 . . .
Art. 13(3) . . .
Art. 13(7) . . .
Art. 13(8) . . .
Art. 18 . . .
245, 348, 353
Art. 18(1) . . .
Art. 18(2) . . .
245, 338
Art. 19 . . .
207, 209, 348
Art. 19(1) . . .
115, 213, 215, 216, 217, 220, 221, 230, 234, 236, 240, 245, 249, 263,
264, 354, 359
Art. 19(2) . . .
115, 213, 215, 230, 231, 233, 234, 254, 324, 326, 327, 335, 339, 341,
Art. 19(3) . . .
215, 230, 324, 325, 326, 334, 335, 339, 341, 342, 357
Art. 19(4) . . .
215, 237
Art. 19(5) . . .
127, 215, 237, 239
Art. 19(6) . . .
120, 126, 128, 215, 353
Art. 19(7) . . .
215, 249
Art. 19(8) . . .
215, 336
Art. 21 . . .
348, 355
Art. 21(1) . . .
Art. 21(2) . . .
Art. 21(3) . . .
356, 359
Art. 22(1) . . .
Art. 22(2) . . .
Art. 27 . . .
Art. 32(7) . . .
427, 435
Art. 48 . . .
Art. 50 . . .
Art. 51 . . .
Art. 52 . . .
Art. 53 . . .
Art. 57 . . .
Art. 58 . . .
Art. 59 . . .
Art. 62 . . .
MiFID Level 2 Directive 2006/73 . . . 15, 17, 200, 203, 207, 209, 215, 238, 245, 263, 315
Art. 4(1) . . .
Art. 8 . . .
102, 210, 211, 247, 273, 278, 328, 329
15, 203
Art. 9 . . .
207, 447
207, 348
Art. 16 . . .
Art. 17 . . .
Art. 20 . . .
Art. 22 . . .
Art. 22(4) . . .
Art. 23(3) . . .
Art. 26 . . .
216, 264, 334
Art. 26(b) . . .
216, 231
Art. 27(2) . . .
Art. 27(3) . . .
232, 325
Art. 27(4) . . .
Art. 27(5) . . .
Art. 27(6) . . .
Art. 27(7) . . .
Art. 27(9) . . .
Art. 29 . . .
Art. 29(1) . . .
Art. 29(2) . . .
Art. 29(4) . . .
325, 335
Art. 29(8) . . .
Art. 30 . . .
334, 336, 338
Art. 30(1)(h) . . .
Art. 30(2) . . .
Art. 30(3) . . .
Art. 31 . . .
216, 334, 336
Art. 31(1) . . .
Art. 31(2) . . .
Art. 31(5) . . .
Art. 32 . . .
334, 336
Art. 33 . . .
326, 334, 340
Art. 34 . . .
216, 334
Art. 35(1) . . .
Art. 35(5) . . .
Art. 38 . . .
Art. 38(d) . . .
Art. 41 . . .
Art. 42 . . .
Art. 44(1) . . .
Art. 44(3) . . .
Art. 44(4) . . .
Art. 46(2) . . .
Prospectus Directive 2003/71/EC . . .
369, 444
9, 13, 52, 119, 120, 129, 289, 323, 363, 366,
Art. 5(1) . . .
Art. 5(2) . . .
Art. 6(1) . . .
Art. 6(2) . . .
Art. 14(2) . . .
Prospectus Regulation 2004/809
Art. 24 . . .
Transparency Directive 2004/109/EC . . .
13, 364, 366, 369, 444
Undertakings for Collective Investment in Transferable Securities (UCITS) Directive
1985/611/EC . . .
7, 26, 121, 122, 126, 128, 134, 135, 142, 146, 149, 151, 152, 153,
156, 162, 163, 168, 176, 188, 189, 246, 250, 295, 302, 321
Art. 1(1) . . .
Art. 1(2) . . .
Art. 1(3) . . .
Art. 4(2) . . .
Art. 4(3) . . .
Art. 27(1) . . .
Art. 28 . . .
Art. 28(1) . . .
Art. 28(2) . . .
Art. 28(3) . . .
312, 314
Art. 37(1) . . .
Art. 44 . . .
250, 426
Art. 44(2) . . .
Art. 47 . . .
Art. 77 . . .
Art. 79 . . .
Art. 91 . . .
Art. 97 . . .
427, 428
Art. 98 . . .
Art. 99 . . .
Art. 108 . . .
Sched. A . . .
Sched. B . . .
Sched. C . . .
Unfair Commercial Practices Directive 2005/29/EC . . .
227, 255, 290
13, 14, 40, 106, 201, 216,
Annex I . . .
Art. 2(c) . . .
Art. 2(d) . . .
Art. 3(9) . . .
40, 228
106, 229
Art. 7(1) . . .
106, 459
Unfair Contract Terms Directive 1993/13/EC . . .
13, 216, 248, 249, 445
Financial Services and Markets Act 2000 . . .
22, 26, 50, 54, 63, 255, 402
s. 2 . . .
s. 5(1) . . .
s. 21 . . .
s. 22(1) . . .
s. 59 . . .
Investment Advisers Act 1940 . . .
Securities Exchange Act 1934 . . .
ABBREV IATIONS
APCIMS
three Level 3 Committees (CESR, CEBS and CEIOPS)
Autoriteit Financiële Markten (Dutch regulator)
Autorité des Marchés Financiers (French regulator)
Association of Private Client Investment Managers
Bundesanstalt für Finanzdienstleistungsaufsicht (German
Committee of European Insurance and Occupational
Pensions Supervisors
Comisión Nacional del Mercado de Valores (Spanish
Commissione Nazionale per le Società e la Borsa (Italian
Distance Marketing of Financial Services Directive
European Parliament Committee on Economic and
European Securities Committee
European Securities Market Expert Group
FIN-USE
Forum of User Experts in the Area of Financial Services
Financial Services Authority (UK regulator)
Financial Services Consumer Group
more-principles-based regulation
Non-UCITS Regulated Scheme
officially appointed storage mechanism
retail service provider
Services and Costs Disclosure Document
Securities and Exchange Commission (US regulator)
Undertakings for Collective Investment in Transferable
I. The importance of the retail markets
This book examines the nature of retail investor protection. It considers the
protections which do, and those which should, apply to individual, private
investors1 who purchase investment products, take investment advice,
carry out direct trading and, overall, engage in short-term speculation or
long-term savings through market-based instruments.2
Its case study is the massive EC regulatory regime for the retail investment markets. This regime has grown exponentially in recent years and
now dictates the nature of retail investor protection ‘on the books’ for the
twenty-seven Member States of the European Union. But, as discussed
throughout the book, retail market protection is not simply a function of
‘law on the books’. Effective retail market protection depends heavily on
‘law in action’.3 And ‘law in action’, in terms of, for example, innovative
supervisory strategies, product design initiatives, retail market research,
investor redress and investor education, is largely the preserve of the Member States. The book’s main case study for domestic ‘law in action’ is the
UK and the Financial Services Authority’s increasingly strenuous efforts in
the retail markets.4 But the book adopts a generally comparative approach,
Although the terms ‘consumer’ and ‘investor’ are sometimes used interchangeably in this
area, notably by the UK Financial Services Authority (FSA), the distinction can be meaningful: sect. III below and ch. 2.
It is not, accordingly, concerned with banking, insurance and pension-related services and
products although, as discussed throughout the book, investment product innovation has
placed considerable strains on the traditional regulatory segmentation between the banking,
insurance and investment sectors.
Ch. 2 considers ‘law in action’.
These include: FSA implementation of the behemoth Markets in Financial Instruments
Directive regime (Directive 2004/39/EC of the European Parliament and of the Council of
21 April 2004 on markets in financial instruments amending Council Directives 85/611/EEC
and 93/6/EEC and Directive 2000/12/EC of the European Parliament and of the Council and
repealing Council Directive 93/22/EEC, OJ 2004 No. L145/1 (‘MiFID’)) and Commission
Directive 2006/73/EC of 10 August 2006 implementing Directive 2004/39/EC of the European Parliament and of the Council as regards organisational requirements and operating
drawing on international experience and experience in the other Member
Why consider the retail markets and retail market regulatory design?
As discussed in chapter 2, the financial crisis has wreaked destruction
on household market savings; it calls for careful consideration of the
role of regulation in the retail markets. But, before the financial crisis,
the retail markets were worthy of close attention. Greater responsibility for financial planning and welfare provision, including with respect
to pension provision,5 is being imposed on individuals and households
internationally;6 welfare is increasingly being privatized and governments
are seeking stronger individual financial independence. Risk is accordingly being transferred from government to households.7 Direct household participation in the markets8 is increasing;9 IOSCO, for example, has
conditions for investment firms and defined terms for the purposes of that Directive, OJ
2006 No. L241/26 (‘MiFID Level 2 Directive’) and the related extensive reforms to the FSA’s
retail market conduct-of-business regime, in particular (chs. 4 and 5); the FSA’s embrace
of a ‘more-principles-based’ regulation strategy (chs. 2 and 4); continuing efforts on the
pivotal ‘Key Features Document’ for retail investment products (ch. 5); burgeoning financial capability initiatives (ch. 7); ever-deepening research efforts (ch. 2); and radical and
far-reaching reform of the investment product distribution and advice regime under the
Retail Distribution Review (ch. 4).
E.g. S. Benartzi and R. Thaler, ‘Naive Diversification Strategies in Defined Contribution
Savings Plans’ (2001) 91 American Economic Review 79; and Ageing and Pension System
Reform: Implications for Financial Markets and Economic Policies (2005) (a report prepared at
the request of the Deputies of the G10 by an experts’ group chaired by I. Visco, Banca d’Italia)
(‘G10 Report’), identifying the importance of savings products which are complementary
to pension products and which provide diversification (pp. 15 and 17).
E.g. C. Borio, Change and Constancy in the Financial System: Implications for Financial
Distress and Policy (2007), ssrn abstractid=1022874 and European Commission, Minutes
of First Meeting of the Expert Group on Financial Education, 7 October 2008. The Dutch
financial market regulator (the AFM), for example, has highlighted that more responsibility
is being placed on citizens and noted the ‘democratization’ of financial options: AFM, Policy
and Priorities for the 2007–2009 Period (2007), pp. 11 and 12.
This point has been made in a range of studies. E.g. J. Delmas-Marsalet, Report on the
Marketing of Financial Products for the French Government (2005) (‘Delmas Report’) and
Subgroup (of the Council of the EU’s Financial Services Committee) on the Implications of
ageing on financial markets, Interim Report to the FSC (FSC4180/06, 2006) (‘FSC Report’).
The rise in defined benefit schemes, for example, has been described as turning employees
into investors and as underlining the importance of securities market regulation: M. Condon,
‘Rethinking Enforcement and Litigation in Ontario Securities Regulation’ (2006) 32 Queen’s
Law Journal 1, 6.
Other than the exposure to the markets which pension schemes and insurance products
Particularly by older investors. ‘Baby boomers’ control more than US$13 trillion in household investable assets, or over 50 per cent of total US household investment assets: SEC,
highlighted increased levels of retail investor participation internationally
in collective investment schemes (CISs) and identified the securities markets as central to individual wealth. 10 And the financial markets have, as a
result, become significant politically.11
In the UK, the retail investment markets have become the focus of close
regulatory and policy attention. The FSA’s current attention to the effectiveness of investment advice ‘in action’ (chapter 4), for example, reflects
FSA concern to support effective investment advice and product distribution structures given government withdrawal from welfare provision,
changing spending and saving behaviour, shifting employment patterns
and other socio-economic factors which are placing pressure on longterm savings.12 Its annual Financial Risk Outlooks repeatedly highlight the
increased pressure being placed on individuals and households to become
financially independent and the risks which arise from failure to do so.
The 2005 Outlook, for example, identified increased longevity, health risks
(including obesity risks), increased individual responsibility for financing
education, changing patterns of employment (particularly an increase in
part-time and self-employed workers) and the need for long-term savings
in support of pension provision as significant trends that could (or should)
influence individuals’ financial planning; it also highlighted the risks of
over-reliance on property investments.13 In 2006, the FSA highlighted the
risks posed by individuals’ failures to address pension provision as well as
the stresses placed on financial planning by, amongst other factors, lifestyle
changes and child-care; similar concerns were highlighted in 2007.14 The
choices faced by individuals are also becoming increasingly complex as
governments encourage market participation and as the industry reacts.
Complex retail investment products are burgeoning,15 as are government
North American Securities Administrators Association and FINRA, Protecting Senior
Investors: Compliance, Supervisory and other Practices Used by Financial Services Firms
in Serving Senior Investors (2008) (‘SEC Senior Report’), p. 1. In the UK, three in eight families (with a member between the ages of 50 and 64) hold some form of investment, whether
directly or through some form of wrapper: FSA, Asset Ownership, Portfolios and Retirement
Saving Arrangements: Past Trends and Prospects for the Future (Consumer Research No. 74,
2008), p. 1.
IOSCO, Objectives and Principles of Securities Regulation (IOSCO, 2008), p. 1.
Zingales has suggested that the massive increase in the use of financial markets for retirement
purposes has made them much more important politically: L. Zingales, The Future of
Securities Regulation (2009), ssrn abstractid=1319648, p. 2.
FSA, A Review of Retail Distribution (Discussion Paper No. 07/1, 2007) (‘2007 RDR’), p. 17.
FSA, Financial Risk Outlook 2005, pp. 33–40 and 43.
FSA, Financial Risk Outlook 2006, pp. 71–4 and Financial Risk Outlook 2007, pp. 77–82.
See further ch. 3.
initiatives to encourage long-term and market-based savings; the UK Child
Trust Fund, for example, provides some limited exposure to the markets.16
The need for stronger financial independence, and for effective and
responsive retail markets, has been repeatedly highlighted by the Community institutions. Political direction has come from the Council of
the European Union, which has called on governments to strengthen the
tools with which they monitor household savings and to increase their
efforts to raise households’ awareness of financial education and information needs.17 The Council’s powerful Financial Services Committee has
engaged in a wide-ranging review of the implications of ageing populations
for financial markets, highlighting the macro-economic and demographic
trends which are leading to pressure on households to increase marketbased savings;18 while governments and financial institutions (such as
pension funds) have traditionally intermediated the risks of market investment, the Committee reported that they are now increasingly being carried
directly by households.19 The European Parliament, often sceptical of the
financial markets, has acknowledged that societal and lifestyle changes
demand sound management of private finances and has related better
financial literacy to lower levels of problem debt, increased savings and
adequate retirement provision.20 A similar concern has come from the
Community’s executive, the European Commission. In its 2007 Green
Paper on Retail Financial Services it argued that ageing populations and
increasing pressure on public finances presented ‘clear challenges for consumers and investors’ and highlighted the need for a ‘competitive, open
and effective market for long-term savings’.21 Earlier, its 2005 White Paper
on Financial Services called for a boost in the efficiency of pan-European
markets for long-term savings products.22 The need for regulatory policy to support long-term savings through the markets has also emerged
See further ch. 2.
ECOFIN Conclusions, 2798th Meeting, 8 May 2007, Press Release, pp. 10–11.
FSC Report. The dependency ratio (or the proportion of the population aged over 65 as a
proportion of the population aged 15–64) is expected to increase from 24 per cent in 2003
to 51 per cent in 2050 (p. 5) and substantial strain is accordingly expected on public pension
schemes (pp. 5–10). The Report suggested that higher levels of savings may be required
following changes to pension provision and to medical subsidies but that ‘investment in
riskier assets’ may reduce the need for additional savings (p. 11).
Ibid., pp. 14–16.
European Parliament, Resolution on Improving Consumer Education and Awareness on
Credit and Finance (P6–TA(2008)0539, 2008), paras. A and B.
European Commission, Green Paper on Retail Financial Services in the Single Market (COM
(2007) 226), p. 11.
European Commission, White Paper on Financial Services (2005–2010) (COM (2005) 629),
as a marked theme of the current debate on the treatment of substitute
investment products.23
Regulators internationally are also increasingly addressing the risks
faced by older and retired investors. The FSA has reviewed how the financial services market operates for older consumers and highlighted poor
understanding of retirement and associated products and services and
difficulties with access to advice;24 it has also underlined the particular
vulnerability of older investors to share scams.25 Internationally, the US
Securities and Exchange Commission (SEC) has also focused closely on the
protection of ‘senior investors’, adopting investor education programmes,
highlighting and prosecuting frauds and scams to which senior investors
may be vulnerable, and providing guidance to financial services firms.26
In this environment, the resilience of investor protection and the appropriateness of efforts to promote individual engagement with the markets
become of central importance.
II. The retail markets and the EC
a) Early developments
In pursuit of the EC Treaty objective of securing an internal market
(Articles 3 and 14 EC) and in support of the Treaty free movement
guarantees,27 the Community institutions have long been engaged in
the construction of an integrated financial market within which market actors can freely access liberalized cross-border markets.28 Financial
market integration is presumed to generate significant benefits in terms
of choice, competition and easier access to capital and, ultimately, more
The Commission, for example, has acknowledged that the policy debate ‘assumes added
importance’ given the need to create the right conditions to support market-driven
solutions for private retirement provisioning: European Commission, Call for Evidence:
Need for a Coherent Approach to Product Transparency and Distribution Requirements for
‘Substitutive’ Retail Investment Products (2007), p. 21.
FSA, Finance in and at Retirement – Results of Our Review (2007). Although the FSA did
not find market failures, it highlighted difficulties concerning access to advice as well as
widespread poor understanding of retirement and associated products and services.
FSA, Press Release, 27 April 2009 (FSA/PN/055/2009). 26 SEC Senior Report.
Particularly the freedom to provide services (Art. 49 EC), the freedom to establish (Art. 43
EC) and the free movement of capital (Art. 56 EC). Treaty references are to the EC Treaty,
as the Treaty on the Functioning of the EU had not come into force at the time of writing
(see Preface and acknowledgments).
N. Moloney, EC Securities Regulation (2nd edn, Oxford: Oxford University Press, 2008),
liquid and efficient markets and stronger economic growth.29 The legal
technology used to achieve market integration30 has been based on, first,
the liberalization of market access through de-regulation (or the removal
of Member States’ ability to impose local regulatory requirements on
cross-border actors) and, secondly, on the related re-regulation of those
markets by a common harmonized rule base. Liberalization is achieved
by the requirement for Member States to accept, or mutually recognize,
the regulation (and often supervision) of cross-border actors by those
actors’ home Member States (typically the State where the actor has its
head office); mutual recognition is supported by re-regulation or the harmonization of Member States’ rules in order to remove the integration
obstacles which protectionist or, more usually, diverging local rules represent, and to allow mutual trust between regulatory regimes. As part of this
process of de-regulation, liberalization and re-regulation, the regulation
of domestic financial markets has, over time, moved from the Member
States to the EC and become a function of harmonized rules. But the
Community’s embrace of retail investor protection regulation and policy
is a relatively recent phenomenon.
The seminal 1966 Segré Report, the opening salvo in what has since
become a massive harmonized regulatory programme for financial services and markets, did not address retail investor protection in any detail.31
The early phases of EC financial market regulation (from the late 1970s)
were concerned with supply-side market access. Integration was initially
sought through, first, detailed rule harmonization (best exemplified by the
early securities directives (now repealed) which addressed capital-raising,
disclosure and issuer access to cross-border markets) and, secondly, in
the wake of the 1985 Commission White Paper on the Internal Market,32
minimum harmonization (which allowed Member States to impose more
stringent rules on their domestic actors and so accommodated some degree
E.g. London Economics, Quantification of the Macro-Economic Impact of Integration of EU
Financial Markets: Final Report to the European Commission (2002).
Whether or not law can drive market integration and change actors’ behaviour is a very
large question. On the debate, see further Moloney, EC Securities Regulation, pp. 40–7 and,
in the retail context, sect. II.3 below and ch. 2.
Perhaps because at that time ‘in continental Europe stockbrokers and other dealers are not
organized in such a way as to facilitate contacts with the public at large. As for investment
consultants, they are still far removed from the developed stage they have attained on the
capital markets of some non-member countries’: Report by a Group of Experts Appointed
by the EEC Commission, The Development of a European Capital Market (1966) (‘Segré
Report’), p. 204.
European Commission, Completing the Internal Market (COM (85) 310).
of regulatory competition) and mutual recognition (best exemplified by
the 1985 UCITS Directive33 on the UCITS CIS and the now-repealed
1993 Investment Services Directive (ISD) on investment services34 ). The
ISD asserted in a recital reference that one of its objectives was to protect
investors. But this assertion sat very uneasily in a Directive which was primarily focused on the investment firm, on the investment services passport
and on achieving the minimum level of harmonization required to support
home Member State control of cross-border investment firm activity. ISD
harmonization was primarily directed to prudential and stability requirements; marketing and conduct-of-business regulation, touchstones for
investor protection in the intermediation context, were not harmonized
and were thus left to the control of host Member States.
The first significant moves towards a harmonized investor protection
regime came in the late 1990s when market integration became more
closely associated with the demand-side, the support of investor confidence as a means of encouraging integration35 and, accordingly, the
harmonization of investor protection rules. The first hint of an investorfacing approach came in 1996 when the Commission presented its Green
Paper on Financial Services Consumers36 which highlighted a number of
investor protection concerns including aggressive marketing by investment firms and poor disclosure. A separate development outside the
financial market policy sphere, the adoption of the 2000 E-Commerce
Directive,37 further sharpened the focus on investor protection. The Directive anchored cross-border e-commerce/online services (including online
investment services) to the ‘Member State of origin’ (essentially the State
of establishment) and removed the ability of host Member States to apply
their protective rules to cross-border online services. The Directive’s striking innovation was to remove host State control without parallel rule
harmonization. By such accidents, or at least by a lack of joined-up
Council Directive 85/611/EEC of 20 December 1985 on the co-ordination of laws, regulations and administration provisions relating to undertakings for collective investment in
transferable securities, OJ 1985 No. L375/3.
Council Directive 93/22/EEC of 10 May 1993 on investment services in the securities field,
OJ 1993 No. L141/27.
N. Moloney, ‘Confidence and Competence: The Conundrum of EC Capital Markets Law’
(2004) 4 Journal of Corporate Law Studies 1.
European Commission, Green Paper on Financial Services: Meeting Consumers’ Expectations
(COM (96) 209).
European Parliament and Council Directive 2000/31/EC of 8 June 2000 on certain legal
aspects of information society services, in particular electronic commerce, in the single
market, OJ 2000 No. L178/1.
thinking across different Commission divisions, do major shifts in regulatory design occur. The subsequent 2001 Communication on E-Commerce
and Financial Services38 called for further convergence of protective rules,
including conduct-of-business rules, in order to address the danger that
Member States would rely on the E-Commerce Directive’s derogations to
the Member-State-of-origin principle to protect investors and consumers
where the Member State of origin’s rules were not regarded as offering
adequate protection. But the Communication also adopted an investorfacing agenda. It linked market integration to the demand side and noted
that ‘consumer confidence’ depended on sufficiently harmonized levels
of protection. An initial response came in the form of the 2002 Distance
Marketing of Financial Services Directive (DMD),39 which addresses disclosure, marketing, contractual rights (including withdrawal rights) and
redress in the distance marketing context and which applies to a range
of financial services, including investment services. It was the EC’s first
sustained attempt to grapple with investor protection. It also reinforced
the emerging reliance on ‘confidence’ as a demand-side justification for
harmonization and market-integration measures; it argued that a high
degree of consumer protection was required to enhance consumer confidence in distance selling (recital 3), and that a high level of consumer
protection should be guaranteed by the Directive (recital 13).
b) The FSAP and the retail interest
Before the pivotal 1999 Financial Services Action Plan (FSAP),40 a massive regulatory agenda which was designed to complete the integration
of financial markets and remedy years of slow development, had begun
to gather steam, the establishment of the Lamfalussy structures for EC
law-making in the financial market sphere brought another influence to
bear on the developing retail market agenda. The seminal 2001 Lamfalussy
Report41 was concerned with the establishment of a new EC law-making
mechanism for delegated law-making (which empowers the Commission
European Commission, Communication on E-Commerce and Financial Services (COM
(2001) 66).
European Parliament and Council Directive 2002/65/EC of 23 September 2002 concerning the distance marketing of consumer financial services and amending Council Directive 90/619/EEC and Directives 97/7/EC and 98/27/EC, OJ 2002 No. L271/16 (‘Distance
Marketing Directive’ or DMD).
European Commission, Communication on Implementing the Framework for Financial
Markets: Action Plan (COM (1999) 232) (FSAP).
Final Report of the Committee of Wise Men on the Regulation of European Securities Markets
(2001) (‘Lamfalussy Report’).
to adopt delegated rules, advised by the Committee of European Securities
Regulators (CESR, composed of Member State regulators) and supervised
by the European Securities Committee (ESC, composed of Member State
representatives)).42 Financial market rules now take the form of ‘level 1’
measures (typically directives) adopted by the institutions under traditional Treaty law-making procedures, detailed ‘level 2’ rules adopted by
the Commission and ‘level 3’ guidance adopted by CESR.43 But the Lamfalussy Report also prioritized retail investor protection. It highlighted
the absence of ‘high and equivalent levels of consumer protection and
no efficient methods for resolving cross-border consumer disputes’ and
recommended that ‘the conceptual framework of overarching principles’,
on which, it suggested, all EC financial market regulation should be based,
include a commitment to ensuring ‘appropriate levels of consumer protection proportionate to the different degrees of risk involved’.44 Its lasting
legacy to the retail market agenda, however, was the establishment of CESR,
which has had a far-reaching influence on the EC retail market agenda.45
The explosive combination of the Lamfalussy law-making reforms and
the FSAP regulatory reform agenda led to an exponential increase in
the intensity of EC financial market regulation over the FSAP period
(1999–2004). The FSAP also included a discrete retail market agenda46 and
the retail market interest emerged strongly across a series of FSAP measures. The first indications of the adoption of a retail market agenda came
with the 2003 Prospectus Directive.47 While designed to support crossborder capital-raising by issuers (by harmonizing prospectus requirements
and clarifying the scope of private placements), it is also designed to
build the confidence of ‘small investors’ in financial markets (recital 41)
and has a strong retail orientation;48 recital 16 states that ‘one of the
objectives of this Directive is to protect investors’.49 The most dramatic
See further ch. 7. 43 Ibid.
Lamfalussy Report, pp. 12 and 22. 45 See further ch. 7.
‘Appropriate and progressive harmonization of marketing and information rules throughout the Union together with a pragmatic search for non-legislative solutions offers the
prospect of a truly integrated retail market fully respecting the interests of consumers and
suppliers’: FSAP, p. 10.
Directive 2003/71/EC of the European Parliament and of the Council of 4 November 2003
on the prospectus to be published when securities are offered to the public or admitted to
trading and amending Directive 2001/34/EC, OJ 2003 No. L345/64 (‘Prospectus Directive’).
The European Commission’s advisory European Securities Market Expert Group has
described the principal objective of the Prospectus Directive as to protect the retail investor:
ESME, Report on Directive 2003/71 (2007), p. 10. See further ch. 6.
But investor protection runs across the Directive. E.g. recitals 10, 18, 19, 20 and 21.
developments, however, occurred with MiFID.50 The massive MiFID
regime, discussed throughout this book, is expressly designed to support
investor protection (e.g. recital 31)51 and addresses conduct-of-business
regulation (including marketing, disclosure and suitability requirements),
best execution, conflict-of-interest management and order execution and
market transparency. MiFID is also notable for the Commission’s related
regulatory rhetoric which claims investor protection (domestically and
cross-border) as a legitimate concern of EC financial market regulation52
and which appears to break the link between investor-protection-based
harmonization and market integration;53 under MiFID, investor protection has become an end in itself. The MiFID Proposal was designed to
address the failure of the precursor ISD to provide a ‘bedrock of harmonized investor protection’,54 while the pivotal conduct-of-business regime
was described as a ‘mainstay of investor protection’.55 In one of the more
striking of MiFID’s many retail market innovations, the regulation of
investment advice has now become a function of EC law (chapter 4). But
It has been described as ‘the most significant directive in capital markets law of recent
times’: BaFIN, Annual Report 2007–2008, p. 12.
The FSA has described MiFID in investor protection terms: ‘One of the main objectives
of MiFID is to provide a high level of investor protection’: Reforming Conduct of Business
Regulation (Consultation Paper No. 06/19, 2006), p. 9.
‘There is a need for enlightened regulation to define the rules of the game and for strong
policemen to enforce these rules . . . [MiFID] should equip regulators with a comprehensive
set of regulatory disciplines to tackle the risks to which the modern retail investor is
exposed . . . A high level of protection is crucial in its own right [emphasis added]. It is
also a pre-condition for the effective operation of the ISD passport’: Speech by DirectorGeneral Schaub of the Internal Market Directorate General on ‘Economic and Regulatory
Background to the Commission Proposal for Revision of the ISD’, 15 October 2002, available
via http://europa.eu/rapid/searchAction.do.
All EC legislative measures must meet subsidiarity and proportionality requirements and be
based on a Treaty competence (Art. 5 EC). In the financial markets sphere, harmonization
has typically been based in the free-movement- and barrier-removal-related competences
set out in Art. 44(2)(g) EC (directives designed to co-ordinate the safeguards required by
Member States of companies or firms for the protection of members and others), Art.
47(2) EC and Art. 55 EC (directives designed to co-ordinate Member States’ rules on the
taking up and pursuit of activities as self-employed persons) and in the two general single
market competences, Art. 94 EC (directives for the approximation of Member States’ rules
which directly affect the establishment or functioning of the common market) and Art. 95
EC (measures for the approximation of Member States’ rules which have as their object
the establishment and functioning of the internal market). The EC institutions do not
enjoy a general power to regulate the internal market. Internal market measures must be
based on the need to remove regulatory barriers or distortions to competition, although
the Commission has rarely appeared troubled by this restriction: Moloney, ‘Confidence
and Competence’.
European Commission, MiFID Proposal (COM (2002) 625), p. 23. 55 Ibid., p. 25.
investor protection, not market integration, is the concern; recital 3 does
not justify the inclusion of advice by reference to the integration of the
advice industry. It notes instead that ‘due to the increasing dependence
of investors on personal recommendations’ it was appropriate to include
investment advice as a service requiring authorization. On its application
on the markets in November 2007 the Commission greeted MiFID as a
robust and comprehensive framework for ensuring high levels of investor
protection.56 The investor protection rhetoric has also been taken up by
CESR which described the harmonization of ‘investor protection throughout Europe and increase[ing] consumers’ confidence that the products
they are being sold are actually appropriate for their needs’ as ‘one of the
main purposes’ of MiFID.57
c) Post-FSAP
Post-FSAP, the policy focus on the retail markets has continued. Integration has often been a subsidiary concern in this period which has
seen a focus on effective regulatory design for the retail markets. In the
UCITS investment products sphere,58 for example, radical reforms to
the design of UCITS disclosure are taking place; the EC is also grappling with the difficulties raised by substitute investment products and
the retailization of alternative investments.59 This period is also strongly
associated with a more holistic appreciation of retail market policy and
with a concern to promote financial literacy, stronger retail involvement
in the law-making process and access to redress.60 Belated efforts are also
being made to understand retail investor behaviour, with the publication
of important reports on long-term retail saving patterns61 and on retail
market disclosures.62
The Commission’s 2007 Green Paper on Retail Financial Services63
points to the entrenchment of the retail market agenda. Its earlier 2005
European Commission, Press Release, IP/07/1625.
Press Release Accompanying the Retail Investor Guide to MiFID (CESR/08-209, 2008),
The EC’s collective investment regime focuses on the UCITS product.
Chs. 3 and 5. 60 Chs. 7 and 8.
BME Consulting, The EU Market for Consumer Long-Term Retail Savings Vehicles: Comparative Analysis of Products, Market Structure, Costs, Distribution Systems, and Consumer
Savings Patterns (2007) (‘BME Report’).
Optem, Pre-contractual Information for Financial Services: Qualitative Study in the 27 Member States (2008) (‘Optem Report’).
European Commission, Green Paper on Retail Financial Services.
White Paper on Financial Services Policy had identified the retail market
as a key element of the 2005–10 financial services agenda and committed
to a series of investor-facing initiatives, including with respect to investor
education initiatives, investor governance and redress.64 The 2007 Green
Paper was concerned with ensuring that the integrated financial services
market (including investment services) delivered products that met consumer needs, enhancing consumer confidence by ensuring consumers
were properly protected and empowering consumers to take the right
decisions.65 Retail financial services markets (including investment services) were also a theme of the Commission’s wider 2007 internal market
policy initiative which addressed the distribution of investment products,
financial education and redress.66 By late 2007, the retail interest in financial services generally had become a major policy priority.67 The shift
in emphasis is well illustrated by the minutes of the Commission’s then
newly constituted consultative Financial Services Consumer Group which,
in December 2007, noted that transparency, the provision of information
and education were all key elements of the current policy debate.68 None
of these elements was a feature of the EC policy debate prior to the FSAP.
Why did retail investor protection acquire such prominence, particularly given the absence of retail stakeholders from the policy debate
(chapter 7)? Traditional integration concerns are certainly a factor, as
is the internal momentum which the FSAP and the Lamfalussy model
generated.69 But regulatory empire-building by the Commission, the
engine of policy development in the EC, cannot be discounted given
the political power of the retail market agenda and its association with
regulation. Member States have become increasingly willing to devolve
retail market regulation to the EC (section II.2.c below). And, perhaps
above all, the Commission has embraced the investor empowerment and
‘marketing the markets’ agenda which is becoming associated with retail
investor policy internationally (chapter 2).
European Commission, White Paper on Financial Services, pp. 7–8.
European Commission, Green Paper on Retail Financial Services, pp. 2–3.
European Commission, A Single Market for 21st Century Europe (COM (2007) 725), Staff
Working Paper on Initiatives in the Area of Retail Financial Services.
The Commission argued that ‘consumer information and protection are at the heart of EU
financial services legislation’: European Commission, Communication from the Commission, Financial Education (2007), p. 1.
Financial Services Consumer Group, Minutes, 12 December 2007.
See further Moloney, EC Securities Regulation, pp. 19–22.
a) Main elements
The main concerns of investor protection regulation – investment
product regulation, disclosure, distribution and advice and trading
rules70 – are now all governed by the harmonized EC regime, albeit to
varying degrees; the scope of the investor protection regime has been further extended by CESR’s quasi-law-making activities.71 The EC regime is
not limited to cross-border activity but applies to local activity. The UCITS
regime, for example, applies to all UCITS schemes, whether or not they
avail themselves of the Directive’s passporting opportunities (Article 1).
MiFID similarly applies to all investment firms within its scope, whether
or not they engage in cross-border activity (Articles 1 and 5).
Investment product regulation (chapter 3) is addressed by the UCITS
regime. Disclosure (chapter 5) forms a large component of the retail market regime and is governed by the UCITS regime (UCITS disclosure), the
Prospectus and Transparency72 Directives (issuer disclosure) and MiFID
and the DMD (disclosure related to product distribution and to investment services). The distribution of investment products and investment
advice (chapter 4) is addressed by MiFID and the DMD; a limited regime
applies to the distribution of investment-related unit-linked insurance
products under the Insurance Mediation Directive.73 MiFID also addresses
the trading process. Retail investors additionally benefit from a range of
contractual and marketing protections under the harmonized consumer
protection regime, notably the 1993 Unfair Contract Terms Directive74
and the 2005 Unfair Commercial Practices Directive.75
Despite its reach, the EC’s investor protection regime is, as discussed
in subsequent chapters, segmented and does not always capture the reality of mass market investment. MiFID, for example, does not cover the
Ch. 2 considers the main tools for intervening in the retail markets. 71 Ch. 7.
Directive 2004/109/EC of the European Parliament and of the Council of 15 December
2004 on the harmonisation of transparency requirements in relation to information about
issuers whose securities are admitted to trading on a regulated market and amending
Directive 2000/34/EC, OJ 2004 No. L390/38 (‘Transparency Directive’).
European Parliament and Council Directive 2002/92/EC of 9 December 2002 on insurance
mediation, OJ 2003 No. L9/3.
Council Directive 93/13/EEC of 5 April 1993 on unfair terms in consumer contracts,
OJ 1993 No. L95/29.
Directive 2005/29/EC of the European Parliament and of the Council of 11 May 2005
concerning unfair business-to-consumer commercial practices in the internal market,
OJ 2005 No. L149/22 (‘Unfair Commercial Practices Directive’).
distribution of unit-linked insurance-related investments or structured
retail products with deposit elements,76 both of which are popular retail
market investments but both of which are vulnerable to regulatory arbitrage risks with respect to distribution requirements and product design
and disclosure rules.
b) A prescriptive regime
The harmonized retail markets regime has become highly prescriptive.
This is in part related to the Lamfalussy model and to the adoption of
detailed level 2 rules77 and the accretion of CESR guidance at level 3;
the crisis, and related EC institutional reforms, will also likely lead to
an increase in the volume of technical rules (chapter 7). But it is also a
function of the extent to which a maximum harmonization model, which
ousts Member States’ ability to apply additional rules in the harmonized
area to domestic actors,78 has been adopted for retail market rules.
The DMD contained an augury of what was to come by employing a
maximum harmonization model and removing Member State ability to
apply additional local rules to domestic actors.79 Recital 13 of the Directive provides that Member States should not be able to adopt provisions
other than those laid down by the Directive in the field it harmonizes.
The prospectus regime, while not formally a maximum harmonization
regime, severely limits, given the scale of the harmonization, the extent to
which Member States can use the prospectus regime to address local retail
markets risks, including with respect to the offering of retail structured
products, a current preoccupation of retail market policy (chapter 3).
In the consumer protection field, the Unfair Commercial Practices Directive adopts a maximum harmonization model, although financial services,
given their complexity and the risks to consumers (recital 9), are subject
to a specific derogation which permits super-equivalent rules (Article
3(9)). The consumer protection field has also seen some enthusiasm for
consumer protection directives (including the Unfair Contract Terms
Directive) to be recast as maximum harmonization measures.80
See further ch. 4. 77 Notably the MiFID Level 2 Directive.
Applying additional rules to passporting actors would be in breach of the relevant directives
as well as, potentially, the Treaty free movement guarantees.
Member States are, pending further harmonization, allowed to impose more stringent
disclosure requirements to those imposed on distance marketing by the Directive (Art.
4(2)). MiFID, however, means that Member States have very limited discretion with respect
to investment services disclosure.
The Commission’s review of the consumer acquis highlighted the fragmentation risks
consequent on minimum harmonization measures and canvassed whether a horizontal,
But the MiFID Level 2 Directive, which is pivotal to the regulation of
product distribution and advice as well as to trading regulation, provides
in Article 4 the clearest example of the extent to which Member States’ regulatory discretion over the retail markets has been restricted. Article 4(1)
addresses ‘gold-plating’ (or the imposition of local super-equivalent rules,
additional to directive requirements, on domestic actors) and severely
limits the extent to which Member States can impose additional obligations on local markets and actors. Member States may only do so in
‘exceptional cases’ where the rules in question are objectively justified and
proportionate so as to address specific risks to investor protection or to
market integrity which are not adequately addressed by the Directive.81
The additional rules must also either address a specific risk of particular
importance given the Member State’s market structure or address risks or
issues that emerge or become evident after the coming into force of MiFID
and are not otherwise regulated by the Community. This ‘gold-plating’
ban represents a political consensus during the MiFID level 1 negotiations that uniform solutions be adopted.82 As discussed in chapter 2,
harmonization of this intensity and the ousting of Member State discretion in purely local markets potentially poses considerable risks to investor
protection given the heterogeneous nature of the Community retail
The extent of the EC’s influence is well illustrated by its impact on
the UK regime ‘on the books’. The FSA has acknowledged that its rules
are now based on EC requirements,83 that implementation of the MiFID
conduct-of-business regime would ‘over-write’ many of the pre-existing
maximum harmonization measure should be adopted and/or earlier measures tightened:
European Commission, Green Paper on Review of the Consumer Acquis (COM (2006)
744). Industry stakeholders were supportive of more extensive harmonization although
consumer stakeholders were more sceptical: European Commission, Report on the Outcome
of the Public Consultation on the Green Paper on the Review of the Consumer Acquis (2007).
The Commission has now proceeded with a proposal for an omnibus directive on consumer
rights (COM (2008) 614) which updates and strengthens earlier measures (including the
Unfair Contract Terms Directive) and adopts a maximum harmonization model.
Applications have not been common. As at September 2009, only France, Ireland and the
UK had made Art. 4 applications: European Commission, MiFID Transposition State of
Play Table. Ch. 4 considers the UK experience.
The Art. 19(10) level 2 delegation for conduct-of-business rules, for example, refers to the
‘uniform application’ of Art. 19, as does the Art. 18(3) delegation for conflict-of-interest
management. ‘Uniform application’ is also a concern of the best-execution delegation
(Art. 21(6)) and the order-handling delegation (Art. 22(3)).
E.g. ‘For the most part, our rules reflect the standards set out in Directives’: FSA, Consumer
Responsibility (Discussion Paper No. 08/5, 2008), p. 25.
FSA conduct-of-business requirements84 and that its Conduct of Business
sourcebook (COBS), central to investor protection in the UK retail market,
is now governed by the requirements of MiFID, the Insurance Mediation
Directive and other EC measures and that these requirement are often, in
a form of quasi-harmonization, applied by the FSA to local activities and
instruments outside the scope of these measures.85 The Retail Distribution
Review, central to the UK’s current efforts in the retail market, has also
highlighted that EC measures, as well as the Commission’s overall policy
direction with respect to retail financial services, have the potential to
influence how the UK distribution and advice market works.86
c) The movement of retail market issues from the Member
States to the EC
The reach of the EC over local and cross-border retail markets is also clear
from the growing tendency of the Member States, notwithstanding the sensitivities of local retail markets, to view retail market policy and reaction
to new developments in terms of a co-ordinated Community response.
The highly sensitive question of retail investor access to alternative investments, for example, saw the FSA acknowledge the need to co-ordinate with
the Community.87 Although regulators have been struggling domestically
with how to design effective investment product disclosure, there appears
to have been little resistance to the current UCITS ‘Key Investor Information’ (KII) reform, although it removes Member State discretion in this
area (chapter 5). The current debate on substitute investment products
(chapter 3) has also seen support for a co-ordinated response.88
The industry also appears conscious of the likelihood but also the
potential value of EC intervention. The FSA’s massive Retail Distribution
Review generated some resistance to the FSA’s reforms given the risk that
Consultation Paper No. 06/19, p. 7.
FSA, Response to the European Commission’s Call for Evidence on Need for a Coherent
Approach to Product Transparency and Distribution Requirements for ‘Substitute’ Retail
Investment Products (2008) (‘FSA Substitute Products Response’), p. 2.
2007 RDR, p. 5.
FSA, Wider Range Retail Investment Products (Discussion Paper No. 05/3, 2005), noting
that ‘any enduring solution will need to take account of, and preferably influence, the
developing European and international debate’ (p. 7).
European Commission, Need for a Coherent Approach to Product Transparency and Distribution Requirements for ‘Substitute’ Retail Investment Products: Feedback Statement on
Contributions to the Call for Evidence (2008), pp. 29–30 and 35. The Retail Distribution
Review reforms have been extended to reflect the scope of the Commission’s proposals:
FSA, Distribution of Retail Investments: Delivering the RDR (Consultation Paper No. 09118,
2009), p. 11.
the FSA’s radical plans might be overtaken by EC developments.89 In a
notable example of the industry using EC influence on domestic policy,
the substitute product debate saw two leading UK trade associations raise
their concerns with respect to the local regulatory treatment of a domestic
product before the Commission.90 The recent concern in the UK to address
the risks posed by ‘boiler rooms’91 has also seen a leading trade association
call for co-ordinated action between the UK, the Commission and national
regulators.92
MiFID, in particular, marked a greater willingness to address retail
market regulatory issues centrally and through maximum harmonization measures. The earlier Council negotiations on the DMD were difficult and focused in particular on the Directive’s ‘abandonment of
the minimum harmonization principle’93 and the extent to which local
consumer-protection (particularly disclosure) regimes could be accommodated within the Directive’s maximum harmonization structure. The
MiFID level 2 negotiations, however, appear to have been more concerned
with preventing gold-plating than with addressing the retail market risks
generated by a removal of Member State flexibility. There is also evidence
of Member State reliance on MiFID as a template for wider national retail
market reforms;94 the European Court has confirmed the intuition that
Member States can expand the scope of EC measures domestically as
long as the national measure makes clear that it does not implement a
Community rule.95
The Association of Private Client Investment Managers (APCIMS) warned that the FSA’s
determination to lead the way might result in their wasting time and resources on domestic regulatory initiatives which were subsequently taken over by European requirements:
APCIMS, Response to DP 07/1 (2007), p. 1.
The Investment Management Association (IMA) raised its concern (which it had already
expressed domestically) as to the UK regulatory treatment of the Global Equity Bond
(issued by the UK’s National Savings and Investments body, which is backed by HM
Treasury) which is not subject to the full application of the FSA’s disclosure and marketing
regime. The IMA argued that it was inappropriately marketed as a substitute product for
equity market investments although, based on the IMA’s research, it under-performs the
market and is not a safe substitute for stock investments: (IMA), Response to Commission
Call for Evidence on Substitute Products (2008), pp. 1–2 and Annex.
See further ch. 4. 92 APCIMS, Press Release, 14 May 2008.
European Commission, Report on the Common Position (SEC (2002) 30), p. 3.
Portugal, for example, has applied MiFID-style disclosure and suitability obligations to the
sale of insurance and pension products (which are outside the scope of MiFID): Comissão
do Mercado de Valores Mobiliários (CMVM) Regulation No. 8/2007. See n. 139 below on
the FSA position.
Testa and Lazzeri [2002] ECR I-10797 (Case C-356/00).
It may be that CESR’s burgeoning influence on policy development,
the opportunities it provides for strengthening trust between regulators
and its recent adoption of a retail market agenda have contributed to a
greater degree of comfort with EC initiatives.96 It may also be that the
recent enhancement to the policy and regulatory design process under
the Lamfalussy process and the Better Regulation agenda,97 including
more extensive consultation procedures, better cost/benefit analysis and
the recent striking attempts to locate policy developments in a better
understanding of the nature of the retail market,98 are leading Member
States to give more weight to the economy of scale benefits of EC intervention than to the restrictions posed by harmonized rules. Given that retail
market measures are often associated with higher industry costs, the EC
may also provide useful political cover for Member States seeking retail
market reforms to emerging risks. Although retail investors do not yet act
as a coherent group in policy-making, intriguing evidence has emerged
of investors’ regarding the Commission as their champion against the
financial services industry; this enthusiasm for EC action extends to those
traditionally more eurosceptic Member States, such as the UK.99 Member
States may therefore find it more palatable to adopt EC-driven solutions
to emerging problems.
While the harmonized retail market regime applies to local as well as crossborder activity, the regime’s roots are in the construction of an internal
market. But the construction of the retail integrated market has proved
to be highly troublesome; integration is proceeding very slowly, and the
impact of harmonization has not been significant. But this has not affected
Ch. 7 considers CESR.
Which the Commission committed itself to follow in the financial services sphere: White
Paper on Financial Services Policy, pp. 4–8. See generally R. Haythornthwaite, ‘Better Regulation in Europe’ in S. Weatherill (ed.), Better Regulation (Oxford and Portland, OR: Hart
Publishing, 2007), p. 19.
See further chs. 2 and 7.
Optem Report, p. 16. The Report found that ‘in a number of countries (Eastern European
Member States, Italy, Ireland and the UK), the Commission was seen as the institution
that was most capable of regulating a sector that has been dogged by scandal’ (p. 117).
Comments included ‘I think it’s great that they [the EC] are trying to do something to help
the consumer’ (from the UK) and ‘It’s very positive that the [Commission] pays attention
to a sector of the financial market where – at least in Italy – so many frauds have damaged
thousands of honest citizens who were simply looking to protect their life’s savings’ (from
Italy) (p. 117).
the reach of the regulatory regime into local markets or the ambition of the
EC’s regulatory strategy for the retail markets, underlining the regulatory
quality of the harmonized regime.
Poor levels of cross-border activity in retail financial services generally were reported in the Commission’s first (2004) Financial Integration
Monitor;100 direct cross-border offers of retail financial products were the
exception and product delivery to the end-investor was typically through
local distribution networks.101 In 2005, there was little change: ‘the degree
of fragmentation in retail markets is still considerable’.102 The 2006 Monitor focused on the CIS sector and reported significant differences in
investors’ preferences for cross-border schemes.103 Since then, MiFID has
come into force, but progress has remained very slow. The 2007 review
reported continuing fragmentation in the retail markets,104 as did the
2008 review which found that a single retail financial market was ‘far
from being achieved’.105 Cross-border transactions by individuals were
limited and prices, products and distribution channels all varied across
local markets. To the extent integration was taking place, it was on the supply side and through firms, particularly retail banks (which typically take
the form of multi-service ‘financial supermarkets’ in continental Europe),
establishing cross-border subsidiaries and branches,106 reflecting strong
demand-side preference for local suppliers.107
European Commission, Financial Integration Monitor 2004 (SEC (2004) 559).
Ibid., pp. 5 and 17.
European Commission, Financial Integration Monitor 2005 (SEC (2005) 927)
(‘2005 Monitor’), p. 12. It reported that only 5 per cent of EU citizens had bought a
financial product from another Member State (and these purchases were usually related
to migration) (p. 10).
European Commission, Financial Integration Monitor 2006 (SEC (2006) 1057) (‘2006
Monitor’), pp. 21–2.
European Commission, European Financial Integration Report 2007 (SEC (2007) 1696)
(‘2007 Monitor’), pp. 13 and 17.
European Commission, European Financial Integration Report 2008 (SEC (2009) 19) (‘2008
Monitor’), p. 14.
Ibid., pp. 10 and 14. The 2007 Monitor reported an increasing number of cross-border bank
branches, although subsidiaries were the dominant form of cross-border establishment
with their assets amounting to 10.5 per cent of the EU-25 market as compared to an 8.5
per cent share by branches (p. 15).
The 2005 Monitor noted that consumers do not appear to distinguish between foreign
and domestic providers where they are both established locally (p. 10), while the 2006
Monitor also emphasized local establishment (p. 5). The 2003 preparatory Monitor had
previously highlighted the importance of proximity in the retail markets: Tracking EU
Financial Integration (2003) (SEC (2003) 628), p. 5.
Close attention was given to cross-border activity in the important 2007
BME Report on long-term savings in the EC. It found that retail consumers
were participating in the integration process indirectly through CISs which
invested in cross-border assets, but that the market in long-term savings
products was highly fragmented.108 It reported modest levels of crossborder activity, wide variations in prices, restricted product diversity and
choice, variations in the performance of intermediaries109 and a strong
preference for local providers.110 It also reported on the extensive evidence of national segmentation in the distribution of investment products
and the delivery of investment advice (chapters 3 and 4).111 Reluctance to
engage with cross-border services and products is also clear from the Commission’s Eurobarometer surveys of public opinion. In 2005, it reported
high levels of reluctance to obtain cross-border financial services and that
85 per cent of respondents had not purchased financial services from firms
situated in other Member States.112
An integrated retail investment services market could offer retail
investors significant benefits in terms of product and services competition, wider choice, cost discipline and better diversification – although
this assumption makes significant demands on the retail investor’s ability
to exercise choice effectively.113 But whether or not a cross-border market can be driven by regulation is highly doubtful. Cross-border activity
in the retail markets, on the demand side,114 depends on a range of factors, few of which are amenable to regulation. Language difficulties are
a significant inhibitor. So too is the tendency of retail investors to prefer local suppliers and to exhibit a strong home bias in investments.115
Cultural factors can affect the extent to which investors operate
BME Report, p. 11. 109 Ibid., p. 26. 110 Ibid., p. 15. 111 Ibid., pp. 100–47.
European Commission, Special Eurobarometer No. 230, Public Opinion in Europe on Financial Services (2005), p. 10. Enthusiasm for future cross-border purchases varied, however.
87 per cent of Greek respondents would not purchase cross-border in future but respondents in France, Ireland, Malta and Slovakia were more open to cross-border purchases
(p. 11). Consumers in the new Member States, however, appear more open to crossborder financial services, suggesting some lack of trust in domestic institutions: European
Commission, Eurobarometer 2003:5 (published in 2004) Financial Services and Consumer
Protection: Summary Report (2004), p. 4.
Discussed further in chs. 2, 3 and 5.
The supply side will have limited incentives to engage without investor demand. The
supply side also faces other obstacles including with respect to diverging non-harmonized
rules, litigation and supervisory risks, taxation, personnel, payment/credit assessment
and other infrastructure difficulties and the need to adapt products, business models and
pricing strategies: European Commission, Green Paper on Retail Financial Services, p. 6.
cross-border.116 Market infrastructure can cause difficulties;117 fragmentation in clearing and settlement increases the cost of retail trading.118 Taxation remains a significant obstacle. Although the BME Report suggested
that investment (and banking) products had greater potential for integration than pension and insurance products, it highlighted a wide range of
obstacles, including wide variations in investment behaviour (section III
below), a home bias and preference for familiar products and services,
information failures, language difficulties, national product segmentation
(including the local distribution of government bonds), higher fees for
cross-border investments, higher investment thresholds for cross-border
investments, switching penalties, lack of transparency and diverging welfare systems which generate different incentives to purchase investment
products.119 The fate of the DMD provides a vivid example of the limitations of law. Two extensive 2008 studies on the Directive’s impact on the
construction of a cross-border market in distance financial services point
to a signal failure. One found that there was no significant cross-border
activity in the distance marketing of financial services and that the failure
of the market to develop was linked not to legal difficulties but to language,
cultural factors and the nature of financial services.120 The second reported
that there was no meaningful cross-border provision of distance marketing of financial services either before or after the Directive, which had little
or no impact. It highlighted the difficulties caused by taxation, electronic
contracts, cultural and language difficulties and consumer preferences for
local providers.121
There now appears to be a policy realization that harmonization is a
limited tool for driving cross-border activity in the retail sector. The Commission’s 2007 Green Paper on retail financial services acknowledged that
integration had not reached its potential with only modest cross-border
activity, wide variations in price, restricted product diversity and choice
and large variations in the profitability of retail providers.122 Stakeholders
are also doubtful.123 The Commission now appears to accept that most
2007 Monitor, p. 13 and 2008 Monitor, p. 14. 117 2007 Monitor, p. 13.
See further ch. 6. 119 BME Report, pp. 211–14.
U. Reifner et al., Final Report: Part I: General Analysis: Impact of Directive 2002/65/EC.
Project No. SANCO/2006/B4/034 (2008).
As well as factors related to understanding local markets, payment structures, credit
assessment and recovery and diverging rules, particularly on money-laundering: Civic
Consulting, Analysis of the Economic Impact of Directive 2002/65/EC: Final Report (2008).
European Commission, Green Paper on Retail Financial Services, pp. 4–5.
The consultation on the 2007 Green Paper revealed that most respondents saw retail
markets remaining local for the foreseeable future given the importance of language,
consumers of retail financial services are likely to remain domestically
focused. Although it has suggested that further reforms may be necessary,
it will only proceed where appropriate and where there is evidence of clear
and concrete benefits.124
This realization of the limits of harmonization in driving cross-border
activity coupled with the ever-increasing ambition of EC retail market
policy points, however, to the importance of the regime as a regulatory
4. But room for local ‘law on the books’ and for ‘law in action’:
The EC regime is not, however, monolithic. Some room remains for
regulation to reflect the different features and risks of Member States’
MiFID and the related UK investment advice and product distribution
regime provides a useful illustration of the ability of Member States to
retain discrete rules ‘on the books’ which respond to local risks. Investor
protection in the UK retail investment markets125 is primarily a function
of the Financial Services and Markets Act 2000 (FSMA) under which the
FSA operates and which, under section 2, imposes a series of statutory
objectives, including consumer protection and public awareness, with
which FSA activities must be compatible (chapter 2); the harmonized
regime, by contrast, does not engage with the over-arching principles
with which local regulators should act and which could lend coherence
to ‘law in action’ strategies in particular. FSMA also imposes the central
authorization obligation for ‘regulated activities’ in the financial services
sector; a person may not engage in ‘regulated activities’ unless that person is authorized or exempt (section 19). ‘Regulated activities’ essentially
relate to ‘specified activities’ and ‘specified investments’ (section 22(1))
which are set out in the related Regulated Activities Order126 which covers
culture and the familiarity of consumers with local providers. A senior FSA official has
similarly suggested that stakeholders need to be realistic in their expectations as to what
can be done through regulation to encourage consumers to do more cross-border business:
D. Waters (FSA), Speech on ‘MiFID, Threats and Opportunities’, 9 January 2008, available
via www.fsa.gov.uk/Pages/Library/Communications/Speeches/index.shtml.
European Commission, Green Paper on Retail Financial Services, p. 6.
This section is an outline discussion only. See further I. MacNeill, An Introduction to
the Law on Financial Investment (Oxford and Portland, OR: Hart Publishing, 2004),
pp. 59–78, 91–135 and 165–85.
Financial Services and Markets Act 2000 (Regulated Activities) Order 2001.
EC requirements as well as those additional activities specified by the
Order. ‘Specified activities’ in the investment services sphere include
advising on investments as an agent of the investor as well as the other
central retail market activities covered by MiFID127 (such as managing
investments and safeguarding and administering investments) and exMiFID activities such as establishing, operating and winding up collective
investment schemes; ‘specified investments’ extend to a wide range of
investments.128 By contrast with the MiFID regime, FSMA also imposes
an additional discrete authorization requirement on particular individuals
through the ‘approved persons’ regime which limits ‘controlled functions’
to ‘approved persons’ (section 59) and which reinforces both ex ante
investor protection regulation and ex post enforcement.129 Alongside the
authorization regime, FSMA also imposes a financial promotions regime
which prohibits financial promotions by persons who are not authorized
(section 21).
In addition to these local features which strengthen MiFID’s authorization requirements for advice and distribution, the local regime also
responds to specific UK market features. Investment advice in the UK is
largely delivered by smaller, notionally ‘independent’ investment advice
firms, often termed personal investment firms, which do not manage
investments or hold client assets or funds and which do not deal in investments; these firms simply advise on investments (primarily the ‘packaged
products’ discussed below) and transmit orders in investments to other
regulated entities.130 They are at the heart of the UK investment advice
industry.131 Their limited range of activities, however, means that MiFID’s
See further ch. 4.
Including government and public securities, shares, debt instruments, derivatives, collective investment schemes, contracts related to life assurance and deposits.
A function may be designated by the FSA as ‘controlled’ where it is likely to enable the
individual responsible for its performance to exercise a significant influence on the conduct
of an authorized person’s affairs (with respect to the regulated activity), where the function
will involve the individual performing it in dealing with customers of the authorized person
in a manner substantially connected with the carrying on of the regulated activity or where
the function will involve the individual performing it in dealing with the property of
customers of the authorized person in a manner substantially connected with the carrying
on of the regulated activity.
Over 5,000 personal investment firms (representing 28,000 investment advisers) provide
advice in the UK market. 83 per cent of these firms have fewer than five advisers, although
firms are increasingly becoming organized in networks and, in some cases, are owned
by product providers: FSA, Review of the Prudential Rules for Personal Investment Firms
(Discussion Paper No. 07/4, 2007), pp. 8–9.
These advisers account for more than 75 per cent of all sales of CISs, for example, and are
seen, based on consumer surveys, as the ‘key conduit between consumers and products’:
weighty authorization and regulatory regime, which responds to a wide
range of investment firm risks, would be costly. But one of MiFID’s more
notable exemptions from investment services authorization (and regulation) relates to ‘Article 3 firms’ which only advise on investments or receive
or transmit orders in transferable securities and units in collective investment undertakings and do not hold investor assets.132 This exemption has
been applied by the UK to its personal investment firm industry. ‘Article 3
firms’ nonetheless carry out ‘regulated activities’ and are subject to FSA
authorization and to a discrete regulatory regime which – in an attempt
to avoid regulatory arbitrage – is closely based on MiFID requirements
where cost benefit requirements have been met.133 But the FSA also has the
freedom to apply a more nuanced regime to the sector, although arbitrage
risks between MiFID and non-MiFID advice firms134 must be managed.
Recent FSA retail reforms have focused closely on this sector and, in particular, on the mis-selling risks with which it is associated (which arise
from a combination of commission-based remuneration, poor investor
discipline and product competition at the distribution level (with respect
to product commissions) rather than at the investor level135 ). The FSA has
engaged in an extensive review of the prudential requirements imposed
on these firms, particularly to limit the impact of latent liabilities where
these firms fail and outstanding liabilities in terms of mis-selling claims
must be met by the industry through the Financial Services Compensation
Scheme,136 and has had the freedom to develop a targeted capital resources
regime for non-MiFID ‘Article 3 firms’.137 The FSA has also addressed misselling risks in this sector through its massive Retail Distribution Review,
HM Treasury, Notification and Justification for Retention of the FSA’s Requirements on the
Use of Dealing Commissions under Article 4 of Directive 2006/73/EC Implementing Directive
2004/39/EC and Notification and Justification for Retention of Certain Requirements Relating
to the Market for Packaged Products under Article 4 of Directive 2006/73/EC Implementing
Directive 2004/39/EC (2007) (‘UK Article 4 Application’), pp. 12–13.
MiFID, Art. 3. 133 See also ch. 4.
In particular as not all personal investment firms fitting the ‘Article 3’ profile are MiFIDexempt as they have ‘opted in’ to MiFID authorization in order to benefit from the MiFID
‘passport’ (FSA, Review of the Prudential Rules for Personal Investment Firms (Consultation
Paper No. 08/20, 2008), p. 5.
FSA, Discussion Paper No. 07/4, FSA, Review of the Prudential Rules for Personal Investment
Firms (Feedback Statement No. 08/2, 2008) and FSA, Consultation Paper No. 08/20. The
reforms followed concerns that the pre-existing and complex regime was no longer fit
for purpose given failures in t