Mis-Selling of Financial Products: How Are Investors Protected in Today S Marketplace?

Mis-selling of Financial Products: How Are Investors Protected in Today’s Marketplace?

ByPadma Venkat, CFA

Categories:Standards, Ethics & Regulations (SER)

Improving disclosures may not necessarily lead to informed decision making for retail investors, many of whom do not possess the knowledge or expertise to analyze the information provided to invest wisely. And when things go wrong, as we saw during the 2008 global financial crisis, investors soon realize they have little recourse.

That was the message echoed by all speakers at the recent CFA Institute-sponsored Investors Rights and Protection Forums in Dubai and Abu Dhabi, organized with the support ofCFA Society Emirates. As discussed at a similar event CFA Institute sponsored in Hong Kong last year, the consensus was that reforms to enhance protection for unsophisticated investors would be better directed at addressing product suitability and fair treatment.

At the recent events in the United Arab Emirates (UAE), panelists discussed the following:

• How financial products are currently approved and marketed by financial institutions in the region
• Role of regulators in protecting investors versus the challenges faced by private bankers and wealth managers in selling products
• Whether investor education would help prevent mis-selling of financial products
• Which remedies (if any) are available to retail investors both locally and internationally when they face problems of mis-selling

Moderated by Tony Tan, DBA, CFA, head of Standards and Financial Market Integrity for CFA Institute in the Asia Pacific, the panel discussions featured the insights of legal experts, regulators, and financial advisers. The Dubai panel featured Darren J. Robbins, partner at Robbins Geller Rudman & Dowd LLP, HusamHourani, partner at Tamimi & Co., PrasannaSeshachellam, director of supervision at Dubai Financial Services Authority, and investment adviser MitriBadr, CFA. The Abu Dhabi panel featured Daniel S. Drosman, partner at Robbins Geller Rudman & Dowd LLP, James Berry of James Berry & Associates, financial adviser Greg Pogonowski, and Abdul Kadir Hussain, CEO of Mashreq Capital.

Let’s start with the basics. There is no clear definition of what constitutes a high-net-worth investor and no licensing requirement for independent financial advisers in UAE, which can ensnare investors in a vicious circle. Indeed, although some investors have a high-risk appetite, they are not sophisticated in their understanding of leveraged and structured products. Meanwhile, inappropriate incentive structures for salespeople can lead to portfolio churning. All of these factors led to mis-selling of financial products prior to the 2008 crisis.

UAE Regulatory Landscape

Fragmented regulatory engagement and enforcement is still a major issue in UAE. Lack of adequate investor education coupled with no legal protection for investors (i.e., class-action lawsuits) has exacerbated the issue of mis-selling. This is in stark contrast to the United States, where billions of dollars were won for clients through class-action suits following the 2008 financial crisis. As one panelist stated, “suing a company for investor fraud not only compensates the victims but also deters future bad actors from committing fraud.” There have been some recent positive developments, including the launch of the Dubai International Financial Centre (DIFC) courts. Based on an independent, common-law judicial system with exclusive jurisdiction over all civil and commercial disputes within the DIFC financial district, it deals with sophisticated financial transactions. These courts have begun to provide better monitoring, enforcement, and avenues for redress for investors, but only among the DIFC-affiliated firms.

Looking at possible solutions, panelists recommend improving investor education and also training investment advisers to actively engage with clients during the lifespan of an investment. A key takeaway was the need to align the remuneration of the front office or the private bankers to the long-term interest of the client, with better fee disclosure and client commissions. The financial adviser will act with integrity when the “tone at the top” of the company is set to do business in a fair manner that keeps in mind the long-term interest of the client.

As one of the panelists pointed out, “financial advisers have a fiduciary responsibility to the client. They deserve to be compensated for success, but the success should be defined as a well-informed, well-invested client.” This will help to gain the trust and confidence of the customer, which in turn is directly linked to the investor’s experience with the financial product.

Until trust and confidence are restored, investors in UAE are practicing the simple rule of “caveat emptor” as if it were enshrined in law.