Reforming Corporate Retail Investor Protection: Regulating to Avert Mis-Selling

The spate of mis-selling episodes that have plagued the financial services industries in recent years has caused widespread detriment to investors. Notwithstanding numerous regulatory interventions, curtailing the incidence of poor investment advice remains a challenge for regulators, particularly because these measures are taken in a ‘fire-fighting’ fashion without adequate consideration being given to the root causes of mis-selling. Against this backdrop, this book focuses on the sale of complex investment products to corporate retail investors by drawing upon the widespread mis-selling of interest rate hedging products (IRHP) in the UK and beyond. It brings to the fore the relatively understudied field concerning the different degrees of investor protection mechanisms applicable to individual retail investors – as opposed to corporate retail investors – by taking stock of past regulatory reforms and forthcoming regulatory initiatives as well as, more importantly, the conclusions reached by the judiciary in IRHP mis-selling claims. The conclusions are particularly interesting: corporate retail investors are in a vulnerable position when compared to individual retail investors. The former are exposed to a heightened risk of mis-selling, meaning that regulatory intervention should be targeted accordingly. The recommendations made as a result of these findings are further supported by insights emerging from behavioural law and economic theories. This book is aimed at researchers, lawyers and students with an interest in the financial regulation field who are keen to explore potential regulatory reforms to the investment services regime that address the root causes of mis-selling, and restore a level playing field amongst all retail investors.

Table of Contents:
PART I THE ILLUSION OF UNIFORMITY 1. Breadth of Investor Protection Regulation I. Why Regulate to Protect Retail Investors? II. Categorising Retail Investors A. Individual v Corporate Retail Investors B. Uneven Retail Investor Protection III. The IRHPs Mis-selling Scandal IV. The Case for Reform V. Brexit Considerations 2. Understanding Corporate Retail Investors and their Behavioural Biases I. Defining Investor ‘Vulnerability’ II. A Behavioural Law and Economics Perspective A. Overview of Behavioural Biases in Complex Investment Transactions B. Behavioural Economics and Corporate Retail Investors III. The ‘Consumer Responsibility Principle’ IV. Addressing Vulnerabilities and Biases 3. Applying Regulatory Reforms and Redress Avenues to the Case of Corporate Retail Investors I. The Regulatory Response to Retail Investor Protection Concerns A. The MiFID II Investor Protection Reforms B. The Retail Distribution Review (RDR) C. Changes to FCA Powers and Objectives II. The Limitations of the Redress Options Available to Corporate Retail Investors A. Regulatory Review and Redress Schemes B. The Financial Ombudsman Service (FOS) C. The Private Right of Action Under FSMA, Section 138D D. English Courts’ Reverence to the Rule of Law: The Principles of ‘Freedom to Contract’ and ‘Legal Certainty’ E. The Statutory Framework Surrounding Standard Form Contracts III. Concluding Remarks PART II THE REGULATORY AND LEGAL INTERPRETATION OF ‘INFORMATION’ AND ‘INVESTMENT ADVICE’ 4. Distinguishing between ‘Information’ and ‘Investment Advice’ I. ‘Information’ v ‘Investment Advice’ – A Regulatory Perspective A. The Distinction between ‘Information’ and ‘Investment Advice’ Under the MiFID Regime B. The UK Position II. Views from the Academic Universe and Consumer Bodies III. A Fair and Reasonable Perspective – The View of the Financial Ombudsman Service IV. The English Courts’ Interpretation of the Notions of ‘Information’ and ‘Advice’ V. Concluding Remarks 5. Championing the Written Contract as the Decisive Tool for Managing Expectations: A Focus on the Mis-selling of IRHPs to Corporate Retail Investors I. The Irrelevance of Investor Protection Objectives in Private Law A. Contractual Duty of Care in Advised and Non-advised Investment Transactions B. The Principle of ‘Assumption of Responsibility’ C. Misrepresentation Act 1967 and Unfair Contract Terms Act 1977 – The English Courts’ Emphasis on Legal Certainty D. Fiduciary Duties and the Establishment of a Fiduciary Relationship in the Context of Non-advised Sales II. Invoking the Doctrine of ‘Contractual Estoppel’ III. The Relevance of Alternative Doctrines IV. Concluding Remarks PART III CONCLUDING REMARKS AND RECOMMENDATIONS 6. Exploring the Co-extensive Relationship between Private Law and Regulation I. A Conceptual Approach to Co-extensiveness II. English Courts’ Approach to Co-extensiveness A. Merging Common Law Duties with Regulatory Standards B. Setting Apart Common Law Duties from Regulatory Standards III. Concluding Remarks 7. Regulating to Prevent Mis-selling: Proposals for Reform I. The Case for ‘Libertarian Paternalism’ II. Recommendations A. Compulsory Investment Advice for Retail Investors Transacting in Complex Investment Products B. Assessment of Product Complexity C. Introducing a ‘Retail Investor Charter’ D. Extending FSMA, Section 138D III. A Side-note on Unregulated Complex Products IV. Concluding Remarks