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Can we prevent further turmoil in the market?

April 16th, 2008 · Greg Atkinson · 1 Comment

As the casualty list from the stock market fall grows, the call for tougher regulation becomes louder. But will tougher laws and regulation really help? Can we prevent investors losing money via financial scams and corporate failures?

Here is a newsflash…stealing a car is illegal but alas cars are still stolen. We have laws in place, police forces, courts, jails etc. but yet cars still get stolen. In fact in Sydney for example, we have seen in recent years the rise of car jackings and so it seems car theft is here to stay.

So why do we expect regulations and laws will prevent dubious activities in the financial services sector or corporate world? No matter what regulations are put in place some people will ignore the rules or find a way around them…just as car thieves find a way to beat the latest car alarms.

However I have some suggestions that could ease future pain and make things a little safer for us all.

1. Clearer warnings on Product Disclosure Statements (PDS)

How hard would it be to start off at the beginning of all PDS’s with a very clear summary of what could go wrong and how the investor could be burnt in “plain English? Instead of having to find these details on page xx of the PDS why can’t we have some short snappy sentences on page 2 (with a reference to the details on the following pages). For example “the returns mentioned in this PDS are subject to exchange rate fluctuations and cannot be guaranteed. Please see page xx”, or:

“this is an advanced financial product only suitable for experienced investors. There is a risk that the investor may lose all his/her capital by investing in this product”.

I think you can get the idea. It is a bit like those user manuals that say do not attempt the service this equipment yourself. A few clear, concise warnings might save a few people their savings.

2. A review of the roles of the ASX.

Maybe we should have a look at the way the ASX pushes various products. Do we need better supervision of the ASX? Do investors really understand the role of the ASX? Should we have the ASX being both the sales team and the self regulator…I think not.

3. Improve the cabilities of ASIC.

Let’s have a look into how we can improve ASIC but not rush to any conclusions and blame ASIC for the greed or misdeeds of people and companies. That may be like blaming the police because you car was stolen. Remember there are a lot of honest organisations that do not need (or deserve) more regulation.

However just as more police on the streets would probably help reduce the number of cars being stolen, I also suspect a few more compliance officers at ASIC would also help keeping the financial and corporate world a little more in check.

4. Financial advisers need to be pulled into line.

If someone in essence sells you a financial product then they are in sales…they are financial salespeople not advisers. The current system where we have people running around called advisers or planners is misleading in cases where these people are getting trailing commissions etc.

This situation has caused much of the pain out in investorland in cases where people were essentially sold products that gave the “adviser” the best commission rather than what was best for the client. This is one area where ASIC needs to take action and where better regulation is required. (better does not mean more)

However even if concrete actions were taken in all the areas I suggested investors will still lose money in scams and in future corporate failures etc. Often we are cause of the problems ourselves as we chase higher returns for our money and thus we create the demand for riskier investments and products.

There will be further corporate collapses, there will be further scams and investors will be burnt again just as bad at some time in the future as they are now. So keep this in mind always and tread carefully. Do not expect regulations and laws to keep all your investments safe.

1 response so far ↓

  • 1 Greg Atkinson // Sep 4, 2009 at 2:09 pm

    Well it seems the Federal Government has addressed my concerns about the roles of the ASIC and the ASX. Recently it was announced that ASIC will take over some of the market supervision currently undertaken by the ASX and I think this is a good move.

    Hopefully we will see also some measures taken to improve the warning in PDS documents and the spotlight put on financial planners as well.

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