05 Sep 2014

A Life Cycle Approach to Investor Protection

Mirzha De Manuel / Diego Valiante

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The market for investment products, including both securities and investment funds, is fraught with difficulties for consumers in terms of the ease of comparing products, trust in suppliers and consumer satisfaction. A comprehensive approach to investor protection, developed around the lifecycle of a financial product, may offer the investor greater protection during an investment’s life span. This paper proposes a new approach to investor protection, building on a review of major market failures affecting the origination, distribution and sale of financial products and based on a review of the relevant scientific literature and country experiences. The application of a ‘know-your-product’ principle at origination, a narrower ‘default rule’ for best execution and an ex-ante distinction between advice and ‘information-only’ services are among the options discussed in this paper to enhance the investor protection framework over the lifecycle of a financial product.

Mirzha De Manuel Aramendía is Director of Capital Markets Policy at the CFA Institute and Diego Valiante, Ph.D. is Fellow and Head of Capital Markets Research at the Centre for European Policy Studies (CEPS).