Investors’ protection in Financial Markets Paola Lucantoni Topics Law and Regulation European Community Securities Regulation Italian Securities Regulation Financial Market Financial market Differences with Banking products Insurance Securities-market participants Issuers of securities Corporations States Collective investment schemes Market intermediaries Investors Operation of the markets themselves

Market Primary market Issuers access to investors and to the securities markets Secondary market Transactions take place between investors after the initial issuer/investor transaction

Method Ec Securities Regulation – Italian Securities Regulation EC Treaty establishing the European Community art. 249 – binding EC rules can take three forms: Regulations: “A regulation shall have general application. It shall be binding in its entirety and directly applicable in all Member States”. Directive: “A directive shall be binding, as to the result to be achieved, upon each Member State to which it is addressed, but shall leave to the national authorities the choice of form and methods”. Directives are binding as regards the result to be achieved but leave the choice of form and method of implementation to the national authorities. Decisions: “A decision shall be binding in its entirety upon those to whom it is addressed”. Italian Securities Regulation: d.l. 58/98 and Consob Regulation on Issuers, intermediaries and markets

Something like a Cinderella in financial market regulation?

Who’s an investor? An individual “who purchases investment products, takes investment advice, carries out direct trading and, overall, engages in short-term speculation or long- term savings through market-based instruments”

Law in books & Law in action Law in books: regulatory regimes Law in action: innovative supervisory strategies, product design initiatives, retail market research, investor redress, and investor education.

EC Treaty objective of constructing a common market EC Treaty (Rome, 1957/amended in Maastricht, 1992 and in Amsterdam, 1997) art. 2: “The Community shall have as its task, by establishing a common market and an economic and monetary union and by implementing common policies or activities referred to in Articles 3 and 4, to promote throughout the Community a harmonious, balanced and sustainable development of economic activities, a high level of employment and of social protection, equality between men and women, sustainable and non- inflationary growth, a high degree of competitiveness and convergence of economic performance, a high level of protection and improvement of the quality of the environment, the raising of the standard of living and quality of life, and economic and social cohesion and solidarity among Member States”.

Wide project to create a single market EC Treaty, art. 14 (2): The internal market shall comprise an area without internal frontiers in which the free movement of goods, persons, services and capital is ensured in accordance with the provisions of this Treaty.

Specifically: the internal market in securities and investment services A single or integrated investment services and securities market supported by liberalizing measures within which investment- services providers and investors can access national markets across the EC and issuers can raise capital Result: broader and deeper capital markets

Finance system: raising of finance via capital or via markets The evolution of the integration project is a story of the movement of the EC from a predominantly bank-based finance system (as far as continental economies are concerned) towards a market-based finance system

Major obstruction to the internal market in securities and investment services and the primary preoccupation of EC regulation The regulatory barrier to market access represented by obstructive and diverging national securities- regulation regimes.

Why investment services and securities market are traditionally subject to regulation? In order to protect investors and the integrity and stability of the market-place itself

What dictates the intensity of regulation? Market structures Investor profiles Maturity of market-place Saving patterns Cultural attitudes towards regulation

Securities regulation is generally based On the need to correct market failures i.e. failures in the market’s self-regulatory mechanism which obstruct the efficient allocation to resources by an otherwise perfect market Asymmetric information issuers/ investors Intermediaries/investors Externalities In economics, an externality, or transaction spillover, is a cost or benefit that is not transmitted through prices and is incurred by a party who was not involved as either a buyer or seller of the goods or services causing the cost or benefit. The cost of an externality is a negative externality, or external cost, while the benefit of an externality is a positive externality, or external benefit. Instability-generating effects which can be caused when a participant fails