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cesr and consumers March 7, 2008

Posted by Bradley in : Uncategorized , trackback

CESR (which thus far has mostly focused its energies on consulting with financial market participants) today announced the publication of a new guide for retail investors on MiFID. The press release states:

The purpose of the guide is to explain, in clear and straightforward language, the new protections retail consumers will experience in buying financial services, following the introduction of this legislation across Europe. As a next step, this guide is expected to be translated into many languages by CESR’s Members, the national securities regulators. This is the first time CESR has developed a guide destined for consumers and it reflects CESR’s strong commitment to increase confidence amongst retail investors.

The guide states that a new consumer-focused website will be available later this year.

Rather oddly, the press release states that the guide’s objective is to increase confidence among retail investors and not to ensure that retail investors know their rights. And the guide is drafted in such a way that an investor would not really know what her rights are in a meaningful way by reading the guide. The guide chooses to be accessible to consumers by omitting the details. In one sense this is obviously necessary, but in another sense it is problematic. This is a perennial problem for those who communicate about complex rules to people who are not used to interacting with complex rules and raises the question whether we’d really be better off trying to make the rules simpler so we could avoid some of these translation issues.

The guide is published today in English and Hungarian and other versions are to follow. I don’t know about the Hungarian version but some of the English in the English version is a bit strange. For example the guide states:

Before providing you with an investment service, your firm is required to categorise you as a Retail
or Professional client. You will normally be categorised as a Retail client, a category which includes the majority of individuals.

I think that are trying to say that most customers will be treated as retail customers, and not that a customer will normally be classified as a retail customer, which suggests that under abnormal conditions she might be classified differently. And the description of the conditions under which a person may be classified as a professional client is unspecific:

Your firm will be able to categorise you as a Professional client only if you meet at least two of
the following conditions:
– you frequently carry out transactions;
– you have a large portfolio;
– you have worked in the field of investment services.

Here I think they would have been better off with more specificity. The directive states:

In the course of the above assessment, as a minimum, two of the following criteria should be satisfied:
– the client has carried out transactions, in significant size, on the relevant market at an average frequency of 10 per quarter over the previous four quarters,
– the size of the client’s financial instrument portfolio, defined as including cash deposits and financial
instruments exceeds EUR 500 000,
– the client works or has worked in the financial sector for at least one year in a professional position, which
requires knowledge of the transactions or services envisaged.

Does the vagueness of the guide really help the consumer to understand her rights. And even within the articulated aims of the document, which formulation would be more likely to enhance the consumer’s confidence?

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