Legal Regulation On The Mis-selling Of Financial Products

In the trend of financial deregulation in recent years, as cross-industry competitionsand competitions among foreign and domestic institutions intensified, financialinnovations continually strike the financial regulation. Mis-selling of financial derivatives,the fuse of the subprime crisis in2008, especially stirs our self-reflection."Lehman CreditLinked Notes" storm in Hong Kong,"Accumulator door" and "Goldman Sachs fraud case",all of these, reflect the mis-selling practices of financial institutions. The traditional "letthe buyer beware" principle of financial market has been challenged, the matter of how theseller to undertake the responsibility has drawn the attentions of the legislatures of manycountries.Two mis-selling practices present in the process of the financial products trade. One isfinancial institutions act in violation of the suitability rule to promote unsuitable financialproducts to the ordinary investors. Another one is the breaching of the obligation ofinstructions. Financial institutions don’t instruct, misrepresent or mislead information tothe investors and so on. These undue practices often intertwined that may damage theinterest of ordinary investor easily. Under the background of horizontal regulation of thefinancial products and practices, and whereas the particularities of the financial productsand the substantial disadvantaged status of investors, it is necessary to bring the individualinvestors into the category of financial customers and use orientated regulation design toregulate the misconducts of financial institutions, further protect the lawful right of thefinancial customers fully. This thesis will analyze the misconducts in the process offinancial products trade for the perspective of the protection of the interest and right ofinvestors that center on the suitability rule and obligation of instruction.There are four parts of this thesis to discuss the topic:The first part of this thesis is the general analysis of the financial products. The firstsection is specifying the definition of the financial instrument and financial customer thatwill be discussed in this thesis, meanwhile, the definition of the financial products will beconfined to investment financial products. The reason of why we should protect thefinancial customers will be obtained by the summary of the characters of the financialproducts. The detailed discussion of the suitability rule is the second part of this thesis. Throughthe definition and contents of the suitability rule, I will analyze the development of thisrule and the process of how the rule is embodied in the laws of different countries to getthe suitability rule of America has developed from the self-regulation to legally bindingrule, and the suitability obligation of security sellers has become from a moral rule to alegal obligation, so investors can get the route to pursuit the direct way of legal remedy.But, as a civil law country, Japanese legislatures turn the suitability rule into law as theneed of society. Even though, the ways of these two countries are different, but theconsequence is same. All of them are to elevate the suitability to enforceable regulationand make the obligation of suitability to be legal obligation. Making suitability rule to be alegal binding law is important to protect the lawful rights and interests of investors fromthe mis-selling conducts of the financial conduct. Then, to continue the above discussion,the thesis analyzes the contents and the objects of the suitability rule by combining theanalysis of case, so we can see the different degrees burdens of the suitability rule imposeson different kinds of investors.The third part of the thesis includes the discussion of the obligation of instruction. Thispart will show the development of obligation from the "let the buyer beware" principle tothe "let the seller beware" principle to establish its definition and instruction of its contentin detail through learning the regulation of the obligation of instruction of the legislationof Japan. The last section of this part is the different types of breaching of the obligation ofinstruction and legal remedy.The fourth part is the analysis of the recent state of the legislation of the suitabilityrule and obligation of instruction of China and the summary of the limitation anddeficiency of Chinese regulation. This thesis will come up with some ways to perfect thesuitability rule and obligation of instruction for the perspective of suitability rule,obligation of instruction and mixed supervision on the base of this analysis and learningthe mature experiences of other countries.