Protect individual investorsIndividual investors have long accused brokerage houses of manipulating stock prices in order to avoid early payouts for returns on investments in equity-linked securities. The argument was that the broker intentionally staged a bear raid to push prices down so the promised payments would not have to be made.
In a recent case, the investors were declared right. A district court in Seoul ordered Daewoo Securities to pay compensation to investors who had accused the company of heavy short selling in the stock that was linked to their ELS investment. The court ruled that the company cut the underlying stock price and investors’ chances of investment gains through early redemption. The hybrid instrument had promised higher-thannormal returns plus principal if the underlying equity price exceeded a certain share price on stipulated redemption dates. It is too early to lay all of the blame on the brokerage house since the ruling could still be overturned by a higher court. Daewoo Securities’ claim that their sale of the shares was necessary to raise the money to pay their investors seems legitimate.
But the real problem is the prevailing distrust that investors have in securities companies. Credibility is the bedrock of finance. If that trust is broken, the financial system could come crumbling down. At this point, financial companies have breached investor confidence far too many times. Consumer complaints about financial instruments have more than tripled over the last nine years. The credit derivatives known as knock-in knock-out options and money market funds rarely paid off according to contract terms. Meanwhile, insurance companies dillydally on payouts, citing various regulations. Many consumers were fooled by ads promising life insurance coverage with just a small premium payment.
This prevalent skepticism and mistrust need fixing before they wreak havoc on the entire financial system. However, the financial industry is primarily responsible for consumer mistrust. Under the current system, the deck is stacked in the financial industry’s favor. Today’s financial instruments are too mystifying and intricate for the average consumer to fully understand, and most consumers make investments based almost entirely on the advice of financial companies.
We need more mechanisms to protect investors. The United States has recently established a Consumer Financial Protection Agency as part of its efforts to reform the financial industry. We should also start thinking about enacting legislation and establishing a similar agency to inform and protect our consumers. We should start working on this immediately since consumer protection is a key item on the agenda for November’s G-20 Summit in Seoul.