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The Failure of Industry Licensing to Keep the Market Informed: Obligation to Provide Financial Services ‘Efficiently, Honestly and Fairly’

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Promoting Information in the Marketplace for Financial Services

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Abstract

Failures, conflicts of loyalties and unevenness in the former occupational self-regulation which was in place for centuries has now given way to licensing regimes in industries and professions to ensure standards of qualification, expertise and conduct. Although some see licensing as ‘raising the drawbridge’ to protect those on the inside and to keep out newcomers, we argue that licensing is superior to alternatives like certification, negative licensing (to prohibit or exclude a person from the industry for specified reasons) and registration. This chapter examines licensing in the financial services industry to see whether it can be relied on as authority for disclosure to stakeholders. Failings in disclosure law are unfair to stakeholders and will impact on the market, investor confidence and the efficiency of the market. We dismiss the utility of the traditional static test of the ‘fit and proper’ person for a license holder to ensure disclosure. In contrast we see potential for disclosure in the operational statutory standards required of intermediaries to provide financial services ‘efficiently, honestly and fairly’. We see value in such operational standards as the basis and the authority for disclosure of information by intermediaries.

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Notes

  1. 1.

    See Chap. 8.

  2. 2.

    We use ‘broker’ in the everyday sense, as explained in the Dictionary above.

  3. 3.

    Law and Martin (2009).

  4. 4.

    See, e.g., Securities Industry Act 2011 (Bahamas) s 69 (registration requirement); Securities and Exchange Board of India Act 1992 (India) s 12; Securities Exchange Act of 1934 (US) s 15 (Registration and regulation of brokers and dealers).

  5. 5.

    Directive 2004/39/EC of the European Parliament and of the Council on Markets in Financial Instruments (21 April 2004) [2004] OJ L-145 1, Title II (‘MiFID’).

  6. 6.

    For example, authorization under Financial Advisers Act 2008 (New Zealand) Part 3 and licence under the Financial Markets Conduct Act 2013 (New Zealand) Part 5. The meaning is the same.

  7. 7.

    Financial Service Providers (Registration and Dispute Resolution) Act 2008 (New Zealand) (‘FSP Act’).

  8. 8.

    International Organization of Securities Commissions (2011), p. 180.

  9. 9.

    Turner (2001).

  10. 10.

    United Kingdom Government Report, Department of Trade and Industry (UK) (1985), discussed by, e.g., Pimlott (1985), p. 141.

  11. 11.

    For example, the Israel Securities Authority holds two examinations per year for license applicants, including subjects on law and ethics, accounting, statistics, finance and economics; see Israel Securities Authority (2013), p. 81.

  12. 12.

    Licensing also raises the issue of how to maintain balance between the efficiency and integrity of the market and the interference with freedom of trade by legislation which may create barriers to entry and industry self-interest.

  13. 13.

    Submission to the Ontario Securities Commission on Bill 75, the Securities Act, Toronto Stock Exchange 34 (11 October 1974), cited in Connelly (1979), p. 1265.

  14. 14.

    Financial Action Taskforce (2010).

  15. 15.

    See, e.g., Gellhorn (1956), pp. 144–152. But compare Friedman (1962), pp. 144–149 (noting that registration and certification more appropriately balance social costs and benefits than licensure).

  16. 16.

    See, e.g., Grundgesetz [Constitution] (Germany) Art 12 (Occupational Freedom).

  17. 17.

    Moore and Tarr (1989), pp. 119 and 134.

  18. 18.

    International Organization of Securities Commissions (2011), p. 181.

  19. 19.

    Enforcement pyramids are discussed in Chap. 6.

  20. 20.

    ASIC and Financial Planning Association of Australia Ltd (2002).

  21. 21.

    An Act to Restrain the Number and Ill Practice of Brokers and Stock Jobbers (1697) 8 & 9 Wm III (Imperial) chapter 32, in effect until 1708, discussed by Banner (1998), pp. 39 and 40; licensing in the UK of those dealing in investments was considered ‘attractive’ but was not supported in the Report of the Company Law Amendment Committee 1925–1926 (Greene Committee on Company Law, London, Cmnd 2657, 1926) para 92. http://www.takeovers.gov.au/content/Resources/other_resources/Greene_Committee.aspx. Accessed 10 June 2014.

  22. 22.

    Kansas Laws 1911, c 133, discussed by, e.g., Fischel and Grossman (1984), pp. 273 and 275.

  23. 23.

    In Australia, the origins of the regulation of dealers and investment advisers and their representatives goes back to the Securities Industry Act 1970 (New South Wales) and equivalents in four other states. All this state legislation was ultimately superseded by the national Corporations Act 2001 (Cth) as part of a national ‘one stop shop’ for corporate regulation.

  24. 24.

    In Canada, Manitoba was the first province to impose a licensing requirement for the sale of securities: Sale of Shares Act 1912, 2 Geo 5, chapter 75 (Manitoba). See, e.g., Securities Act 1990 (Ontario) (Part XI Registration). See further Anand et al. (1999), pp. 270–280. A new Canada-wide registration regime under Canada’s passport system (inter-province harmonization and recognition) commenced in 2009 for firms and individuals who sell securities, offer investment advice or manage investment funds.

  25. 25.

    Securities Industry Act 1973 (Malaysia), which came into effect in 1976; see, e.g., Malaysian Securities Commission (2004), p. 41.

  26. 26.

    The licensing requirements for those dealing in securities are one of the foundation requirements in the US under the Securities Exchange Act of 1934. Section 15(a)(1) requires the registration of any securities broker or dealer falling within the constitutional scope of the Act. Section 15(b) details specific grounds upon which such registration may be denied. See generally Coffee and Sale (2012), chapter 11 (Regulation of Broker-Dealers).

  27. 27.

    MiFID Title II. The regime applies to legal persons only. Member states can consider natural persons as investment firms under the regulation in exceptional circumstances, MiFID Art 4.

  28. 28.

    International Organization of Securities Commissions (IOSCO) (2010), p. 11.

  29. 29.

    International Organization of Securities Commissions (2011), p. 12.

  30. 30.

    See Chap. 2.

  31. 31.

    See, e.g., Lodge and McCauley (1983), pp. 267–270.

  32. 32.

    Such as Certified Financial Planner, which has been established as an international de facto standard, or Certified European Financial Analyst.

  33. 33.

    Friedman (1962), p. 149.

  34. 34.

    Gellhorn (1956), p. 148.

  35. 35.

    See Braithwaite (2009), pp. 439 and 441.

  36. 36.

    This can be a civil penalty (see, e.g., Corporations Act 2001 (Cth) s 206C) or an ancillary order to a conviction (see, e.g., Strafgesetzbuch [Criminal Code] (Germany) § 70).

  37. 37.

    Compare a ‘real’ licensing regime that prescribes the licensing requirements and allows the regulator to cancel the licence if the requirements are not met anymore.

  38. 38.

    Kapitalanlagegesetzbuch [Capital Markets Investment Code] (Germany) §§ 2, 44 (‘KAGB’).

  39. 39.

    FSP Act ss 5, 11.

  40. 40.

    FSP Act s 14.

  41. 41.

    Walker et al. (2010), p. 574.

  42. 42.

    See Chap. 2 above; Brandeis (1914), p. 92.

  43. 43.

    E.g., in New Zealand: Financial Markets Conduct Act 2013 (NZ) s 396(b) (financial market licensee’s directors and senior management must be ‘fit and proper’ persons). According to Bankwesengesetz [Banking Act] (Austria) § 5, the Austrian Finanzmarktaufsicht (Financial Markets Authority) has to assess the director’s professional qualifications and experience necessary for operating a credit institution. In the United Kingdom, the Financial Conduct Authority may only approve an application to perform a ‘controlled function’ under the Financial Services Markets Act 2000 (UK) if the applicant is ‘fit and proper’ (ss 59, 60).

  44. 44.

    Although some jurisdictions combine the ‘fit and proper’ test with minimum competency requirements.

  45. 45.

    E.g., in New Zealand: Financial Advisers Act 2008 s 33; in Germany: KAGB § 26(2) and Wertpapierhandelsgesetz [Securities Trading Act] § 31(1).

  46. 46.

    E.g., Europe: MiFiD Art 19(1); in Germany: KAGB § 26(2); in Australia: Corporations Act 2001 (Cth) s 961B.

  47. 47.

    In Australia, Corporation Act 2001 (Cth) s 961J.

  48. 48.

    In New Zealand, see Financial Advisers Act 2008 (NZ) s 39.

  49. 49.

    Carvajal and Elliot (2009), p. 4.

  50. 50.

    E.g., in Australia, Corporations Act 2001 (Cth) s 912A(1)(b), (c), (ca), (d), (e), (f); in Germany, KAGB § 20(1).

  51. 51.

    E.g., SEC investment advisers rules.

  52. 52.

    E.g. in Australia, Corporations Act 2001 (Cth) s 912A(1)(h); in Germany, KAGB § 29.

  53. 53.

    Vinals (2009).

  54. 54.

    International Organization of Securities Commissions (2011), p. 191.

  55. 55.

    See IOSCO Principle No 31, International Organization of Securities Commissions (IOSCO) (2010).

  56. 56.

    For discussion of responsive regulation, see Chap. 6.

  57. 57.

    International Organization of Securities Commissions (2005).

  58. 58.

    International Organization of Securities Commissions (2011), p. 195.

  59. 59.

    Eisenberg (2010), p. 257.

  60. 60.

    In Australia, this is the statutory ‘general obligation’ set out in Corporations Act 2001 (Cth) s 912A(1)(a), discussed below. These words evolved from the half-mention of efficient, honest and fair in the Rae Report in 1976—that ‘(t)he stock exchanges should be doing their utmost to ensure that … their members are providing honest, skilled, unbiased and efficient service’: Commonwealth of Australia and Senate Select Committee on Securities and Exchange (1974) (Rae Report) [15.6]. http://www.takeovers.gov.au/content/Resources/parliamentary_reports/downloads/aust_securities_markets_vol1.pdf. Accessed 10 June 2014.

  61. 61.

    National Companies and Securities Commission (Australia) (1985), para [7.32]–[7.33]; discussed Latimer (1987), p. 1.

  62. 62.

    Financial Markets Act 2012 (South Africa) s 32.

  63. 63.

    Securities Industry Act 2011 (Bahamas) s 75(a) (‘act honestly and fairly’).

  64. 64.

    Securities and Futures Ordinance 2003 (Hong Kong) s 168.

  65. 65.

    Securities Exchange Act of 1934 (USA) s 15(b)(7).

  66. 66.

    Financial Advisers Act 2008 (NZ) s 39.

  67. 67.

    MiFID Art 19(1).

  68. 68.

    International Organization of Securities Commissions (2011), p. 197.

  69. 69.

    Oxford English Dictionary online.

  70. 70.

    See the discussion in Chap. 2.

  71. 71.

    International Organization of Securities Commissions (IOSCO) (2010), p. 3.

  72. 72.

    Oxford English Dictionary Online. Accessed 10 June 2014.

  73. 73.

    See, e.g., Re Campbell and ASIC (2001) 37 ACSR 238; [2001] AATA 205, [117].

  74. 74.

    Farley v Australian Securities Commission (1998) 16 ACLC 1502 at [149].

  75. 75.

    See, e.g., van de Voorde (1988), p. 44; Duffy (2005), p. 621.

  76. 76.

    The Great Stock Exchange Fraud of 1814 involved conspirators providing false information that Napoleon I of France had been killed and that the Napoleonic wars were over. As a result of this good news, share prices on the London Stock Exchange soared in the morning, and fell in the afternoon when the government confirmed that the news of peace was false. The Committee of the Stock Exchange, suspecting that there had been deliberate stock manipulation, investigated and discovered a purchase the week before and later sale of more than £1.1 million of government securities.

  77. 77.

    R v De Berenger (1814) 3 Maule and Selwyn’s Reports 67, 72 and 73; 105 English Reports 536, 538.

  78. 78.

    Capital Markets Board of Turkey, Capital Market Law No 6362 Art 107/2. http://www.cmb.gov.tr/. Accessed 10 June 2014.

  79. 79.

    Garner (2009).

  80. 80.

    A court may be persuaded that the legislature has made a mistake, that the wrong conjunction has been used, that there is an absurdity or unintelligibility in reading ‘and’ as ‘or’, or that ‘or’ is truly cumulative and the whole class should be read together. It is sometimes necessary to read the conjunctions ‘one for the other’, see, e.g., Theobald and Benson Maxwell (1905), pp. 357–360; also, e.g., Pearce and Geddes (1996), [2.15]; Bartley (2000), pp. 62 and 63.

  81. 81.

    Story v National Companies and Securities Commission (1988) 13 NSWLR 661, 672.

  82. 82.

    Garner (2009), quoting Salmond (1947), p. 460.

  83. 83.

    International Organization of Securities Commissions (2011), p. 237.

  84. 84.

    MiFID Art 40(1).

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Authors and Affiliations

  1. Department of Business Law and Taxation, Monash University, Melbourne, Australia

    Paul Latimer

  2. TUM School of Management Technische Universität München, Munich, Germany

    Philipp Maume

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Latimer, P., Maume, P. (2015). The Failure of Industry Licensing to Keep the Market Informed: Obligation to Provide Financial Services ‘Efficiently, Honestly and Fairly’. In: Promoting Information in the Marketplace for Financial Services. Springer, Cham. https://doi.org/10.1007/978-3-319-09459-5_5

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