The Regulation of the Issuance of Structured Financial Products for Retail Investors

Structured financial products for retail investors (certificates) represent an important and growing market segment. During the financial crisis, especially due to the collapse of Lehman Brothers, these products reached a broad public awareness as many retail investors misjudged the risks of their financial investments and lost large proportions of their capital. With this in mind, the call for higher retail investor protection from false consultation grew louder and more insistent. Part of this project explores the question of whether stronger regulation of the issuance of structured products for retail investors is necessary. With regard to the theory of banking regulation, such a necessity could be attributed to the protection requirement of retail investors. In the context of structured products we aim to analyze to what extent issuers awaken (promote, encourage) biased return expectations in their sales brochures and how investors react to this. The aim of the project is to provide the first extensive (broad, comprehensive) study of sales brochures, examining the scenarios selected to illustrate the functionality of the products. This data will serve to determine whether the informational content is being systematically biased to an extent which would render appropriate regulation necessary. The project consists of two central parts: First, scenarios in sales brochures are analyzed analytically in order to find to what extent these are biased. Second, in an experimental part we analyze a possible link between investor assessment and scenarios in sales brochures which would imply a susceptibility of investors to biased illustrations.

Funded by Frankfurter Institut für Risikomangement und Regulierung e. V.