ESMA imposes first temporary bans on investment products

In June 2018 the European Securities and Markets Authrity (ESMA) for the first time formally adopted new, temporary rules on the provision of contracts for difference (CFDs) and binary options for retail investors. ESMA temporarily banned the marketing, distribution and sale of binary options to consumers (effective from 2 July 2018), and has restricted the marketing, sale and distribution of CFDs (effective from 1 August 2018).

Binary options and CFDs are high risk investment products unsuitable for average consumers. They allow 'betting' on financial indices such as the price of gold, or currency will rise or fall over a fixed period of time, with such an uncertain outcome that they can also be classed as gambling products (see also an interesting article here). Binary options and CFDs became specially dangerous when their online marketing consumers as a way to get rich quickly took up. Unfortunately, instead of getting rich, 74-89% of consumers suffered detriment. As a result, countries around the world started to regulate, and ban these products, and now the EU has joined these efforts.

ESMAs action is landmark because it is the first time that an EU supervisory authority (ESA) has used its product intervention power. The ESAs that have been established following the financial crisis, has been vested product intervention powers to protect EU consumers from the marketing and sale of dangerous products. This power is provided in Article 9 of the regulations establishing the authorities (Regulation 1093/2010, Regulation 1094/2010, and Regulation 1095/2010) and has been concretized in more specific legal acts, such as Regulation 600/2014 of Markets in Financial Instruments (MiFIR). In this case ESMA relied on Article 40 MiFIR.

With its decision from 24 August 2018 ESMA decided to extend the prohibition related to binary options for another 3 months (effective from 1 October 2018), this time refining its approach, and excluding some types of binary options that it found not to impose a sufficient degree of risk onto consumers. The decision is limited to binary options and makes no reference to CFDs, restriction of which came into force a month later than binary options.

While ESMAs actions is undeniably a positive step towards improving the protection of consumers on EU financial markets, one may wonder why are the powers of the EU supervisory authorities limited in time? Binary options (at least some kinds of binary options) are not going to get to be better products. Should the EU supervisory authorities have extended product intervention powers, powers that would enable them to ban products from the EU internal market permanently?

Foreign currency exchange transactions connected to foreign currency denominated loans are not investments

Judgment of the CJEU in C-312/14 Banif Plus Bank Zrt. v Márton Lantos and Mártonné Lantos delivered on 3 December 2015 

The Hungarian District Court of Ráckeve (Ráckevei Járásbíróság) in  referred an interesting question to the CJEU: can the foreign currency exchange transaction be legally separated from the underlying foreign currency denominated loan, and if so, what are the implications for the consumer?

As we have reported earlier, AG Jääskinen first of all considered that the reference for preliminary ruling is inadmissible. However, should the CJEU decide to proceed on the merits of the case, AG Jääskinen was of the opinion that the CJEU should answer the question negatively. The AG disagreed with the referring national court that the foreign currency exchange can be legally separated from the underlying loan contract and be considered a separate, derivative contract, a forward currency transaction. 

The CJEU did consider the request for preliminary ruling admissible (see paras. 35-42), and following AG Jääskinen's opinion, ruled that foreign currency exchange transactions connected to foreign currency denominated loans are not 'investment services or activities' within the meaning of Art. 4(1)(2) of MiFID (para. 76). Consequently, consumers of foreign currency loans are not considered to be investors and do not enjoy the protection guaranteed by Art. 19 MiFID (para. 75).

First, the CJEU rejected that the transaction in question is an investment service or activity listed in section A Annex I of MiFID, because it is incidental to the granting and repayment of the loan (para. 55), and serves no other purpose than to perform the credit contract.

Second, the CJEU rejected the argument that the transaction falls within the scope of 'dealing on own account' under Section A(3) of Annex I MIFID, because this means trading proprietary capital that results in contracts for one or more financial instruments (paras. 58-59). In the present case however the transaction did not result in concluding a contract for a financial instrument. Instead, it served to secure the granting and the repayment of the loan (para. 60-61). 

Third, according to the CJEU, the transaction cannot be considered to fall under Section B of Annex I MIFID, under which a grant of  loan or credit may constitute an ancillary service, because this includes only loans granted for the purpose of concluding one or more contracts for financial instruments, and this was not the case here (para. 63-68).

Finally, the CJEU rejected the argument that the foreign currency exchange transaction falls under any financial instrument listed in Section C of Annex I MIFID, particularly futures. Futures, such as forward currency transactions, are a type of derivative where two parties undertake to buy or to sell, on a subsequent date, an underlying asset at a price fixed at the time of contract conclusion (para. 69). The transaction in question however does not serves the purpose of a sale of a financial asset at a price which is fixed at the time of contract conclusion. In fact, according to the CJEU, there is no distinction between the loan agreement and the future currency sales transaction, since the latter serves the performance of the loan contract, that is, the payment of the capital and the scheduled repayments (paras. 70-71). In addition, the value of the currency (that is to be taken into account for the calculation of repayments) is not fixed in advance.It is rather determined on the basis of the sales price of the currency on the date of each monthly installment (para. 74).

Consequently, 'clauses of such a loan agreement relating to currency conversion accordingly do not constitute a financial instrument distinct from the operation which is the object of the agreement, but merely a term of the agreement which is an inseparable part of the performance.' (para. 72). This also means that in foreign currency denominated credit contracts consumers may be protected by Directive 1993/13 on unfair contract terms and by on Directive 2008/48 on consumer credit (paras. 48-49), but not by MiFID.

As we can see, the CJEU did conduct a more thorough analysis than AG Jääskinen (perhaps it also had more information to rely on), but it arrived to the same conclusion. The CJEU thoroughly analyzed whether the foreign currency transaction meets the requirements of MiFID and did some unpacking whether elements for a forward currency contract are met. It is now clear that foreign currency exchange transactions are not separate contracts for financial instruments, and consumers do not enjoy the protection MiFID guarantees for investors. The question is whether this is detrimental for consumers given that they do enjoy protection under Directive 1993/13 (allows for challenge of fairness of foreign currency exchange clauses) and Directive 2008/48 (provides for information requirements). 

A different look at foreign currency loans? AG Jääskinen's Opinion in C-312/14 Banif Plus Bank Zrt v Márton Lantos and Mártonné Lantos

Opinion of Advocate General Jääskinen delivered on 17 September 2015

The Hungarian District Court of Ráckeve (Ráckevei Járásbíróság) in C-312/14 Banif Plus Bank Zrt. v Márton Lantos and Mártonné Lantos referred an interesting question to the CJEU: can the foreign currency exchange transaction be legally separated from the underlying foreign currency denominated loan, and if so, what are the implications for the consumer?

During 2008 when the majority of loans issued in Hungary were denominated in foreign currency, most notably in Swiss francs, the parties entered in a like loan contract for financing the purchase of a car. These contracts work in a way that the amount of the loan is agreed in a foreign currency (e.g. Swiss francs) but the loan is advanced and the repayments are due in the national currency (e.g. Hungarian forints). In Hungary this is due to Art. 231 of the Hungarian Civil Code of 1959 (that was in force at the time) that although allowed loans to be contracted in a foreign currency actual payments of any moneys owed had to be made in Hungarian forints, calculated based on the exchange rate applicable at the time and date of the payment. For this reason foreign currency loans concluded at the time contained a foreign currency exchange clause that set out the exchange rate (usually the banks buying or selling rate of exchange applicable at the date of exchange). Foreign currency loans thus shield banks from the currency risk of capital markets by transferring this risk on consumers in return for a favorable interest rate i.e. a (seemingly) cheaper loan. 

The referring national court was of the opinion that the foreign currency exchange can be legally separated from the underlying loan contract and be considered a separate, derivative contract, a forward currency transaction. This is because at the time the loan was granted, the bank calculated the equivalent amount of Swiss francs of the amount that was advanced in Hungarian forints at the exchange rate previously determined in the contract, then it purchased from the client the equivalent amount of Swiss francs at the determined exchange rate for the equivalent amount of forints. Later, at each loan repayment, the bank sold the client Swiss francs for the equivalent amount of Hungarian forints at the determined exchange rate (para 15). This according to the Hungarian court gives to a loan contract a possible capital markets dimension opening the interpretation of the concepts of financial instrument and investment activity under the Directive 2004/39/EC on markets in financial instruments - MiFID (para. 16).

Although AG Jääskinen is of the opinion the reference is inadmissible because essential information is absent, information important for the CJEU and interested persons entitled to submit observations to form clear understanding.of the factual and legal context of the main proceedings (para. 21), the AG does give an analysis if the CJEU would nevertheless proceed on the merits of the case.

AG Jääskinen is of the opinion the transaction at hand is not a derivative contract or a forward currency transaction and therefore does not fall under the rules of MiFID (para. 40). Derivative instruments or contracts (see the explanation of derivatives here) are used by one party for protecting against ('hedging') the risk and for speculative purposes by the other party. They work in a way that the future price, rate or value of the underlying asset is fixed beforehand (para 41). This implies that the actual price of the underlying asset (here probably the currency) is different from the contracted future one. This circumstance creates in the derivative instrument an independent economic value from the underlying loan (para. 42). According to AG Jääskinen this is not the case in the present situation. There is no independent economic value because the actual price and the contracted one does not differ, the exchange rate fixed in the loan contract is later used for the currency conversion without creating any added economic value. It is in essence a liquidation of a foreign currency denominated debt in a national currency at the date of payment (para. 43). 

Therefore, AG Jääskinen is of the opinion that the loan expressed in a foreign currency that is advanced and repayable in a national currency at the actual rate on the day of the payment is neither in itself or does it contain a financial instrument or a financial service within the meaning of MiFID (para. 46).

This in turn means that consumers of foreign currency loans are not considered to be investors and do not enjoy the protection guaranteed by Art. 19 MiFID (para. 48-49).

Although the analysis has many valid points and was particularly difficult due to the scarcity of essential information and the complexity of the issue, I somehow do not find convincing that there was no forward currency transaction, even if the conclusion may be correct. AG Jääskinen is of the opinion that we do not have an added economic value because the actual price and the contracted one are not different due to the fixed exchange rate in the contract. However, the characteristic of this derivative contact is exactly fixing the exchange rate for the purchase or sale of currency at a future date (see here). I might be wrong, but I would have expected to see an explanation of what this 'fixing' or 'lock in' means. Does fixing means giving an exact value i.e. a fixed price or is it enough to determine the benchmark at the time of contract conclusion (e.g. the banks selling rate at the date of execution)? If the latter is the case then why is the transaction not a forward currency contract? Second, AG Jääskinen starts from the fundamental point that MiFID is aimed at protecting investors. However, in his opinion consumers of foreign currency loans are not investors in the sense of MiFID because an investor is 'somebody who invests or intends to invest his own or borrowed capital in a financial instrument with a view of gaining revenue, or at least protecting the value of his capital' (para 37). In the present case the client did not intend to invest any capital but to borrow money. While this is true, the point that I missed here is that consumers are often 'tricked' into buying financial services and products they do not need (recall the UK PPI scandal), so the very fact that they did not intended to invest should not deny their protection guaranteed by MiFID.

Thus in my opinion a more thorough analysis would be necessary to decide on the merits of the case, including unpacking whether elements for a forward currency contract are met and touching upon a question whether debtors can be investors within the meaning of MiFID.

We will eventually see whether the CJEU will proceed to decide on the merits of the case (recall that in AG Jääskinen's opinion the reference in not admissible), but if it decides to do so, do you agree with the AG's reasoning?

Scope of required disclosure when buying securities - AG Sharpston in Timmel (C-359/12)

26 November 2013: AG Sharpston opinion in case Timmel (C-359/12)

It's a cliche but financial services are often complex and consumers often require more strict protection measures with respect to such services. Currently, many consumer protection measures rely on information duties (despite raising criticism of this instrument it is still predominant) and what kind of information is to be disclosed and in what form often is subject to lengthy disputes. In the Timmel case AG Sharpston gave its opinion on the mandatory information that needs to be revealed in a 'prospectus' to the public interested in purchasing securities. 

The Prospectus Directive requires such information to be conveyed that enables investors to make an informed assessment of the financial position of the issuer and of the rights attaching to the securities in question. Regulation No 809/2004 sets detailed requirements for the content and format in which information should be presented in a prospectus. Interestingly, while the Directive mentions certain information as mandatory, the Regulation allows the issuer of a prospectus to omit such 'required' information if it is not known at the time when a base prospectus is approved and can only be determined at the time of issue (Par. 38). Mr Timmel subscribed for Dragon FX Grant securities (drawn up by Lehman Brothers Treasury Co.), for which certain required information was omitted from the base prospectus and from a supplement to it. He argued that he had a right to withdraw from the contract due to not valid publication of the securities in question, which right of withdrawal is granted to consumer-investors (private persons acting on their own account, not on behalf of a company). The AG Sharpston considers the supplement to the prospectus as having a function of correcting any material mistakes or inaccuracies as well as revealing significant new factors (Par. 41). If the required information became known to the issuer after the prospectus has been published but would not materially influence the assessment of securities, it does not have to be revealed in the supplement but may be added to the final terms instead (Par. 51).

Not only the base prospectus or its supplements did not contain required information, but they were also not made publicly available. The documents could only be found and retrieved for awhile on the homepage of the Luxembourg Stock Exchange, following a lengthy and complicated registration process, upon which only two documents per month could be consulted free of charge. This contradicts according to the AG Sharpston the requirements of Art. 29 Regulation, pursuant to which a base prospectus should be easily accessible to an investor when entering the website (Par. 68).

Additionally, the AG clarifies the issue as to where the base prospectus must be made available: at the registered office of the issuer and at the offices of the financial intermediaries (Par. 84).

Assuring informed choice in life assurance contracts - EFTA court (E-11/12)

On 13 June this year the EFTA court gave a judgment in the case Koch, Hummel and Müller v. Swiss Life (E-11/12) which concerned the duty to inform and the duty to advice in life assurance contracts, as regulated by the Consolidated Life Assurance Directive 2002/83/EC and the Insurance Mediation Directive 2002/92/EC. 

The case was referred to the EFTA court from the Principality of Liechtenstein where the defendant, a life assurance company Swiss Life was registered. The plaintiffs were German and Austrian national residents who independently concluded unit-linked life assurances with Swiss Life. In all cases, the parties agreed on a type of investment "as per the attached investment strategy". The plaintiffs paid assurance premiums which were then invested by Swiss Life as cover funds, in accordance with investment strategies. Unfortunately, these investments have not been successful which led the plaintiffs to claim damages from Swiss Life, mainly on the grounds that they were not able to estimate the level of risk involved in the investment, and that there was no transparency in the products' structure. It was established that Swiss Life did not inform the plaintiffs about the relevant investment products, but it claimed that it were the plaintiffs who put a request for these particular investment strategies to be included in their contract (Par. 36).

The relevant legal questions were: whether Swiss Life had a duty to advice the plaintiffs on investment strategies and whether there was a duty to inform about the unit-linked assurance products and their risks?

The EFTA court considers that Life Assurance Directive intends to protect consumers by granting them a right to informed choice (Par. 62). Life assurance contracts are perceived by the court as generally complex and detailed, which may make them difficult to understand for the average consumer (reasonably well informed and reasonably observant and circumspect). Additionally, such contracts often bring about serious financial consequences for consumers over a long period of time. Both these factors convince the court that transparent information on these contracts is crucial to consumers (Par. 63). The consumer must, therefore, "be provided with whatever information is necessary to enable him to choose the contract which best meets his requirements" and the Directive's information requirements should only be seen as a minimum standard that needs to be fulfilled (Par. 64-65). However, the Directive does not impose a duty to advice on the assurance company (Par. 69, 72) and instead trusts in the ability of an average consumer to compare essential elements of the contract as long as he is provided with clear and sufficient information (Par. 70). Notwithstanding the above-mentioned, national legislators could impose such a duty to advice on assurance companies (Par. 75).

Since the performance of the duty to inform is seen as crucial to guarantee consumer protection, it does not surprise that consumers do not need to look themselves for information and instead may await this information being given to them by service providers. The EFTA court states that the relevant information on the units to which benefits are linked should be given to consumers in writing prior to contract's conclusion, and it may not be required of them to use a search engine to find and access the necessary information (in compliance with the Content Services, CJEU case) (Par. 96). The information should be clear, complete and accurate and allow consumers to define the units to which the benefits are linked, and to describe the nature of the underlying assets (Par. 102). At the same time, it does not matter who provides the consumer with the relevant information - the assurance company or an insurance intermediary (Par. 110). What is important is that the consumer gets necessary information and not who he gets it from.

Are KIDs going to be relevant when they are finally adopted?

The summer holiday season has not yet started for the EU institutions (even if it might have begun for some of the authors of this blog). Last week the European Council reached an agreement on the new rules that would protect consumers when they enter into PRIP contracts - for packaged retail investment products (such as, for example, investment funds, life insurance policies). The EU institutions want to increase the transparency of such contracts, in order to strengthen consumer trust in the financial market. It only took 1 year for the European Council to agree on the rules proposed by the European Commission. (see our earlier post: Investing consumers should be treated...) Since this type of financial contracts is often quite complex in its drafting, consumers are often unable to understand what they are agreeing to when they conclude such a contract. Not only would they then have difficulties in assessing the contractual risks but also they may not be able to effectively compare offers of different companies, when trying to choose the best one for them. New rules would require certain key information (such as the nature and features of the product, costs and risks profile, performance information, whether it is possible to lose capital) to be given to consumers in a specific, uniform format and content. In order not to overburden consumers, only such key information would be contained in these documents (KIDs). Additionally, Member States would need to guarantee an effective right of redress to consumers. The legislative process on these rules will continue in the European Parliament now. (Council sets out its position on transparency rules for investment products)

 

Coincidentally, most of the authors of this blog have just listened to a presentation on the risks of financial services by Sothi Rachagan, president of the International Association of Consumer Law, given as an opening speech of the Association's bi-annual conference, in Sydney. One of the points that was raised in the presentation was that regardless the measures that we would take to inform or educate consumers about the risks of financial products, consumers would still not be able to protect themselves from them. The complicity of financial products and information on them (even if simplified) is just too overwhelming even for the well educated consumers. It was suggested that instead of further regulating mandated disclosure, other regulatory measures should be taken in order to protect consumers (e.g., limits could be set on the amounts that could be invested/ borrowed by consumers depending on their financial situation). The readers may wonder whether by the time KIDs are adopted in Europe, they would be seen as a pre-historic measure of consumer protection.

Objectivity of financial advice to consumers still not a given

Last week BEUC issued a press release in which it expressed its concerns about the European Parliament's plans to update the MiFID (Markets in Financial Instruments Directive). (Consumers left stranded: self-serving financial commissions survive EU vote) The draft of the EP's Economic Affairs committee apparently permits financial intermediaries to keep all their commissions and incentives received from the parties they are representing, as long as they disclose to consumers that they have received them. This system of disclosure is not seen as guaranteeing sufficient protection to consumers, taking into account the often aggressive practices that intermediaries use to sell the product from which they are themselves earning the most, and not the one that would be the most suitable for the consumer. Another proposal that may endanger consumers is the qualification of certain investment products as 'non-complex' at a European level (e.g. Undertakings for Collective Investment in Transferable Securities - UCITS), which would reduce the level of advice and warning about their risks that needs to be provided to consumers.

Investing consumers should be treated like/with (cross out inapplicable word) KIDs

Yesterday the European Commission presented a new legislative package that is supposed to restore consumers' faith in the financial services. It is an ambitious undertaking, no doubt, taking into account the consumer experience of the last few years with one financial crisis following another and big financial companies failing to provide much needed security and reliability. Many consumers found themselves in financial troubles due to wrong information or financial advice they had received, which often led them to invest in unsuitable for them financial products. To prevent this from happening again, an action at a European level was deemed to be necessary.

"In the aftermath of the biggest financial crisis in recent memory, the financial sector must place consumers at its heart. Retail products must be safer, information standards must become clearer, and those selling products must always be subject to the highest standards. That is why we have adopted a package solely dedicated to consumers, so that they can choose financial products based on clear and sound information and professional advice which puts the consumer's interests first." said Internal Market and Services Commissioner Michel Barnier (Commission proposes legislation to improve consumer protection in financial services)

And so, the European Commission presented three new documents: a proposal for a regulation on key information documents for packaged retail investment products (PRIPS), a revision of the Insurance Mediation Directive (IMD), and a proposal to boost protection for those who buy investment funds which is governed by the Directive on Undertakings for Collective Investment in Transferable Securities (UCITS). The first two of these documents are especially relevant for consumer protection so let's take a closer look at them.

PRIPS

Anyone who ever tried to make an investment knows that financial products are, ehm, complex (this really is too mildly put). In order for consumers to understand what they may expect from a given financial product and what risks they are taking on themselves the information provided to them has to be more transparent and comprehensive. This proposal aims at improving quality of such information by introducing a new, innovative standard for product information. It is intended to be short, plain-speaking and consumer-friendly. Every investment product (investment funds, insurance-based investments, retail structured products, private pensions, etc.) will need to have such a document attached to it. I just love the new name for it: KID - Key Information Document. Let's be honest, most of us have a childlike approach to financial matters - lots of faith in things ending up right even if we climb that highest (financial) tree branch without any security. Each KID will convey information on the product's main features, risks and costs associated with the investment in the product. The intention is to make it clear to consumers whether they can lose money on that product and to show them its complexity. Consumers will easily be able to compare KIDs of different investment products since they will follow the same structure, content, presentation. More information on this proposal may be found here.

IMD

Another matter that often leaves consumers flabbergasted is the risks associated with taking an insurance cover. Most often taking an insurance is seen as purchasing more security, without realising that it may also endanger consumers' interests. Anyone who studied law knows that insurance law is not a thing to trifle with, but consumers often remain blissfully unaware of its complexity. The EC aims at revising the IMD which regulates selling practices for all insurance products. Currently, the Directive applies only in cases when insurance was bought through an intermediary, but the revision aims at giving the same level of protection to consumers regardless of the character of the person they had purchased the insurance from. Moreover, sellers of insurance will need to inform consumers of their professional character, links to the insurance company as well as reveal their remuneration for selling an insurance cover. Most importantly, a professional, honest advice will have to be given to consumers interested in purchase of insurance products. Currently, more than 70% of insurance products are sold without appropriate advice. More information on this document may be found here.

How do consumers choose their financial products?

Shortcomings of a financial market to be healed by a short selling regulation

In May this year we reported that a draft Regulation on short selling and credit default swaps (Short selling regulation?) is being prepared by the European institutions. Last week an agreement has been reached between the Council and the Parliament on this matter and only a formal endorsement lacks before this Regulation enters into force. The new rules are supposed to increase transparency, responsibility and stability in short selling transactions that are so often difficult to understand by consumers. After the regulation is enacted the short positions will need to be disclosed to regulators and they will have the power to limit short selling on a temporary basis in exceptional situations. This regulation is one of the measures that is seen as necessary to restore a healthy financial market and prevent future financial crisis (since short selling was seen as an aggravating factor in price declines in distressed markets).

"In a welcome improvement to our original proposal, so-called "naked" sovereign CDS positions will be prohibited where sovereign CDS are not acquired to hedge an exposure which is correlated to the value of the sovereign debt. The restriction will not apply to primary dealers and market makers. A competent authority will be able to temporarily suspend these restrictions where it believes, based on objective elements, that its sovereign debt market is not functioning properly and that such restrictions might have a negative impact on the sovereign credit default swap market. These balanced measures will ensure that sovereign CDS are used for the purpose for which they were designed, hedging against the risk of sovereign default, without putting at risk the proper functioning of sovereign debt markets." (Commissioner Michel Barnier welcomes trilogue agreement by Council and Parliament on new rules for short selling and Credit Default Swaps).

See FAQ for more details on this new regulation.

Short selling regulation?

While the European Parliament works on funny videos that declare its resolution to fight against the financial crisis (see earlier post), the Economic and Financial Affairs Council agreed on a general approach on a draft Regulation on short selling and certain aspects of credit default swaps (on the 17th of May). This means that serious negotiations on this Regulation may now start with the European Parliament (and it will get its chance to make good on his resolution).

Short selling is one of the financial instruments that tend to be misleading and misunderstood by consumers. It basically allows consumers to sell a security that they do not own, but that is promised to be delivered, with the intention of buying it back later. What's the point of this practice? If the security price drops between the time the consumers short sell it and buy it back, the consumers make a profit from that price difference. Short selling is common for share trading but it can also be used for other financial instruments, e.g. government bonds. There are also two types of short selling: covered and uncovered (or naked - where at the time of the short sale the consumer has not borrowed the securities).

The European Regulation on short selling is something that is definitely missing in order to harmonize financial markets within Europe. It would guarantee common transparency rules (e.g. need to disclose net short positions either to regulator or, at a higher threshold, to the market) and would harmonize powers that regulators may use in exceptional situations, e.g. where there is a serious threat to financial stability (e.g. temporary powers to require more transparency or to restrict short selling transactions). Moreover, naked short selling (the more risky type) would be forbidden (with exception for short selling of sovereign debt).

Press release may be found here.

Inside Job

I've seen yesterday the documentary "Inside Job" that has won an Oscar for the best documentary of 2010. It is a documentary about the financial crisis directed by Charles H. Ferguson explaining how changes in the policy environment and banking practices contributed to the financial crisis of the past few years. It shows clearly that if certain changes had been made, warnings listened and followed, corruption restricted - the financial crisis could have been avoided. The movie introduces certain financial instruments and explains clearly the risks involved with them, it follows year by year developments on the financial market, shows when the first warnings were given by economists as well as presents lack of political response to them. What caught most of my attention were the interviews with various reknowned economists who 'happened' to also be consultants either of the US government or/and major financial companies and banks. Presented in this movie their ignorance as far as morality of certain choices they had made is astounding. And it ends on a scary note: nothing seems to be changing in the US financial policy despite election promises of Obama...

I recommend this movie to anyone. I think it's interesting both for people who have in-depth knowledge as to financial markets, as well as regular consumers who are thinking about investing on the financial market or taking mortgages. Of course, you need to be a bit wary since this movie is definitely leaving you with a certain view that they intended to inflict upon you: bankers are corrupt and care only about their own money, and not about their clients' interests. Still, one cannot help but wonder how much of what is presented in it is more of a rule than an exception.

New measures aiming at enhance financial consumer protection in Europe through prudential regulation

EU negotiators reached agreement on a package of measures to beef up supervision of the bloc's banks, giving new EU watchdogs a mandate to overrule national authorities and ban risky financial products that were widely blamed for the world's worst recession in decades.

Negotiators from the EU's three institutions - the EU Council of Ministers, the European Parliament and the European Commission - reached a political consensus on the package. A European Systemic Risk Board (ESRB) and three new European Supervisory Authorities - a European Banking Authority (EBA), a European Insurance and Occupational Pensions Authority (EIOPA) and a European Securities and Markets Authority (ESMA) - will form part of the new architecture of financial supervision agreed on September 2. The trio of new financial watchdogs will be complemented by a group attached to the European Central Bank that will keep watch for other economic risks, like a property price bubble.

In the European debate, where regulation is aimed at protecting the consumer a distinction can be made between prudential regulation(based upon the idea of information asymmetry and concerned with soundness, solvency, safety and of banks and may apply even if there is not systemic risk) and conduct of business regulation(that focuses on how banks conduct business and self regulation with their customers) which also raise questions related to the legal status and binding character of this codes.

Definitely, this new supervisory architecture is a step forward to protect consumers against toxic financial products. More information is available on EurActive.com