II. Areas, Systems and Methods of Domestic Regulation of Financial Markets

A. Classical areas of financial law

Financial regulation is not complete. It does not cover the entire reality of financial markets. There have always been some areas willingly left unregulated by states in order not to hamper the innovative talents and potential of financial actors. In other areas, there was concern and the need for regulation and supervision was recognized and dealt with. Whether or not areas have been regulated largely depends upon historical antecedents: it is accidental. Most often, financial legislation was enacted after innovative dealings got out of hand and created a crisis. As a result, the matters that are covered by financial legislation do not in any way form a logical or consistent system. The same applies to the content of the legislation: sometimes it addresses the quality of financial actors, sometimes information asymmetries, sometimes market behaviour, and sometimes the infrastructure of the market.

The typical way to regulate financial markets is to demand that actors comply with certain defined conditions. These actors are different financial intermediaries, such as banks, fund managers, brokers, or investment advisers. Underlying their regulation and supervision may be varying concerns. Chief among them is the risk that they might embezzle the funds of their clients or give false advice. Traditional instruments by which financial intermediaries are controlled include the requirement to register and the obligation to turn over certain information to the supervisory authorities.

For some actors, the legal requirements go further, cutting deeply into their organizational structure. This is particularly true for banks. Although banks are in some ways the archetypal financial actors, definitions vary as to what legally makes a bank a bank. There is an abundance of different activities that may constitute

‘banking’.[1] Nevertheless, it can be said that the central reason why banking is regulated in modern societies lies in the risk of the bank not being able to return the funds of its customers when requested to do so. This concern has led to the requirement of obtaining a licence in order to enter the banking business, and to stringent prudential requirements such as those on capital adequacy and liquidity.[2] Since these measures alone are not sufficient to create the necessary trust in credit institutions, most states have added guarantees partly securing the deposits of customers; these deposit insurance schemes exist in various legal systems.[3] Often they are state-sponsored, but are partly supplemented by voluntary or mandatory private guarantees.

The regulation regarding information asymmetry is designed to counter the marked difference between the two sides of the market, i.e. between the issuers of financial products on one side, and the buyers of financial products on the other. In order to balance such asymmetries and to provide both sides with a fair amount of information, different measures have been adopted. Chief among them is the requirement to make a prospectus available to the client.[4] Accounting and auditing rules pursue similar goals: they aim at providing the investor with accurate information about the issuer. Another measure that pursues a similar purpose is to impose specific fiduciary duties on intermediaries who sell financial products.

Financial regulation of market behaviour sets the basic rules on what is and what is not allowed in the marketplace. Remarkably, these rules are applicable to everyone, not only those who offer financial products, but also the buyers. Examples of behavioural rules are provisions on insider trading and other fraudulent practices.[5]

Finally, the regulation regarding the financial infrastructure addresses the technical basis of the market, e.g. exchanges or trading platforms. Mostly, this technical basis is the product of private initiatives. Individual actors also contribute to the creation of the norms and standards that are vital for the functioning of the market’s infrastructure. However, since a breakdown would create considerable risk for the stability of the whole financial system, modern legislation has set up some minimum requirements as to the operation of these mechanisms. One example is the regulation of exchanges or clearing houses.[6] A number of these requirements concern the qualities and the organizational structure of the entities themselves in their quality as financial intermediaries and can therefore be considered actor- specific legislation. However, one can also find provisions that govern their transactions, such as clearing and settlement.

  • [1] See e.g. European Parliament and Council Directive 2006/48/EC on the taking up and pursuit ofthe business of credit institutions, OJ 2006 L 177/1, art 4(1) (defining a credit institution as an‘undertaking whose business is to receive deposits or other repayable funds from the public and to grantcredits for its own account’ or an ‘electronic money institution’). Contrast this with the definition ofbanks in US case law, see e.g. Exchange Bank of Columbus v Hines, 3 Ohio St. 1 (1953) (holding that‘the business of banking, in its most enlarged signification, includes the business of receiving deposits,loaning money, and dealing in coin, bills of exchange, etc., besides that of issuing paper money’);Brenham Production Credit Association v Zeiss, 153 Tex. 132, 264 S.W.2d 95 (Tex., 1953) (holding that‘the primary function of a bank is to serve as a place for safe keeping of depositors’ money’); CityNational Bank v City of Beckley, 579 S.E.2d 543 (W.Va., 2003) (holding that ‘having a place ofbusiness where deposits are received and paid out on checks, and where money is loaned upon security,is the substance of the business of a banker’).
  • [2] See e.g. in the USA: Bank Holding Company Act 1956, 12 USC xx1841ff, Annex A; in the EU:Directive 2006/48/EC, above n 4, arts 9 and 10.
  • [3] For a comparative overview, see Asli Demirgu^ -Kunt and Edward J. Kane, ‘Deposit InsuranceAround The Globe—Where Does It Work?’, World Bank Policy Research Working Paper No 2679,2001.
  • [4] See e.g. in the USA: Securities Act 1933, 15 USC x77e(2)(b), Section 5(2)(b); in the EU:European Parliament and Council Directive 2003/71/EC on the prospectus to be published whensecurities are offered to the public or admitted to trading, OJ 1003 L 345, at 64, art 3(1).
  • [5] See e.g. for the USA: Rules 10b-5 and 10b5-1, 17 CFR x240.10b-5; for the EU: EuropeanParliament and Council Directive 2003/6/EC on insider dealing and market manipulation (marketabuse), OJ 2003 L 96/16.
  • [6] See e.g. in the USA: Securities Exchange Act 1934, Sections 5 and 6,15 USC xx78 e and f; in theEU: European Parliament and Council Directive 2004/39/EC on markets in financial instruments (MiFID), OJ 2004 L 145/1.
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