Reputation risk management in financial firms: protecting (some) small investors

Author:Rasheed Saleuddin
Position:Corpus Christi College, University of Cambridge, Cambridge, UK
Pages:286-299
SUMMARY

Purpose - This paper aims to provide an explanation and evidence for the recent lack of retail financial product failures in Canada in the face of a (formal) regulatory failure. Design/methodology/approach - The paper applies the literature on self-regulation and reputational risk management to a detailed investigation of the marketing ... (see full summary)

 
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Reputation risk management in
nancial rms: protecting (some)
small investors
Rasheed Saleuddin
Corpus Christi College, University of Cambridge, Cambridge, UK
Abstract
Purpose – This paper aims to provide an explanation and evidence for the recent lack of retail
nancial product failures in Canada in the face of a (formal) regulatory failure.
Design/methodology/approach The paper applies the literature on self-regulation and
reputational risk management to a detailed investigation of the marketing of nancial products to
Canadian retail investors. Internal approval processes for many different players in the retail nancial
industry were analyzed in detail primarily using interviews.
Findings – The author was able to identify associations between structures and policies at nancial
rms and outcomes for retail investors. Knowing that prevention is more effective than mitigation,
marketers of nancial products would generally welcome increased state intervention in terms of more
and better information disclosures.
Research limitations/implications The research contributes to our understanding of
self-regulation in nancial markets, specically addressing what rm characteristics may be related to
positive and negative outcomes for small investors in complex structured nancial products.
Practical implications Regulators may be able to imply the research ndings in selectively
allocating scarce resources to policing rms that may be more inclined to participate in riskier behavior.
Financial rms may be able to inuence the decisions relating to how regulations are designed and
implemented and which products are sold to which clients to minimize reputation risk.
Originality/value This is the rst time, to the author’s knowledge, that the reputation risk
management channel has been analyzed in terms of inuencing outcomes for retail (small) investors.
Keywords Regulation, Reputation management, Self-regulation, Investor protection,
Regulatory failure
Paper type Research paper
1. Introduction
This paper examines a regulatory regime for retail structured nancial products to
determine whether there are effective constraints on mis-selling. Based on new primary
research, including interviews with decision makers at a large subset of Canada’s wealth
managers and other market participants, I have analyzed rm characteristics and
internal approval processes for many different retail nancial rms. By also
accumulating data on actual product failures and some evidence of failures avoided, I
was able to identify associations between structures and policies at these nancial rms
and past outcomes from the marketing of complex, and arguably unsafe, nancial
investment products to retail investors.
The author wishes to thank Martin Lodge for his comments and support. The research that
resulted in this paper was self-funded.
The current issue and full text archive of this journal is available at
www.emeraldinsight.com/1358-1988.htm
JFRC
22,4
286
Journal of Financial Regulation and
Compliance
Vol. 22 No. 4, 2014
pp. 286-299
© Emerald Group Publishing Limited
1358-1988
DOI 10.1108/JFRC-11-2013-0040

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