Reputation risk management in
nancial rms: protecting (some)
Corpus Christi College, University of Cambridge, Cambridge, UK
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, specically 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 inuence 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 inuencing outcomes for retail (small) investors.
Keywords Regulation, Reputation management, Self-regulation, Investor protection,
Paper type Research paper
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
Journal of Financial Regulation and
Vol. 22 No. 4, 2014
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