Area Of Financial Services Research Articles

Innocence ou dissidence desAmants magnifiquesde Molière?

Abstract In 1997 former Federal Reserve Board Chairman, Paul Volker, observed that the commercial banking industry was under more intense competitive pressure than at any time in living memory, 'yet at the same time the industry never has been so profitable'. I refer to the seemingly strange coexistence of intense competition and historically high profit rates in commercial banking as Volcker's Paradox. In this paper I extend the evaluation of this 'paradox' to all important and profitable financial markets and discuss three developments that together help resolve it. First, the demand for financial products and services has expanded very rapidly in this period. Second, while competition has indeed increased in many areas of financial services, it has not increased everywhere. Rising concentration in many financial markets has made it possible for key firms to exercise pricing power, while a spectacular increase in non-market, over-the-counter sales of complex financial products has allowed giant banks to...

The External Auditor's Role in Bank Regulation and Supervision: Helping the Regulator Avoid Regulatory Capture

The incoming Labour administration in 1997 caused a stir when it gave the Bank of England additional monetary policy powers but removed the Bank’s powers to regulate banking. Up till 1997, banking regulation had been the function of the Bank of England while other areas of financial services had been regulated by bodies such as: The Securities and Investment Board (for investment business) and the Department of Trade and Industry (for insurance). Section 21 of the Bank of England Act 1998 effectively transferred banking supervision to the Financial Services Authority (then known as the Securities and Investments Board). This paper amongst other objectives, aims to explore how the Financial Services Authority ( the FSA) as a regulator, could benefit from the expertise of the external auditor as a middleman, to avoid regulatory capture. As an efficient system of accountability would also help prevent regulatory capture, the issue of accountability will also be discussed. A consideration of developments leading to the adoption of a single regulator in the UK, will illustrate how the type of regulator can contribute to knowledge of how the external auditor can assist the regulator. Furthermore, not only does this paper consider how the introduction of the FSA has improved transparency and accountability within the banking regulatory and supervisory system, but also the claim that the external auditor could further employ his expertise to help the regulator avoid regulatory capture.

The Baltic Securities Market: Product of Economic Innovation

This article demonstrates the primacy of economics over law in the formation of the Baltic Securities Market [BSM]. The proposition is vindicated by historical data and factual development of the BSM. Community level legislation in the financial services area accelerated in the later 1990's and the early 21st century as the European Union set an objective of creating a vibrant single market in securities. In this respect, the development of the BSM has paralleled the evolution of Community level legislation. However, the main driver of the BSM's development has been economic survival and innovation, not revision of Community or Member State infrastructure. In the Baltic market, the national stock exchanges do not, and never have, performed the traditional macroeconomic function of financial intermediation transferring resources from surplus economic units to deficit economic units, due to the alternative of favourable bank financing. With minor exceptions, the core activity of the BSM is the fund centre primarily dominated by Baltic and Scandinavian banks. The promotion of these products raises questions of fees and returns, and reintroduces the debate of whether payment for professional management is justified given the alternative of investment in passive index funds, or managed funds with comparatively low expenses ratios. The question of whether the BSM complies with recent Community Level legislation is beyond the scope of this article, and for article's purpose, irrelevant. In terms of legal transplants, during its early development, the BSM sampled from diverse jurisdictions. With modifications, Community Level legislation is functionally equivalent to United States Securities laws as both regulatory models embrace the Efficient Capital Market Hypothesis.

Principles of European Law on Financial Service Contracts?

Abstract: Financial services have become increasingly important in the EU. Such services are essential not only for the everyday life of EU citizens, but also for the EU economy at large. This fact explains the large number of EC specific regulatory measures taken in the area of financial services which directly or indirectly affect financial service contracts. In 2003, however, the Commission initiated an action of a more general character which may have important implications for the regulation of financial services in the EU: the drafting of a so–called ‘Common Frame of Reference’ (CFR). An academic draft CFR (DCFR) has recently been published. It includes inter alia a slightly modified version of the Principles of European Law on Service Contracts (PEL SC). The PEL SC contain general provisions applicable to all types of services and specific rules for six categories of services. Financial services, however, are explicitly excluded from the scope of application of the PEL SC. This contribution explores whether and to what extent a module on Principles of European Law on Financial Service Contracts (PEL FSC) can be embedded in the PEL SC and hence in the DCFR. The authors conclude that such a module would fit in the current system. In their view, the inclusion of the PEL FSC in the DCFR would make an important contribution to the creation of a coherent structure of rules on service contracts in general, and financial–service contracts in particular. The authors wish to thank Martine Boonk and Martin Siller for translating the abstract into French and German. Résumé: Les services financiers sont devenus de plus en plus importants dans l’UE. De tels services sont essentiels non seulement dans la vie quotidienne des citoyens européens, mais aussi pour l’économie de l’UE en générale. Pour cette raison, un grand nombre de réglementations sectorielles ont été prises par l’UE dans le domaine de services financiers. Cette réglementation spécifique affecte, directement ou indirectement, les contrats de service financier. En 2003, la Commission a lancé un plan d’action plus général, ce qui peut avoir des implications pour la régulation des services dans l’UE: le projet dit le ‘Cadre Commun de Référence’ (CCR). Récemment, le projet académique de CCR (PCCR) a été publié. Ce projet comprend, entre autres, une version quelque peu modifiée des Principles of European Law on Service Contracts – Contrats de Service – (PEL SC). Les PEL SC contiennent des dispositions générales qui s?appliquent à tous types de services, et aussi de la réglementation spécifique pour six catégories de services. Les services financiers sont néanmoins exclus de la portée des PEL SC. Cette contribution étudie jusqu’à quel point un module sur les Principles of European Law on Financial Service Contracts – Contrats de Service Financier – (PEL FSC) peut être incorporé dans les PEL SC, et peut, en conséquence, être inclus dans le PCCR. La conclusion des auteurs est qu’un tel modèle cadre bien avec le système actuel. Dans l’opinion des auteurs, l’inclusion des PEL FSC dans le PCCR peut faire une contribution importante à la création d’un ensemble cohérent de règles du droit des contrats en ce

European supervisory convergence: a new dynamic

PurposeTo describe the 5th May 2006 ECOFIN conclusions on supervisory convergence and explain why they represent a new departure for European financial services work.Design/methodology/approachThe article outlines the 6th 2006 ECOFIN conclusions relating to supervisory convergence. It then reviews EU developments relating to supervisory convergence from the 2001 Lamfalussy Process onwards as context for the conclusions. Finally, in the light of the review and the description of the conclusions it draws some conclusions about the likely implications for further developments in the EU in relation to EU supervisory convergence.FindingsThe principal findings are that supervisory convergence is likely to increase due to enhanced political backing with member state finance ministries and regulators taking a leading role.Research limitations/implicationsAs this is the first paper on the ECOFIN conclusions there is considerable scope for ongoing research to establish the extent to which the predictions in the paper prove to be justified by future developments.Practical implicationsThe ECOFIN conclusions represent a departure from EU financial services work focused on a legislative programme, the Financial Services Action Plan, to a programme focusing on improving cross‐border relationships between supervisors. This has important implications for the key European actors and gives a strong role to national finance ministries and supervisors. The practical implications will be enhanced cooperation between national supervisors on a cross‐border basis. The paper argues for strong financial services industry involvement in this.Originality/valueThe value of the paper is twofold – Its primary value is as the first academic analysis of the ECOFIN conclusions and as a predictor of their likely influence on EU institutional balance in the financial services area. Secondly it is a useful review of the main developments with regard to EU supervisory convergence over the five years 2001‐2006 – something which, to be the best of my knowledge, has not previously been carried out in the academic literature.

E-COMMERCE DIRECTIVE — UK IMPLEMENTATION: ELECTRONIC COMMERCE (EC DIRECTIVE) REGULATIONS 2002 — WORTH THE WAIT?

This article examines the UK government’s approach to implementation 1 1 This article does not examine the HM Treasury’s implementation of the Directive in the specialised area of financial services. of the key provisions of the Electronic Commerce Directive 2 2 Directive 2000/31/EC on certain legal aspects of information society services, in particular electronic commerce, in the Internal Market (Directive on electronic commerce). (the Directive).

The impact of the E-Commerce Directive in the area of financial services

The impact of the E-Commerce Directive in the area of financial services

E-Commerce — UK: UK CONSULTATION ON THE IMPLEMENTATION OF THE ELECTRONIC COMMERCE DIRECTIVE

At the end of August 2001, the Department of Trade & Industry, the Communications and Information Industries Directorate, published their consultation document on implementation of the Electronic Commerce Directive. 1 1 Directive 2000/31/EC of the European Parliament and of the Council of 8 June 2000 on certain legal aspects of information society services, in particular electronic commerce, in the Internal Market (Directive on electronic commerce) (OJ L 178, 17.7.2000, p.1) This is timely, since Member States are supposed to have implemented the Electronic Commerce Directive into national laws by 16 January 2002. The UK Government plans to implement the requirements of the Directive by means of secondary legislation under Section 2(2) of the European Communities Act 1972 and under specific sectoral legislation where appropriate. Section 2(2) is a general enabling power to pass legislation to implement European legislation. In the light of the responses to the consultation document, the DTI will be producing draft regulations. What follows is a summary of the consultation. It should be noted that, in order to ensure effective implementation in the specialized area of financial services, a separate consultation document will be published by HM Treasury. A summary of the DTI's proposal is on the Department of Trade & Industry website at: http://www.dti.gov.uk/cii/ecommerce/europeanpolicy/ecommerce_directive.shtml. The full consultation paper is also available from the website and, helpfully, the consultation document itself contains numerous useful website details and useful links to enable one, for example, to print off a copy of the e-commerce directive to read it in conjunction with the consultation paper. The consultation document is split into seven chapters:

BRIDGING THE DIGITAL DIVIDE: FINANCIAL AND ETHICAL CHALLENGES

The digital divide – the widening gapbetween people who can use computers and theInternet to advance themselves, and those who,because of poverty, education, or otherbarriers, cannot – offers some unique financialand ethical challenges. Fallows (2000), inThe Invisible Poor, reports on the stateof the U.S. economy as it affects the poor. Among other issues, Fallows argues thateconomic growth separates the classes, ratherthan bringing them together. Attali (2000)suggests a possible solution to this economicgap. Attali believes that “...the only concreteway to reduce the poverty gap is within thecontext of free market economy. It can be doneby combining the two success stories of thelast decade: entrepreneurship and technology,more specifically: microfinance and theInternet.” This article addresses some issues related tohow technology, particularly in the area offinancial services, has affected the ability ofthe poor to better themselves. Ethicalchallenges that accompany Information Agepoverty are examined in the context of effortsto narrow the digital divide.

Information Security Standards: Deluge and Dearth

Avalanche! With new information doubling every five years (soon to be every two and a half years!), the information security professional may find herself buried in an information avalanche. Where a new security standard in the financial services area could, in the past, safely take three to five years in the making, we now frown when it takes two years. Where we would, historically, rarely work on even two standards in parallel, we now must work on a dozen. Prior to 1986, the Internet Engineering Task Force (IETF) didn't exist. Today, we have thousands of Requests for Comment (RFC) documents, many of which are on the IETF standards track. With the American National Standards Institute (ANSI) accredited standards bodies, with the International Standards Organization (ISO), with the International Telecommunications Union (ITU), and other national and international standards bodies, the information security professional faces hundreds of security- or privacy-related standards, guidelines, or regulatory initiatives each year.

Government regulations and FDI: a historical perspective of mexico

This article analyzes the development of foreign investment regulations and their impact on FDI flows in Mexico. The study covers the evolution of sectoral and aggregate investment patterns from the independence period to the 1994 Peso crisis and its aftermath. The pattern followed by FDI in Mexico has paralleled the transformation of the Mexican economy itself, focusing initially on the extractive and agricultural sectors, then on manufacturing activities, and recently on the services sector. Mexico has continuously reformed and modernized its regulatory system in order to adapt to internal political changes and changes in the world economic environment. Recent economic reforms and liberalization of FDI regulations have had a major positive impact on capital inflows, but more needs to be done, especially in the area of financial services in order to achieve a higher level of economic efficiency and to prevent financial breakdowns like the one experienced in 1994.

Modelling Building Societies Takeovers: a Non-Cooperative Game

Takeover and acquisition of corporations is awell-researched area and has been becomingincreasingly important. Much less research emphasishas been devoted to takeover activity within thegeneral area of financial services with thisparticularly the case for the building society sector.

The Earnings of Real Estate Salespersons and Others in the Financial Services Industry

This study explores the determinants of earnings of salespersons in financial services using nationwide data from the 1990 U.S. Census. The study reveals that security and insurance salespersons earn substantially more than do persons in real estate sales. The returns to K through 12 schooling are highest in the insurance and securities areas, while the returns to college are highest in security sales. For males, the returns to graduate education are negative in real estate and insurance. For females in these same areas, returns are large and positive in insurance and negative in real estate. In all areas of financial services, earnings are higher in larger, more wealthy, homogenous cities.

Management strategy in UK insurance broking

Notes that the insurance broking industry is unattractive and subject to long‐term change. Cites factors contributing to this such as industry saturation, low entry barriers and low product differentiation. Notes expected responses to such conditions, including those from the large, medium‐sized and provincial or high street brokers. Suggests that the latter are likely to decrease in number, faced with the increasing efficiency of direct writers and attempts by medium‐sized brokers to enter their market to offset losses in the upper levels of the market. Notes that this pattern is reflected in other areas of financial services.

Artificial Neural Network Models for Pricing Initial Public Offerings

In recent times, managerial applications of neural networks, especially in the area of financial services, has received considerable attention. In this paper, neural network models are developed for a new application: the pricing of Initial Public Offerings (IPOs). Previous empirical studies provide consistent evidence of considerable inefficiency in the pricing of new issues. Neural network models using publicly available financial data as inputs are developed to price IPOs. The pricing performance and the economic benefits of the neural network models are evaluated. Significant economic gains are documented with neural networks. Several tests to establish generalizability and robustness of the results are conducted.

THE PRACTICAL COMPLIANCE OFFICER: TECHNICALITY VERSUS COMMERCIALITY

The purpose of this paper is to stimulate the thought processes of staff employed within compliance functions, and to act as a reminder that the technicalities of operating within the complex financial services area can be balanced with the commercial demands of their respective companies. The author considers the various issues that can be encountered and the means by which to attempt to strike an acceptable compromise.

Segmenting the market for retail financial services

The changing nature of retail financial services, brought about by regulatory and economic forces, has prompted financial institutions to take a renewed interest in the technique of market segmentation in an endeavour to compete successfully. Traditionally employed segmentation studies in the area of financial services have tended to be simple, relying largely on demographic information. This has resulted in segment descriptors rather than segment predictors being identified. This paper argues that the lack of a behavioural element in traditional studies has been the reason for this problem and contemporary research in this area should be concerned with explaining financial services behaviour and identifying segment predictors. An approach is suggested which is quantitative and works towards the establishment of a multidimensional model for segmentation of the retail financial services market. The paper focuses primarily on two sets of variables to be contained in the model and their justification for sel...

Future Directions for Agricultural Banking Efficiency Research: Discussion

vices efficiency research to date, including the papers presented. Third, I turn attention to the specific area of financial services to agriculture. Both the motivations and specific observations concerning financial services to agriculture and rural areas suggest a policy-oriented research agenda. My general concerns about financial efficiency research suggest theoretical, empirical, and methodological issues, the resolution of which may enhance confidence in research findings. I conclude with a discussion of how agricultural economists can contribute to this research

Professional negligence and financial‐legal expert systems: Architectures to enable the reasonableness defence

Abstract The legal implications of professionals relying on expert systems have been extensively studied by analysts who have considered the ‘macro’ issues such as whether products liability can be invited for loss resulting from errors in expert systems, and apportionment of liability. These macro‐analyses do not distinguish programming errors from what we call ‘errors of reasoning’. The latter errors may be considered to be advertent on the part of developers and/or user‐professionals; may potentially be directly compared with the reasoning ascribable to a reasonably competent professional; and cannot be removed merely by better quality assurance in the sense prevalent in software engineering. In this paper we consider the mechanisms by which a court may examine errors of reasoning in expert systems used to assist professionals working in certain areas of financial services ('the financial‐legal domain'). Our analysis of the ‘micro’ issues of liability shows that the advertent nature of errors of reason...