A taskforce, appointed by HM Treasury, has recently proposed legislation to eliminate certificated (paper) shares and to require the investors currently holding paper shares to hold them indirectly through nominees. It has also suggested that disclosure combined with a common messaging protocol will enable the market to improve the ability of indirect shareholders to exercise their rights. In this paper we make a case against legislation eliminating paper certificates. We argue that the industry does not need the Government to remove paper certificates. If they want paper certificates to disappear, they should develop a model for holding uncertificated shares directly that is affordable for retail investors. The Government should nevertheless intervene. It should encourage the Competition and Markets Authority to investigate the price structure of accounts for holding uncertificated shares directly with CREST, which operates as a monopoly provider for such accounts in the UK. We further explain that the current system for holding shares indirectly disenfranchises investors and argue that this not only affects investors but also deprives issuers of oversight of their governance. We use empirical evidence to explain that disclosure combined with a common messaging protocol is unlikely to cause the market to develop a system that better enfranchises indirect shareholders. Consequently, we propose legislation to give indirect investors better access to shareholder rights.

Financial globalisation has given issuers more freedom to carry out jurisdiction shopping. As a policy response, a growing number of stock markets have introduced the dual-class share structure to enhance global competitiveness. However, does the dual-class share structure help stock markets attract issuers? It is a question rarely examined empirically in existing scholarly work. This paper explores the practices of three jurisdictions with global financial centres, ie the US, China and Hong Kong, to narrow the research gap. Based on hand-collected data, it explains the infrequent listings with the dual-class share structure in China and Hong Kong in the post-reform era in two ways: low demand due to the use of substitutes; and limited allowance caused by the harsh ex ante regulation, and is the first comparative quantitative study in this field. Drawing on the empirical lessons, this paper recommends that China relax its ex ante regulation and suggests the wider community consider the necessity of introducing the dual-class share structure and the balance they aim to achieve between investor protection and market openness.

Unequal voting rights arrangements under dual class share structures are increasingly favoured by entrepreneurs and founders of technology companies, in order to retain a degree of control over the company that is disproportionate to their equity shareholdings. The rise of such share structures around the world has put competitive pressure on the UK Government and the country's financial regulator to relax the one share, one vote principle in the premium listing regime of the London Stock Exchange, to ensure the UK equities market remains world-leading and fit for the future development of the economy. There is, however, a long tradition of institutional investors’ distaste for dual class share structures. In fact, the near extinction of dual class listings in the UK capital markets can be largely attributed to the opposition of large British institutions. Therefore, this paper will critically discuss the conflict between the demands to attract listings from high-tech and innovative companies and concerns of a race to the bottom in the UK context. It rebuts criticisms based on investor protection and argues that if dual class companies were permitted to list in the Premium Segment, the higher level of regulatory protection provided in the premium listing regime would help enhance minority shareholder protection and shareholder engagement. The additional safeguarding measures, as we have seen from other global financial centres, would also help to restrain the potential abuse of controllers’ weighted voting power. Together with the market mechanism, permitting dual class listings in the Premium Segment should be welcomed.

The market of a successful financial centre must be efficient, orderly, and fair, which requires that investor protection rules be enforced effectively. While a substantial literature exists promoting privately driven enforcement of investor protection rules, there is a growing consensus that enforcement action by public bodies is likely to be more important for most markets than privately initiated litigation. Hong Kong exemplifies this point. In Hong Kong, public authorities carry almost the entire burden of enforcing corporate and securities laws. Yet Hong Kong functions at a high level of quality globally despite operating a market in which most companies are foreign-incorporated—often originating from jurisdictions with reputations for governance that are middling at best—and trading takes place in multiple currencies. To revisit the debate on the determinants of effective corporate and securities law enforcement, this paper evaluates the enforcement of investor protection laws in Hong Kong. The paper first examines the institutional context, presenting key corporate and securities regulation and explaining avenues for private and public actions. It looks at the powers and competencies of the relevant supervisory authorities, including the stock exchange, which has a quasi-public role in regulating the market. Then, using publicly available data supplemented through interviews with agency staff, the paper presents Hong Kong’s enforcement “inputs” (funding and staffing) and “outputs” (actions and sanctions) for the main public enforcers. We find evidence that the Hong Kong public enforcement model effectively disciplines even its dangerous environment of foreign companies, controlling shareholders, and complex, international groups, and might be able better to do so exactly because of a focus on public, rather than private, enforcement.

Model case procedures have some fundamentals in common with collective redress in civil law countries. This is particularly true in the field of investor protection. This area is highly regulated and marked by resulting enforcement failures, which led the German legislator to the enactment of the KapMuG and its recent amendment, highlighting exemplary elements of model case procedures. A survey of the ongoing activities of the European Union in the area of collective redress and of its repercussions at Member State level therefore forms a suitable basis for the following analysis of the 2012 amendment to the KapMuG. It clearly brings into focus a shift from sector-specific regulation with an emphasis on the cross-border aspect of protecting consumers, towards a ‘coherent approach’ strengthening the enforcement of EU law. As a result, today, regulatory policy and collective redress are two sides of the same coin. With respect to the KapMuG, such a development brings about some tension between its aim to aggregate small individual claims as efficiently as possible and the dominant role of individual procedural rights in German civil procedure. This conflict can be illustrated by some specific elements of the KapMuG: its scope of application; the three-tier structure of a model case procedure; the newly introduced notification of claims; and the new opt-out settlement under amended §§ 17-19.

This article considers the impact of the financial crisis reform agenda on EU investor protection regulation. It argues that retail market regulation is becoming associated with a consumer protection agenda and that a more interventionist approach to the retail markets is following. The influences which are shaping this ‘consumerisation’ of EU investor protection regulation, and the benefits and risks of the new approach, which are particularly apparent in the product intervention sphere, are considered.

This article analyses a recent decision by the German Federal Court of Justice in the field of investor protection. At first sight it seems as if the Court held on to a model of investor empowerment by means of informational duties. However, a closer look at the reasoning of the Court reveals a tendency towards heavier intervention in the field of financial advice, oriented towards the regulation of product design. In light of this new dimension of investor protection, the article critically analyses the Federal Court of Justice's use of the disclosure-based investor protection regime.

The dualism between private and public enforcement of investor-related rights and its influence on the development of capital markets has been the subject of much recent commentary. While opinions differ as regards preference for private or public enforcement, scholarly analysis has so far been focused on the principal-agent relationship between investors and issuers, and has tried to depict the most effective enforcement system from a deterrence perspective. In this article we present some data about the Italian experience of enforcement. Rather than of lawsuits against issuers or gatekeepers, investor protection in Italy is mostly the result of proceedings brought by individuals against investment services providers. Does such a model promote the public goals of securities regulation? Is it efficient? By answering these questions, we aim to show how the Italian experience may contribute to the international debate on the enforcement of securities regulation.

The purpose of this article, and its companion article, is to examine the implications of the new European Securities and Markets Authority, established in January 2011.

In the wake of the financial crisis, the case for institutional reform and for conferring regulatory and supervisory powers on a central EU authority became compelling. But any design for institutional reform of EU financial market regulation and supervision would have struggled to deliver an optimum model, given the necessity for compromise. The central difficulty is one of nuance. Where on the spectrum from national powers to EU powers, and with respect to regulation and supervision, should any new body's powers be placed if optimum outcomes are to be achieved? The question is further complicated by the different dynamics and risks of centralising rule-making and of centralising supervision/enforcement, even if there is considerable symbiosis between these different activities.

This article considers ESMA's rule-making powers; it is accompanied by a companion piece on ESMA's supervisory powers. It examines the considerable powers which ESMA has been granted in the rule-making sphere and argues that ESMA is likely to lead to significant intensification of the EU rule-book for financial markets. While a uniform rule-book carries risks, there are countervailing benefits. There are also promising signs that ESMA may become an effective rule-maker and may prove an effective mechanism for managing the risks of the intensifying rulebook. But the institutional design model is flawed. Treaty restrictions have led to a troublesome compromise in terms of ESMA's design, particularly with respect to Commission control and ESMA independence. Overall, ESMA's design is under-ambitious with respect to rule-making.

By contrast, as the companion piece argues, the extent of ESMA's supervisory powers, real and potential, may have pushed ESMA too high up the spectrum towards EU powers. Local supervision of the EU rule-book represents an important safety valve for the EU financial market, and should not be obstructed by over-centralisation. Once supervision was placed on the reform agenda, however, it was always going to be a challenge to draw the dividing line between ESMA's powers and those of national competent authorities. The line may, however, have been drawn too far on the side of operational centralisation.

Regulators around the world, including the European Commission, are becoming increasingly interested in behavioural finance as a toolbox for better securities regulation. When securities laws are designed to prevent or minimise the effect of systematic investor bias, they may violate one of the most fundamental principles of traditional securities regulation, the ‘inalienable right of everyone to make a fool of him (and her)self’ (Louis Loss). The paper discusses the potential and boundaries of an alternative concept of investor protection, based on the assumption that investors systematically fall prey to certain fallacies. Unlike the philosophy underlying traditional securities regulation, this concept's impetus is not the danger of market failure caused by asymmetric information but by bounded rationality. Its objective is not the informed but the prudent investment decision. Its measures are rules of an ‘asymmetric’ or ‘libertarian’ paternalism which lead those who need help to better investment decisions without limiting the freedom of those who do not need or want any assistance. The paper exemplifies this concept by analysing how the Market in Financial Instruments Directive's conduct-of-business regulation could be re-shaped to protect overconfident investors who suffer from biased self-attribution and confirmation bias from the dangers of excessive trading.

The paper employs law and finance analysis to critically discuss the quality of corporate governance and investor protection in Greece. The paper argues that the Greek corporate governance framework is fragile not only because investor protection standards are inconsistent and insufficient, but also because institutional inefficiencies undermine the effectiveness of enforcement mechanisms. The paper recognises that institutional reform should proceed in tandem with regulatory and supervisory modernisation. Nonetheless, acknowledging that the former requires significant political commitment and takes time, several proposals with a more immediate and direct effect on improving the investor protection regime are made. In particular, the paper: (a) favours the streamlining of minimum, legally binding, bright-line corporate governance norms reflecting internationally accepted standards in conjunction with a ‘comply or explain’ approach, while also considering the upgrading of corporate gatekeepers' liability – especially that of accountants and lawyers; (b) argues for the enhancement of private enforcement as a supplement to public enforcement mechanisms; and (c) supports the shifting of supervisory and enforcement attention to corporate managers' liability.

La Porta et al. have made a number of influential empirical contributions linking the level of investor protection in different countries to the development of capital markets. They find that rules associated with common law are superior in fostering larger and broader capital markets, especially compared to countries based on the French civil law tradition. However, this article argues that the existing methodological approach is problematic when subjected to careful legal analysis based mostly on Scandinavian examples. In particular, one may question the appropriateness of relying on legal indices, as laws by their very nature cannot be stacked like bricks of similar size. Furthermore, it is argued that the notion of investor protection needs to be considered in a consistent, complete and unbiased manner, in which the binary categorisation should be modified. Specifically, due to the ambiguity of formal investor protection rights, it is suggested that the ratio of actual minority votes cast at the general meeting to the total number of minority shares may serve as an alternative proxy for the real degree of investor protection.

This essay argues that the 2004 Markets in Financial Instruments Directive, the investment services cornerstone of the Financial Services Action Plan, represents a bold attempt to build a pan-EU retail investor culture, relying on the transformative effects of law. While the institutional markets have attracted most attention under the FSAP, this strategy represents a sharp change in EU policy, is ambitious given the state of the retail markets and provokes important questions as to the role of law in generating retail activity and the role of the retail investor in developing effective and strong EU capital markets. This essay examines how MIFID attempts to build a retail investment culture through law, the market reality behind this policy shift, what the role of law is in this process and what the emerging retail regime suggests as to the characteristics of the emerging ‘EU retail investor’ as a target of regulatory policy and engine of retail market integration. The newly adopted MIFID conduct of business regime lies at the heart of this ambitious retail agenda and is used as a case study in this analysis. The risks and costs of this approach are, however, high given the unproven relationship between law and investor activity, whether domestic or pan-EU. The essay therefore considers whether this new regulatory and policy strategy on the retail investor is sufficiently nuanced and, in particular, whether, given the risks of imposing inappropriate rules on an immature marketplace, it is matched by appropriate retail investor governance.

A number of ongoing reforms of corporate law are motivated by the need to stimulate entrepreneurship and business creation. Building on the observations that entry is characterised by sunk costs and that the markets for small business finance are imperfectly competitive, we identify a previously overlooked trade-off that such reforms ought to recognise. The appropriate design of the corporate law depends on whether it is the midstream moral hazard and the ensuing lack of finance or the entrepreneurs' inability to recover sunk entry costs that hamper business creation. In circumstances where the former dominates, well-designed mandatory law ought to be efficiency enhancing. In contrast, if the incentives to enter are weak due to the prospect of facing powerful external financiers in the market for post-entry expansion finance, business creation can be boosted by making the law more enabling. Enabling law increases the effective bargaining power of the entrepreneurs in market conditions where their bargaining position would otherwise be weak. It does so by giving the entrepreneurs a credible threat to expropriate the financiers. To the best of our knowledge, neither this trade-off nor the associated effects of corporate law on entry and entrepreneurship have been considered elsewhere in the literature on mandatory v. enabling rules.