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Ethics & Regulation |
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Back to Financial Economics Main Menu One of the most controversial issues regarding financial markets is how do they regulate themselves?. The financial markets have a unique system of regulation, it is a mixture of law, self regulation and customs. The way the financial markets make money is all based on the disclosure of information and how this affects the supply and demand for shares traded on the stock exchange. Often the stock exchanges around the world are owned by the very stockbrokers who compete against each other. Several instances have led to successive bouts of self regulation. The first major ethical case to affect the London Stock Exchange was known as the 'South Sea Bubble'. The south sea company offered shares a impractical and fraudulent manner. Shares were sold on a partly paid basis, this meant people were able to buy a lot more shares than they were normally able to. The result was that excessive amounts of shares were sold in the south sea company. People were buying the shares on the premise of gaining initial dividends and selling the shares onto other people who would then have to pay the outstanding balances on the shares. As a result of this there was a big crash in the value of all shares on the stock exchange, lots of people lost money in the crash. Parliament implemented the Bubble Act of 1720 as well as the Fraudulent Act of the South Seas Company. The act was the first major regulation of the stock exchange. The Acts made the stock exchange sell shares for a few selected companies only. The acts of parliament bought in to regulate the stock exchange as a result of south sea company fiasco, meant that small companies were no longer be able to use the stock exchange as a means to raising finance. Companies were forced to raise capital investments on their own, until 1811, when a co-operative challenged the right to issue shares. The courts ruled that businesses could issue their own shares if they had boards of trustees to maintain the rights of shareholders. The stock exchanges were now allowed to trade shares for all businesses again. ETHICAL & QUESTIONABLE PRACTICE Ever since 1811, when stock exchanges were allowed to sell shares in businesses, the stock exchanges across the world have been involved in several ethical issue debates. Some of the major ethical issues have included the vast amounts of money involved in the share transactions themselves. Take the classic case of the Barings Bank stock broker of the mid 1990's, one person was amazingly un-monitored, eventually generated such excessive losses that he actually made the bank become bankrupt!, with the resulting loss of income for several hundred employees and the lost investments for several thousand investors. As the markets are owned by stockbroker firms selling shares for businesses, the use of insider information to communicate business information to allow for greater profits from trading shares, was seen as being a very un-savoury side to the stock exchange. Stockbrokers were renowned for paying for business information during the 1970-1980's although attempts have been made to eradicate it, it will none the less remain within the stock exchange system. When one stock market losses vast amounts of money in share values, there appears to be a domino effect in other stock exchanges. National governments/central banks through exchange rate transactions invest heavily to maintain the parity between the stock exchanges to prevent a global collapse. The first major global collapse can be traced back as far as the 1920's during the Wall Street Crash, this resulted in a severe depression in America, the collapses of the 1980's and late 1990's have created havoc on the global economy. The most worrying aspect of the stock exchange is the power they now wield on the world at large. Shares are traded solely on the basis of generating larger profits, little regard seems to be given to the lives and families of employees whose business trades on the stock exchange, low share value ratings can cripple and bankrupt companies. The closer integration of stock exchanges on a global computer network will only add to the domino effect only allowing for the possibility of total economic breakdown. Businesses in a capitalist system have become more concerned about how they maintain share values to generate greater capital investment, yet at the same time increase dividend payments. This in recent times has meant trying to slash employee levels whilst maintaining productive output, this is often phrased as business ethics. These issues are always bought into discussions about the ethics and power of stock exchanges. The Financial Service Act (FSA) of 1987 replaced the Fraud Act of 1958. The FSA is basically designed to protect investors. The FSA is based on self regulation, maximum disclosure of information from Plc's, it enforces fines and prison sentences for companies not disclosing correct information. There will always be difficulty for private investor to check the accuracy of published accounts as they only ever snapshots of companies for one period of time only. The FSA was supposed to regulate the financial markets. Since the act was introduced, a lot of observers have pointed that this act was merely maintaining the position of the financial markets. A dedicated agency was set up as a result of the FSA, this was called the Security and Investment board. However the agency is a private company, it was originally designed to establish a compensation scheme similar to that used in the travel industry, but this idea never took of properly. THE ADVANTAGES AND DIS-ADVANTAGES OF SELF-REGULATION THE ADVANTAGES:
THE DIS-ADVANTAGES:
At the end of the day all financial markets involve an element of risk. You can lose all the money you invest or make ten times the amount, the whole logic is gambling good or bad?. The most effective supervision of the financial markets comes from national press, rather than government legislation or the markets own self regulating bodies. Because most of the markets are owned by stockbrokers the need to regulate the markets has always been seen as essential to protect consumer interests, even though most stockbrokers will argue against too many regulations hindering their normal course of business. It's a double edged sword and will always remain so. Back to Financial Economics Main Menu |
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