Central Bank of Ireland’s market supervision director, Gareth Murphy, said the lack of post-crisis case law relating to the Prospectus Directive (PD) could indicate it sets too low a hurdle for the quality of disclosure.
The PD was introduced in 2005 to create a European framework for the preparation of prospectuses for public offering where the securities had to be admitted for trading on a regulated market.
It aimed to enhance investor protection and improve the efficiency of the single market by harmonising requirements to draw up, approve and distribute published prospectuses.
Speaking at Euromoney Legal Training’s Prospectus Directive Conference this week, Murphy said the PD had created a more reliable issuance process and provided a surer path to market. But the lack of case law following the financial crisis was puzzling.
“Is it simply the case the PD does not empower investors to tackle issuers over possible misleading disclosures?” he asked.
In effective regulatory regimes, liability for failure to comply with rules should be clear.
“If the content and quality of prospectuses is not challenged, the quality of disclosure will suffer,” he said.
“Disclosure-based regulatory regimes are severely limited when issuers and issuers’ agents can control the form, content and volume of disclosure to the point of excess,” he added.
Investor analysis
To that end, he warned investors needed to take more ownership of their own investment analysis. They need to exploit the full benefits of in-house and third-party analysis as well as better information technology, he said.
“Following the herd, because the product has an attractive yield and the risk seems low by virtue of rating, recent performance or peer investor appetite is not good enough,” he said.
“Investors should have the analytical tools and access to the information to deconstruct the product, demystify the risks and then track the progress of the product along its different risk dimensions during the course of the investment holding period,” Murphy said.
Just as low-fares airlines created a new market for air travel by flying to place people could not previously reach, he expected the provision of this data to nurture investor demand for more data and improve the analysis of new issues.
“I believe that access to this date is a necessary complement to a regulatory regime, like the PD, which aims to protect investors,” he said.
“It will also ensure better standardisation of key concepts, such as mortgage arrears. It will enable investors to balance their own analysis with the recommendation of the credit rating agencies and other advisors,” Murphy added
Be realistic
Nonetheless, while questions could be asked of the PD as a disclosure regime for providing investor protection, he said it was important to be realistic as to the limits of such a disclosure framework.
Prescriptive disclosure regimes constrain innovation and may cause further confusion.
What’s more, if the structure of a security is difficult to understand or, more importantly, difficult to model it is likely that investors will struggle to determine fair value.
“I do believe that is probably beyond the scope of the PD, which is not a merit-based approval regime, to accommodate amendments which aim to filter out securities with intractable payoffs,” he said. “Industry standards – as opposed to regulation – may have a role to play here.”
“Disclosure-based regulation must be complemented by other measures which are market-driven, like asset pool warehouses, or prompted by financial authorities, like standardized products,” he added.
Euromoney Legal Training’s 3rd Prospectus Directive Conference took place on the September 26 -27 in London’s Radisson Bloomsbury.
See also
‘How successful are the latest EU prospectus framework’
http://www.iflr.com/Article/3081616/How-successful-are-the-latest-EU-prospectus-framework.html
‘Will the KID make Prips too risky for retail’
http://www.iflr.com/Article/3065521/Will-the-KID-make-Prips-too-risky-for-retail.html
‘EC’s Prospectus Directive final terms amendments welcomed’
‘Esma’s prospectus directive consultation: the key points’
http://www.iflr.com/Article/2959649/Esmas-prospectus-directive-consultation-the-key-points.html