This paper aims to provide an explanation and evidence for the recent lack of retail financial product failures in Canada in the face of a (formal) regulatory failure.
The paper applies the literature on self-regulation and reputational risk management to a detailed investigation of the marketing of financial products to Canadian retail investors. Internal approval processes for many different players in the retail financial industry were analyzed in detail primarily using interviews.
The author was able to identify associations between structures and policies at financial firms and outcomes for retail investors. Knowing that prevention is more effective than mitigation, marketers of financial products would generally welcome increased state intervention in terms of more and better information disclosures.
The research contributes to our understanding of self-regulation in financial markets, specifically addressing what firm characteristics may be related to positive and negative outcomes for small investors in complex structured financial products.
Regulators may be able to imply the research findings in selectively allocating scarce resources to policing firms that may be more inclined to participate in riskier behavior. Financial firms may be able to influence the decisions relating to how regulations are designed and implemented and which products are sold to which clients to minimize reputation risk.
This is the first time, to the author's knowledge, that the reputation risk management channel has been analyzed in terms of influencing outcomes for retail (small) investors.
The author wishes to thank Martin Lodge for his comments and support. The research that resulted in this paper was self-funded.
Saleuddin, R. (2014), "Reputation risk management in financial firms: protecting (some) small investors", Journal of Financial Regulation and Compliance, Vol. 22 No. 4, pp. 286-299. https://doi.org/10.1108/JFRC-11-2013-0040
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