sofia june 29, 2010 the experience by the securities regulator in the field of investment education
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Sofia June 29, 2010
The Experience by the Securities Regulator
in the Field of Investment Education
2
- Introduction
- Integration with supervisory activity
- Targets and types of initiatives
- Future prospects
Introduction
The Experience by the Securities Regulator in the Field of Investment Education
A language problem
3
Introduction
What is the main problem to face in realizing financial education initiatives?
The main problem is language, particularly for those who come from public authorities and often use bureaucratic language in their jobs
The Experience by the Securities Regulator in the Field of Investment Education
A language problem
4
Introduction
Appropriate language is so difficult, so problematic, and yet so critical to the success of financial education
The Experience by the Securities Regulator in the Field of Investment Education
Language must be:
5
Introduction
- SIMPLE, to reach and be understood by large sections of the population
- POWERFUL, that is efficient, effective, concise
- ATTRACTIVE, and therefore must intrigue the recipients, not bore them or worse, discourage them
The Experience by the Securities Regulator in the Field of Investment Education
Theory is fine but practice is better
6
Introduction
The Experience by the Securities Regulator in the Field of Investment Education
7
Nel 1999, inizio analisi quali-quantitativa del mercato dei covered warrant e descrizione delle caratteristiche macro e micro strutturali del relativo mercato
Introduction
esame controvalori scambiati nell’unità di tempo esame attività dei market maker presenti nel mercato implementazione modello di verifica della formazione dei prezzi in relazione alla volatilità espressa dal sottostante
Nel 2000, implementazione attività di investor education finalizzata a:
illustrare le caratteristiche macro e micro strutturali del mercato di riferimento analizzare e illustrare i profili di rischio rendimento connessi all’attività di investimento nel prodotto, anche con riferimenti all’andamento delle greche, alla loro reciproca interferenza e alle strategie dei market maker finalizzate al controllo del desk dare evidenza al fattore tempo e alle modalità attraverso le quali esso può influire sul risultato finale dell’investimento e sulle strategie di negoziazione del market makerFornire strumenti stocastici di calcolo volti a confrontare in termini di volatilità implicita i prodotti scambiati sul mercato con caratteristiche confrontabili per fornire elementi di reciproca comparabilità all’investitore
presentazione dell’attività alle associazioni dei risparmiatori e relativi feed backAnalisi costi benefici dei possibili mezzi di diffusione dell’iniziativa
Fine 2000, presentazione e pubblicazione dell’iniziativa
The Experience by the Securities Regulator in the Field of Investment Education
… or it could be an exercise in simple, powerful, attractive language, as if my presentation were a financial education initiative
8
Introduction
The Experience by the Securities Regulator in the Field of Investment Education
therefore the style of my presentation to describe what Consob has done in ten years will be like this. . .
9
Introduction
The Experience by the Securities Regulator in the Field of Investment Education
10
Consob has been engaged in financial education for about ten years. We started in 2000 with a number of initiatives on certain
sophisticated financial products (e. g. covered warrant and reverse convertible) and a guide which analyzes the investment process from
the investors’ viewpoint, step by step
Introduction
2000 2010
Financial Education
The Experience by the Securities Regulator in the Field of Investment Education
11
These early initiatives already reflect our thoughts on this matter. In fact, they have two fundamental purposes
Introduction
The Experience by the Securities Regulator in the Field of Investment Education
12
The first one is an "educational" goal: we want to suggest and to instill good habits that increase investors’ skills of self-protection, for example, through a greater awareness of their rights and how to exercise them
Introduction
The Experience by the Securities Regulator in the Field of Investment Education
13
The second goal is "training“: we want to increase awareness of certain financial products
Introduction
The Experience by the Securities Regulator in the Field of Investment Education
14
The financial products to which we have dedicated our initiatives, have been chosen because of their complexity …
Introduction
The Experience by the Securities Regulator in the Field of Investment Education
15
… their cruciality …
Introduction
The Experience by the Securities Regulator in the Field of Investment Education
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… or their diffusion among the public
Introduction
The Experience by the Securities Regulator in the Field of Investment Education
17
- communication channels that give a better understanding of investors’ difficulties and their need for information
Introduction
To choose the initiatives to be implemented we need:
- A deep market knowledge
The Experience by the Securities Regulator in the Field of Investment Education
18
- Integration with supervisory activity
Integration with supervisory activity
- Introduction
- Targets and types of initiatives
- Future prospects
The Experience by the Securities Regulator in the Field of Investment Education
19
Integration with supervisory activity
We do not see financial education as a separate activity, which aims to provide some form of help and support for investors, by giving general advice and information
The Experience by the Securities Regulator in the Field of Investment Education
20
Integration with supervisory activity
On the contrary, we believe financial education to be a part of the package offered by the Authorities for the complete realization of their mission: the protection of public savings
AutorityRegulations
FinancialEducation
Dispute resolution
Fines
The Experience by the Securities Regulator in the Field of Investment Education
21
Integration with supervisory activity
Supervisors are increasingly committed to managing the sector assigned to them: for example, besides the traditional regulatory instruments and sanctions, they are now also called upon to manage instruments of dispute resolution
Prevention Repression Dispute resolution
The Experience by the Securities Regulator in the Field of Investment Education
22
Integration with supervisory activity
prevention repression dispute solution
Financial education is certainly part of the preventive instruments
The Experience by the Securities Regulator in the Field of Investment Education
23
Integration with supervisory activity
It is generally accepted that a proper financial education can help investors prevent errors or frauds
The Experience by the Securities Regulator in the Field of Investment Education
24
Integration with supervisory activity
It is also accepted that:- the increasing diffusion of forms of distance communication- the integration of world markets- the extreme complexity of products offered are the raisons for implementing financial education
Financial Education
The Experience by the Securities Regulator in the Field of Investment Education
25
Integration with supervisory activity
The appropriate education of investors will increase their self-defense and will then become a pillar for the entire supervisory system of protection of public savings
Regulation Supervision FinesFinancial education
Dispute resolution
The Experience by the Securities Regulator in the Field of Investment Education
26
Integration with supervisory activity
The connection between financial education and other forms of supervision is not only based on the common purpose of protecting public savings. It is much more concrete than that. In fact, financial education is complementary to other forms of supervision, of which increase efficiency, as a leverage factor
Financial education
Supervision
Save of public savings
The Experience by the Securities Regulator in the Field of Investment Education
27
Integration with supervisory activity
Two examples may make this clear…
The Experience by the Securities Regulator in the Field of Investment Education
28
Integration with supervisory activity
In Italy, banks have been obliged to have a "profiling" of the client system for about 20 years. This is an essential instrument for the proper assessment of the adequacy or appropriateness of transactions made on behalf of the clients
The Experience by the Securities Regulator in the Field of Investment Education
29
Integration with supervisory activity
Nevertheless, especially in the early years, many clients saw this activity as an unwanted interference to their privacy, and they often refused to provide information, nullifying, therefore, an important instrument for their own protection
The Experience by the Securities Regulator in the Field of Investment Education
30
Integration with supervisory activity
Proper financial education instead brings investors to develop this tool, and convinces them to provide all the requested information. It is no coincidence that Consob has produced more initiatives in which the theme of "profiling" has been dealt with
Financial education
The Experience by the Securities Regulator in the Field of Investment Education
31
The second example is the relationshipbetween investors
and financial products offered on the market
The Experience by the Securities Regulator in the Field of Investment Education
Integration with supervisory activity
32
Integration with supervisory activity
The last decade has witnessed a greater inability for investors to understand financial products. This is essentially due to their increasing complexity
The Experience by the Securities Regulator in the Field of Investment Education
33
Integration with supervisory activity
…from simple forms of investment, such as government bonds, which offer an interest rate directly proportionate to the length (or, better, to the duration), and inversely proportionate to the reliability of the issuer (and, mind you, this basic variable has already caused problems), we moved to the diffusion of highly complex securities - such as structured bonds, but also the financial–insurance products (unit and index-linked) and some mutual funds, where the final performance is connected to a plurality of variables, many of which are abstruse, not easily estimable or even incomprehensible
The Experience by the Securities Regulator in the Field of Investment Education
34
Integration with supervisory activity
On these products, the investor has at least three problems:-he is unable to assess whether the price to pay is the right one;- he cannot compare the products to other products on the market;- he does not understand which scenarios must take place in order to gain a profit or make a loss on the product
What if?
The Experience by the Securities Regulator in the Field of Investment Education
35
Integration with supervisory activity
The investor’s "problems" coincide with the issuer’s advantages that due to complexity of products offered, can better hide, and then increase, his own profit
If xy+ztf-
2+∑+Ω/Ωα+µ-β+π<245=xzy>56≠hzi≤xy≥zt%+¼x-½z+¾ȶ-Ƚɀ[Φ⅜]+⅝x-⅞z……..
The Experience by the Securities Regulator in the Field of Investment Education
36
Integration with supervisory activity
This is the situation in which financial education can make a contribution
The Experience by the Securities Regulator in the Field of Investment Education
37
Integration with supervisory activity
Not on its own, though! It is virtually impossible to explain in simple terms all the products, some very complex, already on the market or to be made in future by financial engineering
The Experience by the Securities Regulator in the Field of Investment Education
38
Integration with supervisory activity
Consob's activity of supervisory is very effective in this field. For a number of years it has been committed to the diffusion of prospectuses that, due to the complexity of the products covered, highlight certain data. This data, easily affordable by investors, helps them to assess and compare the requested price for the product and the prospects of risk and return
The Experience by the Securities Regulator in the Field of Investment Education
39
Integration with supervisory activity
This data is the result of very sophisticated stochastic (random) calculations, but the investor does not need to comprehend these calculations, nor is it necessary to explain them in the prospectus. The only important thing is that the final result is useful, simple and objective
xy+ztf-2+∑+Ω/Ωα+µ-β+π<245=xzy>56≠hzi≤xy≥zt%+¼x-½z+¾ȶ-Ƚɀ[Φ⅜]+⅝x-⅞z……..
The Experience by the Securities Regulator in the Field of Investment Education
40
Integration with supervisory activity
A concrete example
Contingent Convertible bond X-bank, 6.75% June 2009 - June 2013
The Experience by the Securities Regulator in the Field of Investment Education
41
Integration with supervisory activity
For every 63 shares of X-bank a bond is offered to shareholders; this bond generates an interest rate of 6.75% per annum. But there is a problem: at the expiration date (June 2013) this bond is automatically converted into shares, on the basis of an exchange ratio set at the time of the issuing
Bank
June 2009
100
June 2013
Bond
Share + 6.75 X 4
Bond
The Experience by the Securities Regulator in the Field of Investment Education
42
Integration with supervisory activity
Bank
June 2009
100
June 2013
Bond
Stock + 6.75 X 4
Bond
Share =
OrBond = 100
The Experience by the Securities Regulator in the Field of Investment Education
Share =
43
Integration with supervisory activity
xy+
ztf-
2+
∑+
Ω/Ω
α+
µ-
β+
π<245
=xzy
>56
≠hzi
≤xy
≥zt%
+¼
x-½
z+¾
ȶ-Ƚɀ
[Φ⅜
]+⅝
x-
⅞z…
…..
xy+
ztf-
2+
∑+
Ω/Ω
α+
µ-
β+
π<245
=xzy
>56
≠hzi
≤xy
≥zt%
+¼
x-½
z+¾
ȶ-Ƚɀ
[Φ⅜
]+⅝
x-
⅞z…
…..
The Experience by the Securities Regulator in the Field of Investment Education
44
Integration with supervisory activity
Bond = 95.17
Scenarios
The Experience by the Securities Regulator in the Field of Investment Education
45
Integration with supervisory activity
Scenario Yield to maturity Probability Central value
1 Negative 68.5% 59.2%
2 Positive but lower than the risk-free asset
2.8% 103.8%
3 Positive and similar to the yield of risk-free asset
4.4% 113.7%
4 Positive and higher than the risk-free asset
24.3% 162.3%
Table of probable scenarios of this investment at the expiration date
The Experience by the Securities Regulator in the Field of Investment Education
46
Integration with supervisory activity
educationFinancial
With these supervisory tools, the role of financial education is much easier
The Experience by the Securities Regulator in the Field of Investment Education
47
Integration with supervisory activity
Prospectus
Financial education
The Experience by the Securities Regulator in the Field of Investment Education
48
- Targets and types of initiatives
Targets and types of initiatives
- Introduction
- Integration with supervisory activity
- Future prospects
The Experience by the Securities Regulator in the Field of Investment Education
49
Targets and types of initiatives
It is generally accepted, even in international forums, that financial education should be targeted towards several population groups and, especially, the younger ones
The Experience by the Securities Regulator in the Field of Investment Education
50
Targets and types of initiatives
Not to underestimate the importance of a proper financial education for young people, there is no doubt that they are quite far from the real problems of investing. So, it should also keep those who now face the problem of investing their savings into consideration
The Experience by the Securities Regulator in the Field of Investment Education
51
Targets and type of initiatives
Besides long-term initiatives, aimed at younger generations, the objective of which is to explain the general themes of saving, financial planning, investment, debt
A B C D E F G H I L M N Oa b c d e f g h i l m n o
1 2 3 4 5 6 7 8 9 10
/ / / / / / / / / / / / / / / / / / /
\ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \
The Experience by the Securities Regulator in the Field of Investment Education
52
Targets and types of initiatives
We must also implement “short term” initiatives dedicated to instilling in older people, directly and currently involved in investing, an accurate and virtuous conduct and to distribute information and concepts that allow them to choose financial products consciously
The Experience by the Securities Regulator in the Field of Investment Education
53
Targets and types of initiatives
Obviously, differentiation of targets must not only consider the different age groups, but also the different cultural backgrounds and basic predisposition towards financial matters
The Experience by the Securities Regulator in the Field of Investment Education
54
Targets and types of initiatives
So, together with the initiatives dedicated to products of some complexity, we must widely realize lower-level initiatives, including elementary ones, aimed at those (probably the majority) that have very little knowledge and experience of financial matters
xy+ztf-2+∑+Ω/Ωα+µ-β+π<245=xzy>56≠hzi≤xy≥zt%+¼x-½z+¾ȶ-Ƚɀ[Φ⅜]+⅝x-⅞z……..
2 x 4 = 83 x 3 = 98 : 4 = 2
The Experience by the Securities Regulator in the Field of Investment Education
55
Targets and types of initiatives
Consob, for example, among its initiatives, has a decalogue of very simple, very effective rules
1 ----------
2 ---------
3 ---------
4 ---------
5 ---------
6 ---------
7 ---------
8 ---------
9 ---------
10 --------
The Experience by the Securities Regulator in the Field of Investment Education
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Targets and types of initiatives
… the simplest one is: if you do not understand, do not invest. We believe that this is the fairest answer to the increasing complexity of financial products that often, through their opacity, conceal more profit to the issuer and, consequently, higher risk/return ratios for investors
The Experience by the Securities Regulator in the Field of Investment Education
57
- Future prospects
Future prospects
- Introduction
- Integration with supervisory activity
- Targets and types of initiatives
The Experience by the Securities Regulator in the Field of Investment Education
58
In these last ten years, Consob has implemented financial education initiatives, discussed the issue with other Authorities, consumer groups and in any context where this was possible
Financialeducation
2000-2001-2002-2003-2004-2005-2006-2007-2008-2009-2010
The Experience by the Securities Regulator in the Field of Investment Education
Future prospects
59
With our activities we have helped to highlight the existence of a problem of financial education in Italy. Now there is attention in our country, witnessed by the many legislative bills waiting to be discussed by Parliament in order to regulate the matter
The Experience by the Securities Regulator in the Field of Investment Education
Future prospects
60
In recent years we have devoted much work and passion to financial education, but do not expect to have significantly affected the average level of financial literacy of the population. To achieve this goal many more resources will be necessary
2000-2001-2002-2003-2004-2005-2006-2007-2008-2009-2010
The Experience by the Securities Regulator in the Field of Investment Education
Future prospects
61Financial education in Italy is at a crossroads
The Experience by the Securities Regulator in the Field of Investment Education
Future prospects
62
One possibility is to continue with the initiatives undertaken by individual authorities, reflecting a commitment still alive but with little ability to affect the general public
The Experience by the Securities Regulator in the Field of Investment Education
Future prospects
63
The best solution is a commitment of the whole country to a national program able to coordinate individual subjects and their initiatives and to make adequate resources available to this program
The Experience by the Securities Regulator in the Field of Investment Education
Future prospects
64
Prospettive future
It is therefore necessary that there be a governing body that will coordinate and check all the activities carried out by individual subjects
The Experience by the Securities Regulator in the Field of Investment Education
65
... that there be valid systems for assessing and monitoring the level of financial literacy of the population and the level of effectiveness of each campaign. This is essential in order to be able to choose more effective communication tools
The Experience by the Securities Regulator in the Field of Investment Education
Future prospects
66
Prospettive future
… that individual efforts be coordinated to avoid overlaps or even contradictions and reach all possible targets
The Experience by the Securities Regulator in the Field of Investment Education
67
… that there be adequate funds available to enable the use of mass media to reach wide sections of the population. Otherwise the population will be prey to advertisements carried out by those who offer financial products and services
The Experience by the Securities Regulator in the Field of Investment Education
Future prospects
68
Only if addressed to a similar program, the efforts of various authorities or other interested subjects can achieve appreciable results in raising financial literacy of the population, thereby increasing their level of protection
The Experience by the Securities Regulator in the Field of Investment Education
Future prospects
The Experience by the Securities Regulator in the Field of Investment Education
Sofia June 29, 2010
Thank you for your attention
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