Regulatory backlash

Equity markets have rallied sharply since mid-March. The Nikkei 225 has risen by 37.2% to 9,680.77 by July 6; while the Hang Seng Index has beaten that, soaring 58.5% from March 9 to 17,979.41. Meanwhile, volumes of accumulator products - which where ruefully referred to as 'I kill you later' instruments just a few months ago - are back above HK$1 billion ($130 million) per day in Hong Kong.

Goldman Sachs and Morgan Stanley - the last two US investment banks that just 10 months ago were fighting for their very survival - revealed in June they are both paying out bonuses to staff in excess of those offered during the halcyon days of 2007. And bankers are already starting to pitch both clients and regulators with new-fangled structured credit instruments.

While many market participants are sceptical about the likely duration of the current rally, others are already concerned that important lessons from the financial crisis may never be fully learned, let alone acted upon. They say regulators around the world are failing to use the groundswell of political support to institute better supervision to reshape the rules governing the activities of financial institutions. The fear is that supervisors will fail to act in time and their efforts will be blunted.

Regulators in Asia, however, are being highly proactive in the area of retail protection. Notably Taiwan, Singapore and South Korea have made significant moves in this area in the past several weeks.

Singapore censured 10 distributors in early July for their role in the sale of credit-linked notes that blew up due to the collapse of Lehman Brothers, giving them bans for between six months to two years. And in response to the events of September last year, South Korea is moving to restrict retail investors from using derivative instruments based on credit and natural phenomena for the next two years.

Regulators in Taiwan, meanwhile, are giving conflicting signals about how they want to improve investor protection in the country - with draft guidelines shifting dramatically within just a matter of days (see cover story). In part, this may be due to the regulator trying to 'think outside the box' and gauge market reaction to a raft of potential changes to the retail structured notes market in the country. But too many shifts in direction can have a detrimental affect on market confidence.

Christopher Jeffery.