Investment suitability requirements in the light of behavioural findings: Challenges for a legal framework coping with ambiguous risk perceptions

Abstract

The findings of behavioural finance research. Have undoubtedly influenced the traditional understanding of the processes and patterns that allow the financial markets to function.1 Perceptions, which used to be based on the assumptions of rational behaviour gradually allow for human flaws.2 Not only the structural information asymmetries between the various financial market participants interfere with the efficient allocation of capital; moreover, there is also a need to address other factors that may substantially influence markets, such as emotions, reference biases, overconfidence and inertia impair rational choice.3 Since such insights from the field of behavioural economics are often not in line with the common legislative model developed on the basis of the rational investor concept, the question arises which possible reactions of the law (especially of financial market law) to the insights provided by other disciplines might be valuable.4 Today's approach towards the point-of-sale (POS) regulations for investment advisory and portfolio management services includes a mandatory assessment regarding the individual appropriateness and suitability of financial investments.5 The following analysis of presently debated regulatory code-of-conduct requirements fostering investor protection is based on behavioural findings.