Regulation and integrity

Managing funds, portfolios and/or investment accounts requires a great deal of investment knowledge over and above familiarity with ever-changing regulations.

Many could say that managing investments in the 80s and 90s generated far greater returns than those seen nowadays. This is true, in part, given the greater risk and deregulation present at the time.

Such deregulation allowed many stockbrokers, investment managers and advisors to freely pursue profits, regardless of the prudence needed in applying the risk-reward trade-off.

Such behaviour led to numerous counts of fraud, bankruptcies and scandals over the years notably the collapse of Barings Bank, the Enron bankruptcy, the collapse of the Lehman Brothers and Bernie Madoff’s largest Ponzi scheme.

The Wizard of Lies is a recent film release worth a watch that depicts Bernie Madoff’s Ponzi scheme story. The inaction of the US regulators (the SEC) to adequately flag such fraudulent behaviour led to worldwide reforms in the aftermath of the 2008 global recession crisis.

Today, investment reforms and regulations are enhanced and in place to further protect end investors from repeats of previous scandals, deception, fraud and negligent losses.

While well needed for retail investors, large financial institutions such as banks have seen their corporate earnings strained by new industry constraints. Such changes came in the form of enhanced core capital reserve requirements, for one, limiting banks’ abilities to invest/loan out added funds, for further profits.

Fund managers likewise, must abide, by stricter constraints, to ensure investments are suitable for investors and unnecessary risk is sparred. Whilst profits certainly still remain attractive, those expecting figures anywhere close to those seen in the past decades, especially relating to financial institutions can look elsewhere.

Hedge funds are alternative investment funds that come closest to unconstrained investments, yet these, albeit on a much smaller scale to retail funds, are still regulated by regulating bodies.

In fact, typically, only qualified investors contribute to hedge fund strategies, given the high capital risks present.

Derivatives, structured and leveraged products are also popular in generating above-average market returns, yet, such products in the form of Credit Default Swaps, amongst many others, were the trigger of the credit crisis back in 2008.

Some will argue that nowadays regulation has gone to the other extreme, hampering economic growth prospects throughout the world’s major economies. Reforms and controlled deregulation could certainly be needed to boost the stagnant growth of power house economies, notably the eurozone.

Yet, despite the US considerably ahead in its economic cycle, and recording positive GDP growth, deregulation would be a side tool to further enhance positive growth, as the ‘overregulation’ of the past decade, many describe, has not hampered but rather slackened positive growth momentum.

Whatever further regulation or deregulation presents itself going forward, investment professionals have the end duty of protecting the interests of their clients. Whilst sadly, as historically seen, this is not always the case, integrity and ethical professionalism is the greatest of profits in an industry where trust makes or breaks reputations in the eyes of clientele.

This article was issued by Jordan Portelli, investment manager at Calamatta Cuschieri. For more information visit, .The information, views and opinions provided in this article are being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice. Calamatta Cuschieri & Co. Ltd has not verified and consequently neither warrants the accuracy nor the veracity of any information, views or opinions appearing on this website.

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