Sofia June 29, 2010 The Experience by the Securities Regulator in the Field of Investment Education.

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


A language problem

4

Introduction

Appropriate language is so difficult, so problematic, and yet so critical to the success of financial 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


Theory is fine but practice is better

6

Introduction


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


… or it could be an exercise in simple, powerful, attractive language, as if my presentation were a financial education initiative

8

Introduction


therefore the style of my presentation to describe what Consob has done in ten years will be like this. . .

9

Introduction


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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


11

These early initiatives already reflect our thoughts on this matter. In fact, they have two fundamental purposes

Introduction


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


13

The second goal is "training“: we want to increase awareness of certain financial products

Introduction


14

The financial products to which we have dedicated our initiatives, have been chosen because of their complexity …

Introduction


15

… their cruciality …

Introduction


16

… or their diffusion among the public

Introduction


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- 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


18


Integration with supervisory activity

- Introduction


- Future prospects


19


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


20


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


21


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


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prevention repression dispute solution

Financial education is certainly part of the preventive instruments


23


It is generally accepted that a proper financial education can help investors prevent errors or frauds


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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


25


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


26


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


27


Two examples may make this clear…


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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


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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


30


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


31

The second example is the relationshipbetween investors

and financial products offered on the market



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The last decade has witnessed a greater inability for investors to understand financial products. This is essentially due to their increasing complexity


33


…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


34


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?


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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……..


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This is the situation in which financial education can make a contribution


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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


38


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


39


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……..


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A concrete example

Contingent Convertible bond X-bank, 6.75% June 2009 - June 2013


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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


42


Bank

June 2009

100

June 2013

Bond

Stock + 6.75 X 4

Bond

Share =

OrBond = 100


Share =

43


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…

…..


44


Bond = 95.17

Scenarios


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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


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educationFinancial

With these supervisory tools, the role of financial education is much easier


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Prospectus

Financial education


48


Targets and types of initiatives

- Introduction


- Future prospects


49


It is generally accepted, even in international forums, that financial education should be targeted towards several population groups and, especially, the younger ones


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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


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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

/ / / / / / / / / / / / / / / / / / /

\ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \


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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


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Obviously, differentiation of targets must not only consider the different age groups, but also the different cultural backgrounds and basic predisposition towards financial matters


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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


55


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 --------


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… 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


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- Future prospects

Future prospects

- Introduction




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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


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


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


Future prospects

61Financial education in Italy is at a crossroads


Future prospects

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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


Future prospects

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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


Future prospects

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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


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... 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


Future prospects

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Prospettive future

… that individual efforts be coordinated to avoid overlaps or even contradictions and reach all possible targets


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… 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


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


Future prospects


Sofia June 29, 2010

Thank you for your attention

Sofia June 29, 2010 The Experience by the Securities Regulator in the Field of Investment Education.

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