This issue of the European Business Organization Law Review is devoted to fundamental problems in the field of retail financial services as have become particularly clear since the recent disruption of the financial markets. Ultimately, these issues lead to line-drawing problems and policy choices about investor and consumer protection which are tackled from a legal and an economic perspective respectively. The articles in this issue have originated from papers and proceedings of the joint IMFS (Institute for Monetary and Financial Stability) and LEMF (Doctorate/PhD Program ‘Law and Economics of Money and Finance’) conference on ‘Retail Financial Services after the Crisis: Legal and Economic Perspectives on Investor and Consumer Protection’, which took place at the House of Finance, Goethe University of Frankfurt on 20 and 21 January 2012.

It has generally been maintained that UK companies embrace a shareholder value approach. But some commentators have challenged that view. This article documents an attempt to ascertain the actual position in UK companies by an analysis of the position taken concerning corporate objective by 50 of the largest companies in the UK. The research consists of an examination of the public documents of these companies, namely those that could be accessed from the companies' websites, and the primary document considered was the company's most recent Annual Report. The study found that companies could be divided into three groups with one group consisting of 36% of the companies considered, stating that they have shareholder value as their ultimate goal. But, critically, it also found that most of these companies indicated that non-shareholding stakeholders were important to them.

Much ink has been spilt in discussing the extent to which risks generated by over-the-counter (OTC) derivatives were implicated in the global financial crisis (GFC). Subsequent inquiries into the causes of the crisis have focused on, amongst other things, the substantial exemption of these financial instruments from regulatory oversight and an apparent lack of awareness amongst both market actors and regulators about the extent of risk involved. Following the GFC, a narrative has now emerged in both the United States and the European Union which emphasises the significance of systemic risk, comprising the aggregate consequences arising from failure of transactions as opposed to the risk associated with particular transactions. To address systemic risk, new regimes focus both on increasing the transparency of OTC derivatives transactions and on the imposition of new regulatory requirements.

The European Commission's Recommendation of 2008 on auditor liability relies heavily on the assumption that auditors are over-deterred. The economic rationale that underpins this assumption is entirely focused on liability towards investors and the US narrative concerning securities class actions. This approach oversimplifies the issue, because it does not consider why auditors really exist and what the different interests served by them are. Accordingly, it neglects that auditors' liability is multidimensional. This article analyses auditor liability's multi-layered regimes. It investigates who the auditor's principals are; whether the auditor and those principals are in a position to negotiate in order to design the optimal liability regime; whether and at what stage market failures prevent contractual negotiation; what kind of positive (or negative) interferences stem from multiple negotiations and a multi-layered liability regime; and how such a multi-layered regime might be designed. In doing so, the article makes reference to some existent legal regimes and comments on them. However, its analysis is functional, not comparative. The article argues that the auditor liability case is much more complex than the economic and the law & economics literatures suggest, and concludes that a generalised, uniform, worldwide approach in favour of liability reduction has no scientific grounds, at least at the current stage of our knowledge.

The dualism between private and public enforcement of investor-related rights and its influence on the development of capital markets has been the subject of much recent commentary. While opinions differ as regards preference for private or public enforcement, scholarly analysis has so far been focused on the principal-agent relationship between investors and issuers, and has tried to depict the most effective enforcement system from a deterrence perspective. In this article we present some data about the Italian experience of enforcement. Rather than of lawsuits against issuers or gatekeepers, investor protection in Italy is mostly the result of proceedings brought by individuals against investment services providers. Does such a model promote the public goals of securities regulation? Is it efficient? By answering these questions, we aim to show how the Italian experience may contribute to the international debate on the enforcement of securities regulation.

It has frequently been claimed that over-the-counter (OTC) derivatives were, by and large, not directly regulated in the largest markets immediately prior to the global financial crisis (GFC). While there is an element of truth in this contention, it betrays the more complex interactions between public legislators and influential transnational private trade associations, most notably the International Swaps and Derivatives Association (ISDA), both prior to the GFC and in the wake of it. ISDA, its members and national governments interact on the basis of legal and policy tradeoffs which are ostensibly related to OTC derivatives' regulatory treatment but which, in reality, extend beyond this. The fact of these interactions between ISDA and nation states may raise less regulatory legitimacy challenges than some of the norms which are communicated. A prime example is the public transposition of ‘safe harbours’ which insulate OTC derivatives, including ‘purely speculative’ contracts, from the full force of gambling law. It is thus suggested that while the regulatory role and expertise of ISDA should be formally recognised and appropriately harnessed by public actors in the creation of a new public-private regulatory détente in the OTC derivatives markets, a review of the appropriateness of the current legal treatment of purely speculative derivatives should be a priority for any such regulatory regime.

The controversial and long-awaited Commission Proposals to revise the cornerstone Markets in Financial Instruments Directive 2004 (MiFID I) were presented in October 2011. The Proposals are currently going through the Council and Parliament negotiation process, and final agreement is expected sometime in 2013. This article places these important reforms (together, MiFID II) in context by examining the impact of MiFID I since its application to EU financial markets in November 2007, and by considering what MiFID I's impact suggests for the design of MiFID II. It considers how MiFID I reshaped the EU share trading marketplace and how the dominant interests which shaped MiFID I's regulatory design fared. It also examines how those interest groups are seeking to shape MiFID II, and the implications. It suggests that the influence of interest groups may have led to overly ambitious MiFID II Proposals which are excessively concerned with investment firm and trading platform interests, and not sufficiently focused on the overall efficiency and effectiveness of EU share trading markets. It calls for a more modest approach to reform, based on fine-tuning MiFID I.

Alan Greenspan, the former Governor of the Federal Reserve, remarked in the context of the financial crisis that ‘even sophisticated investors got things badly wrong’. This comment throws a spotlight on quite how out of step and unrealistic general assumptions can be as regards markets and market regulation. From a consumer perspective, we may wonder what chance the average consumer has of getting things right, if sophisticated investors can get things so badly wrong?

Much of the legislation governing financial products and financial services is based on the classical view that economic agents, including consumers, are essentially selfish by nature, seeking to maximise their personal financial benefit, by acting in a rational manner and through making independent choices.

Of course, nobody pretends that this view is an accurate reflection of the economy, and even less so an accurate portrayal of human beings. Yet this forms the standard profile for modelling and thus the basis for assumptions which underpin much of the regulation governing the economy.

This paper explores the relationship between disclosure in securities markets and the firm's need for confidentiality. Transparency plays a crucial role for both investor protection and the proper functioning of financial markets. Confidentiality protects the value of information which has been costly produced by the company and preserves private incentives for business and technological innovation. The requirement of too detailed or early disclosure in securities markets, even when aimed at greater investor protection and enhanced market efficiency, would be ultimately detrimental since it would hinder the firm's competitive capacity and weaken the system of private incentives for innovation. EU mandatory disclosure rules protect the firm's interest in confidentiality and allow public companies to refrain from – or delay – the release of the most sensitive data. The scope of these safe harbours, however, is narrow and always at risk of excessive restriction by the powers of regulatory agencies. Furthermore, when information with competitive value is concurrently significant for investors, refraining from disclosure – no matter if allowed or not by the law – hampers the firm's capacity to raise finance and makes the process of resource allocation less efficient. Selective disclosure reconciles investors' demand for information and the firm's need for confidentiality since it allows market prices to react to the information whilst also bypassing the need for public release of the relevant contents. Reconciling the tension, in turn, constitutes a desirable outcome: the securities market will be more efficient and raising finance will become less costly, especially for the most ‘secrecy sensitive’ projects. At the same time, the system of private incentives for innovation will be fully preserved.

This article examines the regulation of directors' remuneration in EU, UK and Belgian law. The author argues that there are two categorises of norms for the regulatory framework of directors' remuneration: one is market-based, market efficiency norms of agency costs; the other is socio-legal norms. The paper argues that agency costs – a responsive mode of governance – alone cannot adequately address the problems of directors' remuneration. On the other hand, socio-legal norms – which are value and ethics-focused – can better construct a paradigm capable of addressing a broader issue of directors' remuneration in the EU context. Agency costs-based regulation has been used by the EU whereas socio-legal matters have been left to Member States. The article shows how socio-legal norms could form the underlying basis of the regulatory regime by examining the laws in the UK and Belgium. It is concluded that the European Court of Justice will need to carry out the role of negative integration by harmonising these social values in developing EU company law.

This paper examines the contract interpretation strategies adopted by the International Swaps and Derivatives Association (ISDA) for its credit derivatives contracts in the Greek sovereign debt crisis. We argue that the economic function of sovereign credit default swaps (CDS) after Greece is limited and uncertain, partly thanks to ISDA's insistence on textualist interpretation. Contract theory explanations for textualist preferences emphasise either transactional efficiency or relational factors, which do not fit ISDA or the derivatives market. We pose an alternative explanation: the embrace of textualism in this case may be a means for ISDA to reconcile the competing political demands from state regulators and its market constituents. We describe categories of contracts susceptible to such political demands, and consider when and why textualism might be the preferred response.

This article considers the impact of the financial crisis reform agenda on EU investor protection regulation. It argues that retail market regulation is becoming associated with a consumer protection agenda and that a more interventionist approach to the retail markets is following. The influences which are shaping this ‘consumerisation’ of EU investor protection regulation, and the benefits and risks of the new approach, which are particularly apparent in the product intervention sphere, are considered.

The aim to develop transnational principles for the regulation of Alternative Dispute Resolution (ADR), which deal, inter alia, with whether and how the use of ADR should be promoted by the state and how ADR should be regulated, brought leading experts from different European countries, the USA and Japan to the University of Bayreuth from 14-16 September 2012. ADR refers to dispute resolution mechanisms outside the state court system. It includes procedures such as negotiation, mediation, conciliation, (binding) expert opinion, arbitration and ombudsman proceedings. In suitable cases, ADR offers solutions which are faster and cheaper than court procedures, especially for cross-border conflicts. The parties have greater control over the conflict resolution procedure. They can arrive at a sustainable compromise adapted to their interests. The procedures are conducted in private; the parties can agree to keep the result confidential.

The financial crisis has impacted enormously on two features that are critical for investors' decisions: their beliefs and their preferences. It has brought to light diffuse opportunistic behaviour and some serious frauds. Because of this, trust in banks, bankers and brokers and the stock market has collapsed to unprecedented levels. The fear following the crisis, and the symptoms of panic that went with it, have led investors to become much more risk averse than they used to be in the past. We argue that failing trust and risk tolerance have a major effect on the working of financial markets and the economy. We show evidence that suggests that the drop in trust and the increase in risk aversion are likely to be enduring and very slow to recover. This is one reason, perhaps among others, why the consequences of the financial crisis will probably be lasting.

In November 2011, the European Commission published legislative drafts proposing radical reforms for statutory audits in Europe, fuelling heated political and academic debates. This paper presents cornerstones for a new regulatory framework of auditing and thereby contributes to the ongoing debate on the role of auditors and their independence.

The paper focuses on financial transactions, addressing over-the-counter (OTC) trading of derivatives, which many analyses of the recent financial crisis argue produced significant problems. This area of financial activity grew massively from the 1990s, facilitated by legal developments in both the US and the UK that ruled out any state regulation of the market whilst at the same time affirming that the contracts made in the area were fully legally enforceable in US and UK law. At the same time, the private association, the International Swaps and Derivatives Association (ISDA), developed the Model Contract and international private soft law agreements that were generally respected by national legal systems and provided an agreed framework for OTC contracts. The paper explores how this lack of public regulation was legitimated, and the interests which lay behind this legitimation process. It then considers how the financial crisis and the role of OTC derivatives forced a re-opening of the issue of how these markets should be regulated. The paper explores the interplay between what may be described as technical fixes to regulatory problems, on the one hand, and the efforts of private and public actors to defend their interests by shaping the new markets in particular ways, on the other.

Austrian courts are faced with a tremendous wave of investor lawsuits, more than 1,200 are still pending. This challenging situation has given the Austrian Supreme Court the opportunity to clear up a lot of legal questions concerning inadequate investment advice and prospectus liability and to accept and develop new legal instruments to enforce claims of investors and compensate their damages.

The main focus lies therefore not on questions of ‘classical’ capital market law but rather on fundamental issues of civil law such as contract law and transactions. Instead of dealing with the clauses of the MiFID and the Prospectus Directive, which are of course implemented in Austrian law, the investor and the courts refer to compensation claims under civil law by transferring old-fashioned civil law issues such as avoidance on the grounds of error and warranty claims to modern and dynamic capital market law with ongoing success.

Innovation and R&D are important to economic growth. One argued way to encourage innovation is through government support for venture funds. This might be especially important in countries that lack a developed venture capital (VC) sector. However, some papers have suggested that this government backing might ‘crowd out’ purely private sector funds and might undermine innovation creation. Thus, I examine the use of a scheme in Australia (the Innovation Investment Fund (IIF) scheme). I focus on Australia because unlike many low innovation countries, it has strong legal foundations, enabling a cleaner look at the impact of government backing. I argue that Australia's scheme is well structured. I then show that while Australia has relatively low levels of VC and innovation compared with other countries, its VC activity scaled by GDP has grown following the inception of the IIF scheme, particularly increasing after 2001. The policy implication is that properly structured government support for VC funds can stimulate innovation and VC activity.

The issue of whether and how to regulate short selling has vexed regulators for some time. While there are a number of potentially damaging consequences that are said to stem from short selling, there is also evidence that it can have beneficial effects on financial markets. In the wake of the collapse of Lehman Brothers in September 2008, and more particularly the falls in the prices of listed financial securities that followed, the regulation of short selling has come back onto the regulatory agenda with a vengeance. Various regulatory techniques, some temporary and some more permanent, have been adopted to deal with short selling. This paper explores those implemented in the US, the UK, Germany and France. The EU has also been developing its regulatory response and in March 2012 the final text of a Regulation dealing with short selling was published. This paper considers the arguments for and against the regulation of short selling, and considers the EU's Short Selling Regulation in the light of these arguments. It is suggested that although the provisions of the EU's Regulation introducing disclosure to the regulator are broadly sensible, as are the provisions designed to foster a stricter settlement regime, other provisions are more problematic and have the potential to cause damage to European financial markets.