Distinguishing Yourself As An Informed Investor From A Naive Investor: Financial Markets And Regulatory Awareness

Farhat Ali Khan

22 Jun 2021 6:36 AM GMT

  • Distinguishing Yourself As An Informed Investor From A Naive Investor: Financial Markets And Regulatory Awareness

    An Informed Investor is often termed as a "protected" investor; a person who may claim to have an adequate understanding of the market dynamics, strategies, risks, structuring, suitability, etc. prior to investing in financial markets.

    An Informed Investor claims to have a good understanding of financial products such as securities, bonds, funds, currencies, commodities, deposits, and the unlimited range of financial products traded on various exchanges or platforms across countries. However, it may be the case that this Informed Investor is not so mindful of the various rules and regulations that have been issued and implemented by financial regulatory authorities in different Countries.

    What are Financial Regulations?

    Financial Regulations act as a legal framework within which the financial markets must function in accordance with. In financial markets, there are certain fundamental laws and rules which are applicable through which the markets are regulated and structured. The intent of regulating the financial market is to ensure that the safety, soundness, and protection of the consumer remains intact. These regulations further intend that any form of financial services or investment management whether done at stock exchanges, depositories, investment funds, pooled investment schemes, mutual funds, or any form of collective investments can only be done by an individual or a legal person after having obtained the correct authorizations via a 'License' issued by the Regulatory Authority of the Country. These conditions within which a License is issued are termed as the 'Financial Regulations'.

    There is a general prohibition applied internationally that firms cannot carry out a regulated financial activity unless and until the firm has been authorized or has been exempted to do so. In fact, in certain, if not most jurisdictions such as the UK it is a criminal offence to carry out any regulated activity such as dealing with investments or accepting deposits without an appropriate License issued under the Financial Conduct Authority due to the major risks involved associated with non-compliance.

    Who are the Financial Regulators?

    A Financial Regulator is an authority that supervises and controls the financial system of a country, it monitors evolving markets and ongoing risks and this process is consistent. The government enacts laws, issues regulations, and establishes the regulatory authority and frameworks to ensure that the laws and rules are effectively implemented for the financial system to protect investors interests, remain transparent, to prevent of fraudulent activities and to take the necessary action i.e., to investigate or prosecute in the event of a fraudulent act being detected.

    Financial Regulators are each an independent body, but they are also accountable to the Government of their jurisdiction, and it is their responsibility that the financial market works adequately and protects consumer interests. The more commonly known authorities are the Financial Conduct Authority (FCA) in the UK; the Securities and Exchange Commission (SEC) in the USA; the Australian Securities and Investments Commission (ASIC) in Australia; the Securities and Exchange Board of India (SEBI) in India; and in the UAE, it is the Securities and Commodities Authority of UAE (SCA).

    Financial Regulators are established by a Law issued in the Country, for example, the FCA was formed under the Financial Services and Markets ACT of 2000, and as amended under the Financial Services Act of 2012. In India, the Securities and Exchange Board of India was constituted under the SEBI Act of 1992 and the Federal Law No. 4 of 2000 related to the Securities and Commodities Authority of the UAE came into effect to supervise the functioning of financial markets.

    Financial Regulators of different countries are members of 'The International Organization of Securities Commissions' (IOSCO) which is a body that brings together the world's securities regulators and is recognized as the global standard set for the securities sector. The IOSCO regulates more than 95% of the world's securities markets in more than 130 jurisdictions making its applicability and force widely known.

    Why are Financial Markets Regulated?

    Economies run on well-functional financial systems, the Government by way of these regulations ensure that the safety and soundness of the financial system is maintained efficiently and that financial crimes are limited in their scope of devastation. As each individual depends on a financial system one way or another, it is imperative that it must always remain protected from any threats that may undermine the stability of any financial system.

    It is of utmost importance, that investors are aware of fraudulent promotion schemes such as those involving binary option and binary options trading platforms which can be prevented through a thorough due diligence and market awareness.

    Of recent date it was published by the Australian Competition and Consumer Commission (ACCC) of Australia that a total of 444,164 scams were reported to difference government agencies in 2020. Australian citizens lost more than USD 850 million to different forms of fraud, mentioning further that its citizens lost a total of USD 328 million to investment scams alone. Moreover, a City of London finance firm has been accused of helping illegal Instagram traders scam hundreds of people out of nearly USD 5.6 million using shell companies in the Caribbean. It had occurred when a large sum of individuals had lost large sums of money when a seemingly successful foreign exchange investment scheme on a global trading platform called "Infinox" collapsed in 48 hours over Christmas 2019. Many blamed the 'self-made' Forex trader, Gurvin Singh who promoted the scheme to his 170,000 followers. He was accused of covering up massive losses and duping investors into thinking the scheme was protected by the UK's financial authorities, when their money was actually sent to a broker registered in the Bahamas using the Infinox brand.

    The Financial Conduct Authority (FCA) issued a scam alert against Singh and unnamed associates under his 'GS3' brand for 'providing financial services without our authorization', which can lead to a criminal prosecution.

    What is the Role of Financial Regulators?

    In order to safeguard the interests of a large number of investors across various exchanges or platforms, financial regulators of various countries regulate all formats of financial services offered on securities, commodities markets and/or invested or managed in a collective format. In the past the regulators have not only reported but have publicly come across several instances wherein an investor is often left stranded or is contesting legal claims against financial service provider or a company engaged by the investor, functioning in a manner not prescribed in financial regulations.

    Financial regulators have from time to time issued warnings especially for retail investor to carry out all the necessary checks before getting attracted to investment offers marketed by a company without registration certificates or licenses which are mandatory to conduct any form of financial services.

    The Securities and Commodities Authority (SCA), regulator of the UAE Market, issued an advisory cautioning individuals/investors before dealing with such companies and their representatives or signing any contracts or transferring any funds in their favor. The SCA asked investors and the public to verify the license of companies that offer investment opportunities and claim to have legal licenses, through reviewing the list of the registered and licensed companies on the website of the Securities and Commodities Authority (www.sca.ae), or similar regulatory authorities (such as the Central Bank of the UAE, the Dubai Financial Services Authority, the Financial Services Regulatory Authority of Abu Dhabi Global Market) or through direct communication with the SCA and similar regulatory authorities.

    The FCA of the UK has created a 'The Scam Smart Tool', this tool helps you check if an investment opportunity could be a scam and there are steps which guide an investor as to how such scams can be avoided. The FCA website also has a 'Warning List' containing list of firms that have been identified as promoting financial products without a license from the authority.

    In USA, one can look at the company's financial statements on the SEC's EDGAR filing system to understand a company's business and its products or services before investing. The disciplinary history of brokers and advisers for free using the SEC's and FINRA's online databases.

    India, on the contrary does not have any mechanism to search any scam. The investor can search the website of Ministry of Corporate Affairs (MCA) or the official website of SEBI to pull out information about the company the investor is investing into.

    What are the License and Key Regulatory Requirements before Investing?

    We would have seen that most of the fictitious entities run financial scams through various means such as calls, social media, emails, etc. as such it is important that an investor must ask certain basic questions before the investments are made.

    • Is the Company providing Licensed by the Financial Regulator of the Country?
    • What Activities have been Licensed by the Regulator?
    • What products is the investment firm offering?
    • What policies are maintained by the investment firm? What are the types of Licensed Activities?

    The below list includes but is not limited to activities that can be traded performed only by a regulated financial service firm.

    • Advising on Investments
    • Arranging Deals
    • Dealing in Investments as Agent
    • Dealing in Investments as Principal
    • Introducing or Promoting Financial Products
    • Investment Funds
    • Managing Investments
    • Operating a Multilateral Trading Facility

    What types of Regulated Financial Products are there?

    The below list includes but is not limited to products that can be traded only by a regulated financial service firm.

    • Securities
    • Commodities,
    • Contracts
    • Derivatives
    • Structured Products,
    • or any OTC Financial Products, including Cryptocurrencies such as Ethereum and Bitcoin.

    With the wide variety of types of securities and commodities and the more recent fascination with cryptocurrencies and digital currencies circulating across various exchanges, it becomes more evident that Informed Investors must take part of heavy due diligence in order to ensure not to fall victim to a financial fraud in regard to the highly unregulated assets. It is clear with the eruption of new digital currencies such as the newly Elon Musk vetted 'Dogecoin' that these currencies and most importantly the platform on which they are traded on should be on a close watch and that the correct questions should be asked before an Investor can feel comfortable to deposit money into any platform.

    What types of Policies and Documents should be in place?

    • Anti-Money Laundering and Combatting the Financing of Terrorism Policy (AML & CFT)
    • Customer Engagement Documents
    • Conflict of Interest
    • Data Protection (GDPR) and Privacy Policies
    • Operations Manual
    • Risk Disclosure Policy
    • Suitability Assessment Policy
    • Whistle Blowing Policy and other related documents.

    The policy documents need to be set in accordance with laws governing the Financial Regulated Activities and some are mandatory to be formulated prior to rendering any form of financial services.

    What are the AML & CFT and FATF Guidelines?

    Whilst there are other policy documents that are mandatory for the company to maintain, one very important policy document that is pertinent to mention is the AML & CFT Policy.

    AML & CFT Policy forms a vital part of operations of the investment firm. It is mandatory for the investment firm to ensure to take all necessary steps in compliance to the AML & CFT and KYC compliance. Non-compliance or violation of AML & CFT regulations can lead to prosecution. If the investment firm acts casual on this, it may be an indication that the firm may not be regulated. It is mandatory for a company engaged in financial service to have an MLRO appointed for supervising KYC and AML checks on client onboarding.

    For investment firms to be in strict compliance of AML & CFT rules, the FATF has prepared guidelines to provide support to countries and their financial institutions in designing AML & CFT measures that meet the national goal of financial inclusion, without compromising the measures that exist for the purpose of combating crime.


    Often, we have come across highly publicized news items luring potential investors with the promise of getting rich quick with unbelievable investment returns. The advertisements are so exciting that the financial service provider makes their "opportunity" sound more than legitimate with woes and wonders catching investors in a trap. It does not matter if you are a beginner or have been investing for many years, it is never too early or too late to start asking questions related to the legality in such offers.

    An Informed Investor may ask all the relevant questions related to investments made and returns expected, which may include not limited to:

    • Does this investment match my investment goals?
    • Specifically, what must happen for this investment to increase in value?
    • Has management been successful in the past and made money for investors before?

    However, you may be missing out on questions relating to the legal and regulatory compliances, which will help you complete a check on the legal status of the Company and therefore must not hesitate to ask the following:

    • Is the financial product duly registered with the Financial Regulator of the Country?
    • What are the specific risks associated with this investment?
    • Do you have risk management policy?
    • How long has the company been in business?
    • Is its management and staff of the company accredited and registered with the Regulator?
    • Can I get the latest reports filed by the Company with the Regulator?
    • And any other question that may ask for a legal validation on Company or regulatory confirmation on the Financial Products.

    One should not get carried away by exciting advertisements, promising high returns, or guaranteeing incomes on investment in financial markets. In the financial markets an investor may lose more than the deposits. The risks associated to trading in financial markets can be substantial and an investor must be sure whether investment in financial markets is suitable to them, whether they have read and understood the risk statements and most importantly is the Company ensuring compliance to the Financial Regulations.


    • Company or the Investment Firm: Is referred to as a company engaged in providing financial service either through advisory, dealing, managing assets/portfolio/fund, custody, etc.
    • Client or Investor: A person investing with Company or as per the advice of the Company.

    Farhat Ali Khan is the Managing Partner at Century Maxim India.Views are personal.

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