An uninformed and risk adverse public, in an expanding economy, is fertile ground for financial crimes. It is when the economy slows and expectations fail to materialize that the blame games cause financial runs and court matters.The rules and regulations governing the financial sector must not only police the institutions and their products, but must educate and in fact, test the financial literacy of each and every investor or depositor via the products prospectus. Mandated by law and administered by an independent organization without any vested interest in promoting one product over another. Failure to achieve and demonstrate a minimum standard, as to how a particular instrument should work, must lead to the disqualification from participating in such products, hence protecting a vulnerable public and avoiding future bailouts or legal actions.
The now infamous Ponzi scheme is to set out to defraud investors by selling a false promise and continuing to take new investors’ funds to pay off previous victims. Whereas, mismanagement can be a simple failure to forecast the highs or lows of a market, but stealing to enrich executives personally, from funds allocated to shareholders or depositors, is a criminal offence. Accusations are made, when an institution’s failures are made public, by the regulators charging mismanagement, by investors or depositors alleging financial improprieties and by the media, obsess with scandals and quick to label any questionable deal ‘a Ponzi scheme’, which inevitably leads to a public run on the institution.
Before purchasing, depositing or investing in any properly regulated financial instrument, one must know the rules of divestment; defining the portfolio objectives, dividing by exposure to high and low risk and separating into unrelated institutions. Understanding, that when one invests, their money is put to work or employed, along with other portfolios, with the same objective, in a percentage of debt and equity financing projects, with a small percentage balance held in cash reserves. If one does not understand the product, the returns on that portfolio should be low, hence, standard risk exposure is determined by the portfolio’s objective, protecting the portfolio is to take very little risk and growing the portfolio is to up the exposure to losses.
When confidence declines and purchasers, investors or depositors want all their money, now, this is unrealistic and ill advised, as funds will be tied up in loans and assets requiring time to be liquidated into cash. This should have been made clear before the transaction, on the prospectus voiced and printed on brochures and ads, and maybe now, a person wishing to participate must be licensed by the regulator as being financially literate or graded to indicate their levels of comprehension to portfolio management. The regulator must protect the public from bad financial products, educate and license the public and would be investors, but crucially, prosecute and be seen to be enforcing their own rules and regulations across the board equally and fairly to discourage financial crimes.
Rationale
T.A.J & Associates Company Limited uses this occasion to comment on topics that have been covered, both academically and by the mainstream media, to add its opinion and point out investment opportunity, not to invoke any social action.
