Product Suitability, Tort And Consumer Protection Of OTC Financial Derivatives

As an important achievement of financial innovation, OTC financial derivatives not only have been the focus of financial market in recent decades, but also will affect the direction of future financial industry. With the rapid development of interest rate and exchange rate marketization, Internet finance and electronic business finance are flourishing. Traditional financial institutions have to accelerate business innovation under great pressures. In order to enhance their core competitiveness, they combine traditional financial products with derivatives. A new round of financial products reform is in progress.As we all know, OTC derivatives have a typical character of "double-edged sword". On one side, they can speed up capital flow, expand capital and manage risk effectively; on the other side, they may bring catastrophic crisis to enterprises, financial markets and even the global economy. Before the outbreak of subprime mortgage crisis, US financial institutions think OTC financial derivatives as a magic money machine; but after that, they think it a roller coaster, which fell down and collapsed overnight. The scale of OTC financial derivatives shows cliff-style decline. People have witnessed that OTC financial derivatives make many people richer overnight, but also witnessed that many big famous investment banks collapse and Countless families go bankrupt just in one day.During the era of post-crisis, along with many deep-seated causes of the crisis being found, financial consumer protection has been pushed to the forefront, becoming the subject of the highest attention in the financial field. Financial regulatory authorities have realized that it is the regulatory indulgence and lack of financial consumer protection that induced this financial crisis. The world's major economic organizations and national financial regulatory agencies began to incorporate financial consumer protection into the financial regulatory system. A series of laws and regulations have been introduced, covering banking, securities, insurance, non-bank financial institutions and other industries involved in financial consumption, it should be said that, in the world, a basic framework has been already erected for financial consumer protection. Compared with ordinary financial products, OTC financial derivatives are designed more professional, more information-dependent, more serious information asymmetry between the supply and the demand. Therefore, we think this paper has very important theoretical significance and application value.In this paper, we take the buyers of OTC financial derivatives from bank financial institutions as the sample to study consumer protection. This paper includes three parts:In the first part, we confirm the identity and protection status of OTC financial derivative consumers and put forward the main research questions. At present, the difficulties faced by OTC financial consumer protection are lack of clear unified trading rules, lack of special consumer protection laws and regulations and highly asymmetric information. These make the OTC financial derivatives consumer protection system very fragile, the transaction is actually built on Legal risk. It is easier to create a regulatory vacuum for financial derivatives. Financial institutions will be more willing to commit tort under the motive to maximize profits,In the second part, there are four types of tort in OTC financial derivatives trading, among which product suitability is the most hidden, and the social welfare reaches the maximum when the financial institution can strictly fulfill the product suitability obligation. However, through the mathematical model of supply analysis, financial institutions preferably maximize the interests, whether consumers belong to low-risk or high-risk type, they will be unanimous to recommend high-risk products to consumers. If the product suitability is regarded as a standard to judge whether financial institutions make fault in trading, the principle of serious fault defense liability is the most suitable for the tort imputation of OTC financial derivatives. Reasonable allocation of the transaction damage and responsibility among the main body contribute to stimulate effective tort prevention, to maintain the efficiency of product suitability, and to protect consumer rights efficiently.In the third part, "six in one" OTC financial derivatives consumer protection system is put forward for consideration. Product suitability as the main line, this paper proposes that we should reconstruct OTC financial derivatives consumer protection system from the legislative and judicial, regulatory efficiency, judicial relief and industry associations and other aspects.The main content as follows:1. Introduction. From the purchase purpose, the buyer's position in the transaction and the concept of legislation to protect the interests of vulnerable groups, we confirm that OTC derivatives consumer should enjoy consumers'rights. It is very important significance and practical value to conduct this research.2. The status quo at home and abroad. The related literatures in the world are sorted out from three dimensions:from the perspective of OTC financial derivatives suppliers, from the perspective of consumers and from the perspective of transaction regulation. On the basis of reviewing the existing research, main problems of this paper are established.3. Comparative analysis of domestic and foreign OTC financial derivatives consumer protection status, focusing on analysis of China's OTC financial derivative product development status. Taking 33 structured financial products as a sample, this paper uses the premium rate as an index to measure the level of consumer protection, and analyzes the current situation of OTC financial derivative consumer protection in our country.4. Analyzing the OTC financial derivatives rules and the legal system arrangement in operation, we find some conflicts. It means that transactions are based on legal risks. Illegal disclosure of information, unfounded obligations, improper inducements, and violation of product suitability are the main problems faced by OTC financial derivatives consumers. Product suitability principle should be used as the standard to judge other torts.5. Laws and regulations about product suitability are introduced in this part. We demonstrate product suitability can maximize the social welfare with the mathematical model. That appropriate products should be introduced to the right consumers is a basic requirement for product suitability, simultaneously it is a fundamental obligation for financial institutions. But from the supply model analysis, the product suppliers would rather promote high-risk products than perform the obligation of product suitability, plunder the interests of consumers and brokers by designing contracts to maximize their own interests.6. Product suitability as the standard of fault, we compare the efficiency of consumer protection under different principles of imputation. The optimal level of social prevention is proved to be existed with the method of cost-benefit analysis. Only if the statutory standard of prevention is equal to social optimal prevention level, and the residual responsibility can be completely observed, the principles of fault in any form, bilateral preventions are always efficient. The legal standard of tort prevention needs to be established and maintained by the judiciary, the legislature, the regulatory institutions, the financial institution and the consumer.7. We gather up main problems which are already discussed in this paper. Then basing on product suitability principle, we propose policy suggestions to perfect our consumer protection mechanism of OTC financial derivatives from four aspects. They are:legislation, supervision, relief, industry self-regulation.This paper firstly studies the current situation of consumer protection of OTC derivatives. Secondly it explores the motivation and path of tort and analyzes the necessity of tort. Thirdly it finds out the measures to prevent tort effectively, and then establishes the reasonable allocation of loss and liability. And finally it proposes policy suggestions to perfect consumer protection. Product suitability is regarded as the main line of this article. We analyze the economic rationality of the product suitability by using the economic and legal theories, regard product suitability as the standard of fault liability, and propose policy suggestions based on product suitability. It can be said that this paper focuses on the combination of theory and practice.