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Financial Product Design, Retail Investor Sophistication and Issuer Incentives: A Case Study

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  • Kevin Davis

Abstract

Many financial products and securities marketed to retail investors involve design features that can make it difficult to understand the risk and return characteristics involved. This paper examines one such security, Convertible Preference Step Up Units (CPUs), issued in Australia by the US Masters Residential Property Fund (URF) at the end of 2017. It argues that an apparently relatively simple design masks significant complexity which would make risk assessment and fair pricing well beyond the capabilities of retail investors. Despite that, analysis of the security design and disclosure documents suggests that it would not fall foul of the financial product banning powers recommended for the Australian Securities and Investment Commission by the 2014 Australian Financial System Inquiry and in draft legislation as at mid 2018. This highlights the difficulties for effective financial consumer protection resulting from the mismatch between financial literacy levels and financial product design.

Suggested Citation

  • Kevin Davis, 2020. "Financial Product Design, Retail Investor Sophistication and Issuer Incentives: A Case Study," Australian Accounting Review, CPA Australia, vol. 30(3), pages 206-211, September.
    • Handle: RePEc:bla:ausact:v:30:y:2020:i:3:p:206-211
    DOI: 10.1111/auar.12266
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    References listed on IDEAS

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    1. Dutordoir, Marie & Lewis, Craig & Seward, James & Veld, Chris, 2014. "What we do and do not know about convertible bond financing," Journal of Corporate Finance, Elsevier, vol. 24(C), pages 3-20.
    2. Margrabe, William, 1978. "The Value of an Option to Exchange One Asset for Another," Journal of Finance, American Finance Association, vol. 33(1), pages 177-186, March.
    3. John C. Handley, 2002. "On the valuation of warrants," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 22(8), pages 765-782, August.
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    Cited by:

    1. Michael Bradbury & Bryan Howieson, 2020. "Editorial: Evidence on APRA Proposals and Impact of COVID‐19 on Expected Credit Loss Accounting," Australian Accounting Review, CPA Australia, vol. 30(3), pages 157-158, September.

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