Optimization of China’s Financial Advertising Regulation System: Based on Behavioral Finance and EU Experience

Ren Chao

Journal of Shanghai University of Finance and Economics Vol. 23, Issue 02, pp. 136 - 152 (2021)  DOI:10.16538/j.cnki.jsufe.2021.02.010

Summary

With the rapid development of Internet finance, the volume of China’s financial advertising has exploded. On the one hand, the problems caused by false and misleading information contained in some financial advertising have already affected the stability of China’s financial market. On the other hand, China’s current regulation system has inherent flaws. Under the framework of protecting financial consumers’ rights and interests, it is combined with the traditional false advertising regulation system and premised on sellers’ duties of appropriateness and informing. However, its theoretical premise-rational investors-is rocky, which has already been challenged by the behavioral finance theory: While making investment decisions, investors are tend to be affected by their behavioral deviations. The heuristics and behavioral deviations of the typical retail investors are often exploited by financial advertising, including representativeness bias, availability bias, framing bias, anchoring bias, and affection bias. Therefore, the system, which is based on the rational investor theory and centered on the proper fulfillment of information disclosure obligations, is flawed by nature and cannot fundamentally solve the problem of regulating financial advertising which takes advantage of investors’ limited rationality and behavioral deviations. It is, thereby, necessary to establish a specialized financial advertising regulation system , so as to protect the stable operation of the financial market and the legitimate interests of financial consumers. In practice, taking advantage of investors’ limited rationality and behavioral deviations is the common problem of financial advertising in China and the EU. In order to transform the theoretical achievements of behavioral finance into practical system effectiveness, China may learn from the practical regulation experience of the EU’s New Markets in Financial Instruments Directive in this regard. In terms of the optimization idea of the regulation system, an informed financial advertising regulation model should be established by taking investors’ psychology and information processing mode into consideration. In terms of the optimization path of the regulation system, the basic requirements of financial advertising information should be neutral, clear and non-misleading. In addition, specific regulation systems should be further formulated for typical problems in practice, including the regulation system of financial advertising information involving historical performance, future performance forecasting, comparative financial advertising, and taking advantage of investors’ affection bias.

Keywords

financial advertising; behavioral finance theory; regulation; limited rationality; behavioral deviations