Alternative Investment Markets under Criticism: Reasons to be Worried? Lessons from Gowex

Abstract

The recent financial scandal of Gowex in the Spanish Alternative Investment Market (MAB) has reopened the debate about the dangers of lightly regulated markets and their optimal level of regulation. This article argues that Gowex’s collapse was not a failure of these markets but a failure of the gatekeepers in charge of overseeing Gowex’s activities. Therefore, we propose that regulators should focus on providing mechanisms to encourage gatekeepers to do their work in an effective and credible way. Namely, we propose that regulators should enhance the role and effectiveness of Nominated Advisers, since these players have been created precisely for the purpose of compensating for the lower level of information issued by companies in these markets. Likewise, when it is not currently applicable in an Alternative Investment Market, regulators should also consider the possibility of implementing some—relatively costless—corporate governance policies applied in Main Markets such as the imposition of independent directors. Thus, by mitigating perverse incentives between directors and executive officers, the board of directors would be in a better position to oversee the managers. Finally, we also argue that regulators should improve the reputation and expertise of their own financial authorities, especially in cases of relatively new Alternative Investment Markets such as the Spanish MAB. Otherwise, they will not create a safe environment for investors; the efforts to preserve the Alternative Investment Market might be useless and costly; and the most likely end for this market would be its closure, as was the case with Germany's Neuer Markt after its reputation was severely damaged as a result of various cases of fraud and corporate bankruptcies in the aftermath of the high-tech bubble.