Tan Kin Lian responds to Minister Lim Hng Kiang’s remarks in Parliament
Tan Kin Lian / Columnist
Several questions were asked in Parliament on 20 October 2008 about the failure of the structured products linked to Lehman Brothers. In his reply, the Second Minister of Finance said, among others, the following:
- MAS’ approach is one that balances regulation with the responsibility on the part of the institution to ensure that consumers are given a fair deal, and the responsibility on the part of the investor to understand the products he invests in.
- MAS requires financial institutions and issuers to properly disclose the features and risks of investment products to investors.
- MAS has put in place the necessary infrastructure to support this approach. There are two key pieces of legislation – the Securities and Futures Act, and the Financial Advisers Act.
- The issuer must include in the prospectus all information that an investor would reasonably need to make a proper assessment of the securities being offered.
- The issuer and its advisers are responsible for ensuring that the prospectus complies with the law. MAS checks, based on information provided by the issuer and its advisers, that the prospectus discloses the risk and product features, and that there are no false or misleading statements.
- MAS registered the prospectuses for the Lehman Minibond Programme, DBS High Notes 5 and Merrill Lynch Jubilee Series 3 LinkEarner Notes as they met the requirements for registration under the SFA.
Prospectus
I searched the MAS website for the prospectus of the four structured products that they have approved as meeting the requirements for registration under the SFA. I was not able to find these prospectus.
I could locate the prospectus of several hundred products listed under the category of “collective investment schemes”. Why are the prospectus of these structured products, which are approved by MAS, not listed in their website?
Nature and risk of the structured products
Many investors have stated in writing and in letters published in newspapers that they were misled into believing that these structured products were invested in the bonds of the six reference entities and that all of these entities had to fail before they were to lose their entire invested sum. They were assured that the structured products were “low risk” and that the invested sum is “capital protected”, implying that they will get back the invested sum at the end of the term.
The investors in both the “vulnerable group” and the “non vulnerable group” comprising of educated professionals and others”, were horrified to find that these structured products are “extremely high risk” and are worse than investing in equities.
They now learn that the structured products face the risk of a substantial portion or the entire invested sum being wiped out under the following circumstances:
> the failure of any one of several reference entities
> the failure of a certain number of a specified large number of the underlying assets
> the failure of the swap counterparty
The term “failure” is not used in the prospectus. The actual term used is a “credit event”. The credit event is defined in certain wordings, but it is difficult for the investor to figure out what they actually mean.
It is now clear that these structured products have quite high risks. We now have to ask these questions: Are the risks adequately described in the prospectus? Is the necessary information about this important matter easily located in the prospectus?
The Minister said “The issuer must include in the prospectus all information that an investor would reasonably need to make a proper assessment of the securities being offered. “
Perhaps the Minister can read the prospectus to see if he has the information that he would reasonably need to make a proper assessment of the securities.
False or misleading information
With the benefit of hindsight, I suggest that MAS should now go through the advertisements, sales brochures and prospectus, to see if the information provided are false or misleading, which is an offence under the Securities and Futures Act.
If the information is provided clearly and fairly, why are several thousand investors, including the educated professionals and the financially-savvy persons, misled into believing that they are investing in “low risk” bonds? Are these people so careless and irresponsible with their money?
Dishonest concealment of material facts
Section 200 of the Securities and Futures Act states that it is an offence for a person to induce another person to deal in securities through “dishonest concealment of material facts”.
An important piece of information is the risk of losing the entire invested sum. What is the extent of this risk? Is it 1%, 5%, 10% or 50%, during the lifetime of the investment?
Does the issuer know the extent of this risk? They probably have some idea, based on the premium received by them for providing the insurances to the counter party under the credit default swaps involving the reference entities and the underlying assets.
Should this material information be provided by the issuer in the prospectus? By failing to provide this material information, is the issuer committing an offence under the Act?
Fair dealing outcome
The Minister has also said that MAS’ approach is to ensure that the “consumers have a fair deal”. Perhaps it is appropriate for MAS to see if the structured products meet this test.
The product issuer does not disclose in the prospectus the total income received from the various investments of the structured products, including several highly risky credit default swaps. Where does this income go to? How is the income shared between the issuer, distributor and the note holders (i.e. the retail investors)?
Is the portion of the income, i.e. the target return of 5%, a fair outcome given the high risk of the structured product as reflected in the income streams?
I am not aware that any statement of account has been given to the investors in any of the structured products. Is there any breach of the Trustees Act? Does the product issuer (or product arranger) and the trustee have any fiduciary duty to look after the interest of the investors and render a full and complete statement of the affairs?
Spirit of the law
My final appeal to the Minister, Mr. Lim Hng Kiang, and the Monetary Authority of Singapore, is to see if there is a requirement under our legal system in Singapore that parties should observe both the spirit and the letter of the law.
I hope that appropriate action be taken to restore the confidence of the people in the fairness of the system in Singapore and to restore the reputation of Singapore as a financial hub that the Singaporeans and foreigners can trust to leave their money here safely.
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Read also Leong Sze Hian’s response to the minister’s remarks: Mis-selling 101.
And: Investors petition Lim Hwee Hua.
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T, we don’t know what axe you are trying to grind. But you are getting on other’s nerves. If you have a plan to help investors, let’s hear it. If not, please refrain from personal attacks against Mr Tan. Perhaps you had a previous encounter before or perhaps you had bought a couple of million of the locabl banks’ preference shares. Whatever, it is don’t take out your frustration and anger at this forum. IT IS VERY UNPRODUCTIVE!!!
Apart from the issue of the level of risk associated with the product, I believe another pertinent issue is how the bank approached the customers in the place. In a typical case, we all know that an RM usually try to sell a customer after the customer has been recommended by a bank counter officer who has just realized that the customer has a sum (sometimes huge) of money in his bank account.
My point is, is there any breach of banking secrecy regulation here ? I know the RM and the bank counter officer are both employess of the bank. But I do feel that an RM should not have access to the customer’s account information unless the customer volunteers it. This (arguably unauthorised) access to the customer’s account information allows the RM to practise unethical selling potentially.
I think MAS ought to look into this aspect of the transaction. For the longest time they have turned a blind eye to this. In fact they ought to have been looked into it long ago, and if they had done so, the current saga would not have erupted.
I agree with T, I believe justice should be a fair treatment to both sides…
If every single investor gets a bailout, I think this could create a moral hazard..and this is definitely not a fair treatment to both sides.
I hope Tan Kin Lian could be more open to criticism. Many have called him “hero”, but I believe a true hero should not be afraid of unfavourable comments, these comments can give a more balanced view.
# Singasoft on October 26th, 2008 6.23 pm
Please lah. You think critics here are asking for blanket favourable treatment to only one side meh.
As for the other side, do you think they are so jialak and lack of resources that they will not be able to defend themselves if they are wrongly aggreived.
Do you also think that critics here are so goondoo that we cannot see clearly which groups (a, b, c, d groups) should be defended as mentioned by T.
And Do you think that people on this site cannot grasp the concept of moral hazard fairly ? Anyway, you brought up a good point on moral hazard and as things go this should apply to both sides also, especially to those at a most superior end in terms of information with first or second contact with the vulnerable groups (a & b groups as mentioned by T).
Yes, justice should be a fair treatment to both sides and we hope that no one is wrongly penalised or no one is unnecessarily rewarded at the end of the day.
I have being following this link for the past hour and could not help but contrinute my fair share as one who sold investment products before.
I have being an insurance agent with AIA and a financial advisor (FA) in DBS before and have left the industry good eight years ago. It is unfortunate that besides the mandatory paper work such as risk profiling and product brochures, supervision of how we sell the bank products is minimal. One can simply says the product “sure make money don’t worry uncle” and move on to our salespitch anchored at making the sales. Obviously, all sales agents want to make a sales to make a living. However, by tying commission to the sales of a product to low,medium or high risk profiled clients, we all tend to misrepresented one way or another. If the client asked “Risky or not?” what do you think the RM will do? “Where got risk uncle? Just sign here la.” The sales is closed. A top notched RM in DBS can make around $5k to 6k in commissions alone excluding basic salary. Most RMs will target aunties and uncles as they are the easiest to sell for they hardly understand any financial jargon and trust bank staff too willingly for their own good. If we explain the minibonds to them and revealed that
For the sake of our investors, banks and financial institutions need to do away with the commission-based remuneration package. A fixed salary with a bonus tied to our sales seems reasonable. I remembered my monthly sales quota in DBS was a million dollars in trust funds. If not, within three months of failing to hit your target, you can kiss your job good bye. I automatically left on my own accord as I don’t feel good “cheating” customers of their hard earned money. My batch of 20 FAs also found the job too challenging for them and within a year half has left the industry. I am sure the other half should have gone by now.
Hopefully when the storm dies down, banks will come up with a favourable salary package for the RMs/FAs and our investors can have the confidence to part with their money again for yet another series.
I disagree with “T” and those who think likewise that being a a former CEO of an insurance company or even an FI is necessarily investment savvy. Yes he may know a little bit more but still clueless when it comes to some exotic products like structured products., except Professor Ho of NUS business school who teaches financial engineering and who can make informed, caveat emptor decision.This guy belongs to the academia.
If these people with financial background are clueless what about the man in the street , they are even worse. Reading the prospectus does not mean you understand the mechanics of the products, especially the intricacies of derivatives.
For many who got burned how many did understand what actually they got into and made Informed decision without help and without the pushing and “influence” from the RMs.I beleive many were pushed into signing on the dotted line, even the so called educated and CPA and MBA. I define ‘pushing ‘ as applying undue pressure and ‘influence’ as mis-selling and misrepresenting” to induce someone to take action.
Those who were prospected by RMs were definitely mis-sold and misrepresented. Those who walked into the bank and asked for the products might be misrepresented and sold.
Those who placed order with their private bankers might be savvy or pretend to be savvy . For this group we are not concerned, they can donate to the pockets of the salesmen or women who disguised as private bankers . Mr. Tan is definitely NOT taking up the cudgels for this group.
Dear all,
This is a personal plea to all contributing parties to this topic of discussion.
I have been following this forum because of the very high level of sharing and everyday I am learning something new from it.
I would like for this to continue because I am 100% certain that the outcome will benefit the people each of you has set out to help.
It is understandable that emotions would run high too because the engagements come in fast and furious and there will surely be instances when languages used may not exactly reflect what the party actually wants to convey.
In such instances, where clarification is sought and given, it is to everyone’s interest that we return our focus on the main topics of discussion.
From the discourse above, it is very clear for followers like myself, to see that each party is trying their very best to contribute and share the knowledge that each of the party wants to share, and all for the better outcome of the suffering investors.
For those who feel that the investors ought to be the ones to be protected, do remember that there will be those who also feels that the banks and FI’s interest also needs protection. This is where swords will be crossed.
At times like these, we would do well to listen to the reasons from both sides and then work together for the outcome that this discussion wants to achieve, which is, to help the investors.
Let not this discussion degenerate into a mud-slinging event. It’s purpose will then be lost to no one’s benefit.
Thank you, gemami.
To everyone: Please refrain from making personal attacks. I have allowed as many comments as possible and I have disallowed some.
Please stick to the issue – and refrain from making further disparaging remarks about fellow commenters or the author of the article.
Keep to the issue and all should be fine – else this thread will have to be closed for comments.
Thanks.
Regards,
Andrew Loh
Singasoft (#105) aka T Phua has an axe to grind and was creating a lot of trouble for me. It is not for him to lecture me about being open for criticism.
To everyone: please do not be overly sensitive on opposing views or comments.
I hope the community here can debate things as mature as possible.
Look at the debate between Obama and McCain…I’m hoping that we can be as matured as them when debating over an issue.
I believe most who are affected will want to be compensated fully by the FI, but let’s realize that it is not something fair to the other parties. However, I hope that those affected to be compensated as much as possible. But, be mentally prepared that in many cases you will probably lose much of your monies.
When the deputy chairman of MAS said that MONEY SENSE public education can help investors or consumers to make informed decision. I wonder he was so naive or he was making a clown of himself. I wonder whether he has ever attended a MONYSENSE talk?
Money sense at the best helps consumers to make sense of some financial words
and equip them with conversational vocabularies.Example, to understand what is whole life products , ILPs or UTs or diversification or asset allocation.They don’t equip the consumers with skills to DIY. The deuty chairman misrepresented the objectives of Money Sense. and DEFINITELY It will NOT help them to make informed decision.
MS aims to do as that , to make consumers financially literate and not an expert.
“Look at the debate between Obama and McCain…I’m hoping that we can be as matured as them when debating over an issue.”
You must be joking to have even brought up this example. They way they go about open discussion and debate will make us look like boy scouts. They have developed into a fine art of how spinning and mud slinging is being done.
If we are in anyway close to them, similar form of our engagement (perhaps by more well known persons) would have already been done and aired in our so-called MSM – so that weakness or strength of any view / counter-view can be
seen through by a much wider audience.
You should know by now that maturity comes from both people and the good system by design which feed on one another.
To #113:
yes, I hope we are moving towards that direction. But this issue itself deserves another separate thread.
Here, I think it is suffice to say we should not be overly sensitive towards opposing comments. These comments can give a more balanced view.
Singasoft: If you are talking about fairness, why only “unfair” to the other parties?
I believe the comment from Mr. TKL (TKL’s blog FAQ from investors) is more sensible.
Fair compensation
…..to investors who have been misled. A fair compensation is for the loss to be shared equally between the investor and the distributor.
Some investors expect 100% compensation. This is unreasonable. The distributor expects to get away with no compensation. This is unreasonable also.
> Tan Kin Lian (#93)
> i am not sure if there are people in category (c) and (d). If the financial institutions had been aware about the actual nature and risk of the structure and had represented in correctly to the investor, then these categories exist.
>
> a) Wrong target market – too old or illiterate
> b) Misrepresentation by the financial reps
> c) Those who are aware of the risks
> d) Sophisticated investors
To be fair to everyone, we can’t compensate people category in (c) and (d). I’m sure there are people who have taken the risks willing but still want to have a free-ride on any possible compensate for genuine victims of unethical selling.
People in (c) and (d) should NOT be compensated. They have to shoulder their own responsibility just like unethical businesses.
“Here, I think it is suffice to say we should not be overly sensitive towards opposing comments. These comments can give a more balanced view.”
The gist of the content is more important. Level of tone and emotion just gives it added flavour or bad taste depending on which side you stand.
Emotion will definitely show for some who are more invested into the issue and / or delibrately choose not to hold back this emotion for the purpose of effect or who may not have the predisposition to hold back this emotion.
A rose by any other name still smells like a rose.
In any thread, contributions of various persuasions (the more the merrier) will either reinforce or convert an existing view. A balanced view is still the same whether it is said in a tone of an uncouth person with barely any education or some cultured Phd material.
Donaldson, yes he can take side. But there is a huge difference between taking side when facts are on your side, and misrepresenting. Being partition give you the licence to suddenly become a layman without any financial understanding. – T (#99)
There is no mis-representation here, but your mis-interpretation. In the course of his campaign for rightful compensation for victimised retail investors, did he ever give out specific investment advice? No, not at all. Your presumption that being a former CEO of NTUC Income makes him an investment expert is flawed. Being CEO only meant that he is an acknowledged expert in business management of the insurance industry.
Speaking from an ex-financial advisor, the way we sell the financial products to the aunties and uncles certainly smelled of misrepresentation. We ourselves were not properly briefed by the topbrass of financial products. By the way, the way the minibonds is structured, no one will be able to understand it unless we have a degree in financial analysis or accounting. If we are to comprehend the product thoroughly and then sell it to the consumers with the same explanation, I am sure no one will buy it as from what I read, it is a failry risky product.
However, since when there is a no-risk investment product? Even cash in the bank carries risk unless the government guarantees it’s cash deposits when the bank goes bust.
We are merely briefed the main points of the products and often given brochures to sell. Most importantly, clients want principal guaranteed products are if they know that their money is sfae, they will buy.
Our cash deposit interest rate has all along being very low at one precentage point or lower so I don’t people with cash to look for higher yield. It is not greedy but also financially prudent to look for a better yielding safe investment.
A few lessons to learn here:
1. RMs/FAs need to be better positioned both in knowledge and ethics to market financial products. Remuneration should not be soley tied to commission earns from sales of such products so RMs do not face the stress of monthly sales target.
2. Consumers need to be more enquiring when investing in such products in the future. If they don’t feel ‘safe”, they should not invest at all.
3. Our retirees need a retirement institution to help them to invest in a retiree fund for better returns. In Australia, a retiree fully-funded insitituion called Centrelink looks into the retirement needs of retiree funds. The returns will then be given in the form of monthly cheque for retirement needs. It also looks into welfare retirement cases.
4. MAS so far has not aken a strong-arm watchdog view of the whole financial situation and this is the correct approach. In a free economy, less governmental involvement is appreciated so that banks and FIs can develop fully.
5. In this once a lifetime financial tsunami, one needs to know that everything that you put your money in will go south. Investors in stocks, unit trusts, property, businesses, currencies, etc will depreciate. If you are an investor, you will know what I mean.
The best advice to all is still prudence in investment and goodwill to mankind. There is more to ife than money and materialism. Learn to smell the roses along the way in life.
Thanks all.
Gilbert
NSW Sydney
Remuneration of RMs, consultants, insurance agents must change to prevent conflict of interest.. Remuneration must be based on advisory work provided and the fee charged negotiable with the customers. The products carry a very low nominal ‘commission’ to compensate for the die hard salesmen for too much sweet talking., beating round the bush and lies.
This model allows customers who think they are smart enough to DIY. In fact there are people who DIY their investment. It is good , it is ok.They save on commission. Salesmen don’t give advisory service that is commensurate with the commission they receive.The DIY investor are responsible for any outcome. They buy directly from distributor and they conduct their due diligence.
How does it affect the products?
The products will be able to give better return and if it is an insurance product better return, higher protection and at lower cost..
Somebody told me if this happens not many will want to join this profession.
It is fantastic,!! Whatever they are doing will be professionalised . Now it is more like con job. This will eliminate the salesmen, reduce the consultant /insurance agent population from 14,000 to 5000. The 9000 can be deployed to industries where their ‘skills’ are much needed instead of bringing in foreign talents. The 5000 left can be more professional, passionate, highly competent, advisory not product peddling and ethical and give to the best to consumers.
The life insurance industry is seen as a get rich quick industry. Tom , dick and harry, may or mary, Ah beng, Ah lian, including Ah meng join because of the commission they can rob from Ah Pek, Ah Sohs , uncles and old aunties and the uneducated.
I remember someone from MAS remarked that commission driven remuneration inevitably leads to conflict of interest, mis-selling and misrepresentation. It was reported in the paper. So what is MAS doing about it?
Many insisted that the prospectus is an easy document to read and understand and therefore able to make an informed decision.Don’t be fooled by MAS and the FIs .You need help and the RM is supposed to help not only to understand but also to tell you whether the product is suitable for you after looking into your circumstances. The onus lies with them. They need only to tell either of these words, good or not good for you.
Below is a testimony of a financially trained person.
Vincent said…
Just want to share a personal experience. I am a Malaysian working in Singapore & married to a local Singapore girl. My in-law sold their property in 2007 & went to a local bank to deposit the proceeds & they were persuaded to invest in Lehman mini-bonds. Fortunately, I found out about it the same day & I brought them down to the bank to see the manager; I asked them to explain clearly & in absolute details what product has been sold to my in-laws …. they could not satisfactorily explained. Now, I have been an investment professional for more than 10 years & I have gone through the documents myself 3 times & I could not even understand what this product is! Luckily, the bank agreed to void this deal. Shh, lucky.
If the compensation (if any) is at “market value”, investors will get very little back. Just look at the various unit trusts and equities and how they have been performing the past couple of months. How anyone wants to get back 100% at this time is beyond me.
Clear not?
“Prospective investors in the Notes should note that there are many different types of notes or bonds in the market
place, many of which will have unique and distinctive features. Not all notes or bonds are capital protected. Notes
which are sold or redeemed before their maturity date will be subject to unwinding or other transaction costs, and the
amount received by prospective investors may be lower than the initial amount invested.
The purchase of any Notes to be issued under the Programme involves certain risks. You should ensure that you
understand the nature of the Notes, in particular, the section headed “Risk Factors”, and should carefully study the
matters set out in the relevant Pricing Statement, before you invest in the Notes. There will be no guarantee from any
entity to you that you will recover any amount payable under the Notes and you could lose all or a substantial part
of your investment in the Notes.”
mengmeng (#122),
When the relationship manager is trying to hard sell you and attempts to distract you from reading the prospectus, what should you do? Downplaying the risk is mis-representation. Distracting the retail investor from reading the prospectus until the contract has been signed is also mis-representation.
If the prospectus denies the distributor of any liability relating to financial advisory, while the distributor is also acting as a financial advisor to the retail investor, there is no way financial institutions cannot see any conflict of interest and that the set-up undermines the retail investor right from the start.
I think if you are first time investor (never invest shares, bonds, etc.) and lowly educated, you could reasonably be considered as “vunerable”. Age should not be an important factor.
I also think everyone and every hero can agree that not all should be compensated as that could create moral hazard and it’s not fair to the shareholders of the FI.
It is unbelieveable that many by now still think the issue is “CAVEAT EMPTOR”.
The main focus issue is whether there is misrepresentation and misselling NOT CAVEAT EMPTOR.
“Prime Minister Lee reiterated MAS’s stance that the government should and would not step in to interfere with the process, citing it as a “moral hazard”, thereby leaving it entirely to the financial institutions to work out a deal with individual investors.” – wayangparty
I’d like to cautious people not to give mis-leading hope to those investors and to be realistic. Please be aware of the “moral hazard” issues. Also, fairness should be looked from both sides.
Please be aware of the “moral hazard” issues. – Singasoft (#126)
Fence-sitting is the least effective mean to pressure for action.
Also, fairness should be looked from both sides. – Singasoft (#126)
Yes. In the case of DBS High Notes 2 and 5, the legal and commercial set-up is already unfair right from the start. DBS is the issuer, arranger and distributor. Moreover, the same contract is used for both financial advisory and sales of investment product. The set-up is already unfair.
This is an excerpt from Lee Hsien Long’s Biodata on Cabinet Website:
In 1990, Mr Lee was appointed Deputy Prime Minister with responsibilities for economic and civil service matters. He also concurrently served as Chairman of the Monetary Authority of Singapore (MAS) from 1998 until 2004, and Minister for Finance from 2001 until 2007.
At the MAS, Mr Lee initiated reforms to liberalise the financial sector and to shift the emphasis from one-size-fits-all regulation towards a lighter supervisory touch, relying more on disclosure and caveat emptor.
Does this suggest that over-zealous middle managers at MAS may hesitate to go against policies that LHL had spearheaded when he was Chairman of MAS?
Please be aware of the “moral hazard” issues. – Singasoft (#126)
Moral hazard is only applicable for MAS and the government because they play the role of regulators. It does not apply to victimised investors and financial institutions which have clearly defined their position. It also does not apply to people who has already chosen what side they will take.