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07-11-2010, 09:20 AM
Nov 7, 2010
New MAS safeguards for investments =
Better protection for retail investors
What the new measures are and how they affect your investment decisions
By Lorna Tan, Senior Correspondent
Retail investors can look forward to more protection with the rolling out of new safeguards put forward by the Monetary Authority of Singapore (MAS) last month.
The MAS says the measures aim to ensure that financial institutions recommend suitable investment products.
Product features and risks should be conveyed effectively in order to safeguard customers, particularly those who may not have the relevant investment knowledge or experience, it says.
The measures will be rolled out in stages. First up will be those not requiring legislative changes. They follow some rude shocks suffered by investors during the financial crisis that were later investigated by the MAS.
The MAS looked into the huge losses of about 9,900 people here who lost some or all of their investments, totalling about $520 million.
These retail investors had bought products known as structured notes such as Lehman Minibonds, DBS High Notes 5 and Morgan Stanley Pinnacle Series 9 and 10 Notes. These products came unstuck when United States investment bank Lehman Brothers collapsed, for instance.
The MAS probe had pointed to three major failings in the selling of these products.
First, the institutions wrongly classified the notes they were selling as having a lower level of risk than was actually the case. They were, in fact, highly complex and carried considerable risks.
Second, the institutions did not provide accurate, complete information about the notes to staff. That meant the notes were sold by staff without the proper financial advice being given.
Third, the institutions did not ensure that their sales teams were sufficiently trained to sell the notes.
The Sunday Times highlights some of the new safeguards which aim to address these and other concerns.
1 Enhanced product due diligence before new investment products are distributed for sale
This calls for financial institutions to put in place formal policies and procedures to assess the nature of each new investment product and its suitability for its targeted customers before placing them on the shelf.
OCBC Bank set up a group product suitability committee last year comprising senior executives from various divisions like risk, legal compliance and customer service. They are responsible for giving the green light before products are allowed to be distributed. Some of the questions they ask include: 'Is it a product that will expose the bank to reputational risk? What's the extent of loss that the customer has to bear?' For a product that receives the green light, the committee will decide how it should be classified according to the product's risk profile.
OCBC was not among the 10 financial institutions that sold the ill-fated products.
2 Enhanced documentation of basis of recommendation
With this in place, representatives would be required to give the customer a document setting out in detail the basis for a recommendation. It must state, at least, the customer's objectives and needs, explain the reasons why the product is suitable for the customer having regard to the information obtained, and explain any possible disadvantages of the investment to the customer.
Mr Christopher Tan, chief executive of financial advisory firm Providend, gave this proposal the thumbs up.
This will ensure that representatives of financial advisory firms will be more serious in gaining a thorough understanding of a client's financial needs and risk tolerance before making recommendations. Therefore, clients can expect better advice, he said.
3 Enhanced quality of information to be collected from customers
Representatives are already required to collect key information such as the customer's financial objectives, risk tolerance, financial situation and current investment portfolio.
In future, they would be required to collect additional information, including the source and extent of the customer's regular income and whether the amount to be invested is a substantial portion of the customer's assets.
Mr Patrick Lim, associate director at financial advice firm PromiseLand Independent, noted that there are currently four options available to retail investors in the 'fact find' process. He suggests that investors should be given only two options, that of disclosing all or specific financial information. By doing away with the options of product advice and no advice, the quality of information collected from customers will be enhanced.
DBS Bank's managing director and head, consumer banking group (Singapore), Mr Jeremy Soo, said the bank has taken steps to ensure that customers are properly assessed in terms of their suitability and risk profile for various products.
'Based on the analysis, DBS' relationship managers will shortlist products that are aligned with the customer's profile,' he said.
4 Raised competency standards of representatives
By the third quarter of next year, there will be additional examinations for representatives covering securities and futures, collective investment schemes and investment-linked life insurance policies (ILPs).
Singapore Insurance Institute president Stanley Jeremiah noted that ILPs range from straightforward ones to very complex plans which are merely wrappers for more complex financial investments with a negligible insurance element.
He recommends a further sub-classification of ILPs.
'Otherwise the new exams will not capture the complexity of the sophisticated products or the test will be unnecessarily complex for the average representative who is selling a simple straightforward ILP,' he said.
5 Representatives to undergo training on a new non-excluded investment product (NEIP) prior to sale
Besides meeting the minimum entry and exam requirements, financial institutions must ensure that representatives have undergone training on a new NEIP before they are allowed to sell it.
Only investment products that are less complex and generally well understood are prescribed as EIPs. They include shares and life insurance policies other than ILPs.
6 Product Highlights Sheet with key information in plain language
The Product Highlights Sheet will provide key information about an exchange traded fund, unlisted unit trust, investment-linked life insurance policy fund, asset-backed security or structured note.
To be provided to investors together with the prospectus before the sale of an investment product, the Product Highlights Sheet will be written in plain language in a 'Question & Answer' format prescribed by MAS.
It will describe the profile of customers for whom the product is suitable, what the product invests in, and the risk areas that could cause a customer to incur a loss.
Mr Tan said that when customers understand the product better, this will help them to make informed investment decisions.
The guidelines will kick in from March next year.
7 Fair and balanced advertising and marketing materials for investment products
Financial institutions will be required to ensure that such materials give a fair and balanced view of the investment product. The materials should clearly set out both the potential upside and downside of the investment, and all material benefits and risks. They should not give the impression that a customer can profit without risk.
To ensure that statements on the downside or risks are legible and not downplayed, information and footnotes contained in advertisements appearing in any document would be subject to a minimum font size requirement.
Financial experts suggest that institutions benchmark the clarity of their materials and Product Highlights Sheet to a global standard like the Crystal Mark stamp which is given by a British-based body known as the Plain English Campaign. It is an internationally-recognised standard for plain English and is used by many leading financial institutions in Britain and Australia.
8 Timely and meaningful ongoing disclosure requirements for unlisted debentures
To provide investors with timely and meaningful ongoing disclosure on their unlisted investment products, MAS will require all issuers of unlisted debentures with tenures of 12 months or longer to issue semi-annual and annual reports to inform investors about developments concerning their investments.
In cases where a product has predetermined payouts, MAS will require product issuers to explain any significant deviations from the expect-ed returns.
9 Mandatory safeguards for customers without relevant knowledge or experience
This requires financial institutions to conduct a Customer Knowledge Assessment before selling certain products to retail investors. The assessment will look at whether the customer has a finance-related background and any investment or work experience related to the products.
Its aim is to deter inexperienced investors from putting their cash into sophisticated investments that they do not really understand.
If the customer still wants to invest after being assessed as not having enough knowledge or experience, the financial institution must give advice and outline the risks.
If these customers want to invest in certain listed products requiring trading accounts, they will be offered an Internet-based tutorial on derivatives - a risky and sophisticated form of investing - developed by the Singapore Exchange.
Mr Lim noted that the Customer Knowledge Assessment is valid for one year for the purchase of the same or similar product from the same intermediary. This may be cumbersome for the consumer as the assessment cannot be applied to a different intermediary.
10 Policies and procedures for sale of products
If a customer chooses to receive advice, the financial institution and representative must have a reasonable basis for recommending the investment product to the investor. Where a customer wishes to purchase an investment product even after the financial institution advises that it is not suitable, he may decide to do so.
However, the sale can be completed only if certain conditions are met. They include the representative informing the customer in writing that the product is not suitable for the customer and the reasons for such an assessment, and seeking the customer's confirmation that he still wishes to proceed with the transaction. The customer is informed that he will not be able to file a civil claim in the event he alleges he has suffered a loss. These conditions must be confirmed and signed off by senior management.
11 Prohibition of referrals by bank tellers
Bank and finance company tellers will be prohibited from referring customers to representatives for the purchase of investment products. They can do so only when the customer has approached the teller with an explicit request for information on investment products.
Mr Lim highlighted that if this had been put in place earlier, it may have the effect of 'saving' some elderly and illiterate customers from buying complex products. Before the recent financial crisis, bank tellers - who earned a referral fee - could have given the wrong impression that the products they were recommending were similar to fixed deposits.
Mr Tan said that even without referrals by bank tellers, he has noticed that some banks are asking staff to question bank customers who are in a queue to find out if they are potential clients for certain products. If they were, they would be placed on a shorter queue which leads to a relationship manager.
12 Cooling-off period for unlisted debentures
Cooling-off periods are currently mandated for unit trusts and life policies. They are seven days for unit trusts and 14 days for life plans.
In future, a cooling-off period of seven days will be implemented for unlisted debentures such as structured notes with tenures longer than three months. This would allow investors to exit the investment without having to incur sales charges or commissions.
'This is good as clients who are mis-sold, or who regretted, buying the product or upon being better advised by family members can have a chance to reverse the decision,' said Mr Tan.
lorna@sph.com.sg
New MAS safeguards for investments =
Better protection for retail investors
What the new measures are and how they affect your investment decisions
By Lorna Tan, Senior Correspondent
Retail investors can look forward to more protection with the rolling out of new safeguards put forward by the Monetary Authority of Singapore (MAS) last month.
The MAS says the measures aim to ensure that financial institutions recommend suitable investment products.
Product features and risks should be conveyed effectively in order to safeguard customers, particularly those who may not have the relevant investment knowledge or experience, it says.
The measures will be rolled out in stages. First up will be those not requiring legislative changes. They follow some rude shocks suffered by investors during the financial crisis that were later investigated by the MAS.
The MAS looked into the huge losses of about 9,900 people here who lost some or all of their investments, totalling about $520 million.
These retail investors had bought products known as structured notes such as Lehman Minibonds, DBS High Notes 5 and Morgan Stanley Pinnacle Series 9 and 10 Notes. These products came unstuck when United States investment bank Lehman Brothers collapsed, for instance.
The MAS probe had pointed to three major failings in the selling of these products.
First, the institutions wrongly classified the notes they were selling as having a lower level of risk than was actually the case. They were, in fact, highly complex and carried considerable risks.
Second, the institutions did not provide accurate, complete information about the notes to staff. That meant the notes were sold by staff without the proper financial advice being given.
Third, the institutions did not ensure that their sales teams were sufficiently trained to sell the notes.
The Sunday Times highlights some of the new safeguards which aim to address these and other concerns.
1 Enhanced product due diligence before new investment products are distributed for sale
This calls for financial institutions to put in place formal policies and procedures to assess the nature of each new investment product and its suitability for its targeted customers before placing them on the shelf.
OCBC Bank set up a group product suitability committee last year comprising senior executives from various divisions like risk, legal compliance and customer service. They are responsible for giving the green light before products are allowed to be distributed. Some of the questions they ask include: 'Is it a product that will expose the bank to reputational risk? What's the extent of loss that the customer has to bear?' For a product that receives the green light, the committee will decide how it should be classified according to the product's risk profile.
OCBC was not among the 10 financial institutions that sold the ill-fated products.
2 Enhanced documentation of basis of recommendation
With this in place, representatives would be required to give the customer a document setting out in detail the basis for a recommendation. It must state, at least, the customer's objectives and needs, explain the reasons why the product is suitable for the customer having regard to the information obtained, and explain any possible disadvantages of the investment to the customer.
Mr Christopher Tan, chief executive of financial advisory firm Providend, gave this proposal the thumbs up.
This will ensure that representatives of financial advisory firms will be more serious in gaining a thorough understanding of a client's financial needs and risk tolerance before making recommendations. Therefore, clients can expect better advice, he said.
3 Enhanced quality of information to be collected from customers
Representatives are already required to collect key information such as the customer's financial objectives, risk tolerance, financial situation and current investment portfolio.
In future, they would be required to collect additional information, including the source and extent of the customer's regular income and whether the amount to be invested is a substantial portion of the customer's assets.
Mr Patrick Lim, associate director at financial advice firm PromiseLand Independent, noted that there are currently four options available to retail investors in the 'fact find' process. He suggests that investors should be given only two options, that of disclosing all or specific financial information. By doing away with the options of product advice and no advice, the quality of information collected from customers will be enhanced.
DBS Bank's managing director and head, consumer banking group (Singapore), Mr Jeremy Soo, said the bank has taken steps to ensure that customers are properly assessed in terms of their suitability and risk profile for various products.
'Based on the analysis, DBS' relationship managers will shortlist products that are aligned with the customer's profile,' he said.
4 Raised competency standards of representatives
By the third quarter of next year, there will be additional examinations for representatives covering securities and futures, collective investment schemes and investment-linked life insurance policies (ILPs).
Singapore Insurance Institute president Stanley Jeremiah noted that ILPs range from straightforward ones to very complex plans which are merely wrappers for more complex financial investments with a negligible insurance element.
He recommends a further sub-classification of ILPs.
'Otherwise the new exams will not capture the complexity of the sophisticated products or the test will be unnecessarily complex for the average representative who is selling a simple straightforward ILP,' he said.
5 Representatives to undergo training on a new non-excluded investment product (NEIP) prior to sale
Besides meeting the minimum entry and exam requirements, financial institutions must ensure that representatives have undergone training on a new NEIP before they are allowed to sell it.
Only investment products that are less complex and generally well understood are prescribed as EIPs. They include shares and life insurance policies other than ILPs.
6 Product Highlights Sheet with key information in plain language
The Product Highlights Sheet will provide key information about an exchange traded fund, unlisted unit trust, investment-linked life insurance policy fund, asset-backed security or structured note.
To be provided to investors together with the prospectus before the sale of an investment product, the Product Highlights Sheet will be written in plain language in a 'Question & Answer' format prescribed by MAS.
It will describe the profile of customers for whom the product is suitable, what the product invests in, and the risk areas that could cause a customer to incur a loss.
Mr Tan said that when customers understand the product better, this will help them to make informed investment decisions.
The guidelines will kick in from March next year.
7 Fair and balanced advertising and marketing materials for investment products
Financial institutions will be required to ensure that such materials give a fair and balanced view of the investment product. The materials should clearly set out both the potential upside and downside of the investment, and all material benefits and risks. They should not give the impression that a customer can profit without risk.
To ensure that statements on the downside or risks are legible and not downplayed, information and footnotes contained in advertisements appearing in any document would be subject to a minimum font size requirement.
Financial experts suggest that institutions benchmark the clarity of their materials and Product Highlights Sheet to a global standard like the Crystal Mark stamp which is given by a British-based body known as the Plain English Campaign. It is an internationally-recognised standard for plain English and is used by many leading financial institutions in Britain and Australia.
8 Timely and meaningful ongoing disclosure requirements for unlisted debentures
To provide investors with timely and meaningful ongoing disclosure on their unlisted investment products, MAS will require all issuers of unlisted debentures with tenures of 12 months or longer to issue semi-annual and annual reports to inform investors about developments concerning their investments.
In cases where a product has predetermined payouts, MAS will require product issuers to explain any significant deviations from the expect-ed returns.
9 Mandatory safeguards for customers without relevant knowledge or experience
This requires financial institutions to conduct a Customer Knowledge Assessment before selling certain products to retail investors. The assessment will look at whether the customer has a finance-related background and any investment or work experience related to the products.
Its aim is to deter inexperienced investors from putting their cash into sophisticated investments that they do not really understand.
If the customer still wants to invest after being assessed as not having enough knowledge or experience, the financial institution must give advice and outline the risks.
If these customers want to invest in certain listed products requiring trading accounts, they will be offered an Internet-based tutorial on derivatives - a risky and sophisticated form of investing - developed by the Singapore Exchange.
Mr Lim noted that the Customer Knowledge Assessment is valid for one year for the purchase of the same or similar product from the same intermediary. This may be cumbersome for the consumer as the assessment cannot be applied to a different intermediary.
10 Policies and procedures for sale of products
If a customer chooses to receive advice, the financial institution and representative must have a reasonable basis for recommending the investment product to the investor. Where a customer wishes to purchase an investment product even after the financial institution advises that it is not suitable, he may decide to do so.
However, the sale can be completed only if certain conditions are met. They include the representative informing the customer in writing that the product is not suitable for the customer and the reasons for such an assessment, and seeking the customer's confirmation that he still wishes to proceed with the transaction. The customer is informed that he will not be able to file a civil claim in the event he alleges he has suffered a loss. These conditions must be confirmed and signed off by senior management.
11 Prohibition of referrals by bank tellers
Bank and finance company tellers will be prohibited from referring customers to representatives for the purchase of investment products. They can do so only when the customer has approached the teller with an explicit request for information on investment products.
Mr Lim highlighted that if this had been put in place earlier, it may have the effect of 'saving' some elderly and illiterate customers from buying complex products. Before the recent financial crisis, bank tellers - who earned a referral fee - could have given the wrong impression that the products they were recommending were similar to fixed deposits.
Mr Tan said that even without referrals by bank tellers, he has noticed that some banks are asking staff to question bank customers who are in a queue to find out if they are potential clients for certain products. If they were, they would be placed on a shorter queue which leads to a relationship manager.
12 Cooling-off period for unlisted debentures
Cooling-off periods are currently mandated for unit trusts and life policies. They are seven days for unit trusts and 14 days for life plans.
In future, a cooling-off period of seven days will be implemented for unlisted debentures such as structured notes with tenures longer than three months. This would allow investors to exit the investment without having to incur sales charges or commissions.
'This is good as clients who are mis-sold, or who regretted, buying the product or upon being better advised by family members can have a chance to reverse the decision,' said Mr Tan.
lorna@sph.com.sg
My Value Investing Blog: http://sgmusicwhiz.blogspot.com/