Q1: Why is MAS introducing the cancellation process at this time?
A: When the Financial Advisers Act comes into force, financial advisers and the agency sales force of insurance companies are expected to play a more significant role in the marketing and sale of unit trusts. The emergence of a mobile distribution channel, together with increased marketing of unit trusts, raises the risk of pressure selling from salespersons or wrong advice given by sales advisers. The proposed introduction of a cancellation process affords investors an opportunity to reconsider a hasty investment decision which could have been influenced by aggressive hard selling tactics from sales advisers.
Q2: Are there any countries which already have such a mechanism in place?
A: The UK and Australia already have such cancellation requirements in respect of certain financial products. These requirements have been retained in the recent legislative reforms in the UK and Australia. This is also the case with the insurance industry in Singapore, which already gives policy holders the right to terminate a life insurance policy within 14 days from the date of receipt of policy documents.
Q3: How did MAS determine the 7-day cancellation period? Why not 14 days, as in the case for life insurance? Is this sufficient for investors to make an informed decision?
A: A 7-day cancellation period would make investors reconsider their investment decision promptly. This would instil better discipline in our investing public, and is preferable to a longer cancellation period, since investors will have to bear the risk of adverse market movements during the cancellation period. Investors who are unable to decide whether to cancel their purchase within 7 days are unlikely to be any better off with a longer time period to reconsider. A shorter cancellation period will also cause less disruption to the business operations of fund managers and distributors of unit trusts. On balance, we think that a 7-day window is a reasonable proposal. In comparison, the cancellation period ranges between 7 and 21 days in the UK, depending on the type of financial products. Australia imposes a 14-day cooling-off period for investors to reconsider their investments.
Q4: Will the free-look period for life insurance be aligned with the cancellation process for unit trusts to ensure a level playing field?
A: The free look period for life insurance has been implemented since 1990. Both industry practitioners and consumers are familiar with the key features of the free-look period for life insurance, and the process has worked well. As such, MAS has decided for the present to maintain the free-look period for life insurance in its present form. At the next stage of development, MAS will review the need for harmonising the free look requirements for unit trusts and life insurance. There may be a case for some degree of alignment in this respect between unit trusts and investment-linked products (ILPs), especially single premium ILPs given their similarities.
Q5: Will the cancellation process lead to abuse by investors, who may use this privilege to punt?
A: The proposed cancellation scheme has been designed to discourage punting by investors. Under the proposal, investors will have to bear the market risk relating to their investment during the cancellation period. Should there be a downward price movement in the unit trust, investors will bear the shortfall. On the other hand, in the event of an upward price movement, investors will not be entitled to any upside gain if they exercise their cancellation rights. On the whole, we believe that there is little danger that investors would abuse this privilege to engage in short-term investing.
Q6: Will the cancellation process ultimately lead to higher cost of investment for investors, as fund managers and distributors may pass the costs down to investors via higher management fees or distribution charges?
A: The introduction of a cancellation feature may result in administrative costs for fund managers and distributors, when an investor chooses to exercise the right to cancel the purchase of a unit trust. Given the increased competition in the marketing of unit trusts, we expect fund managers and distributors to absorb such costs and not pass the cost to investors. If the fund managers and distributors ensure that their sales and advisory process is fair and proper, and that the product features are properly explained to investors, we would expect the incidence of cancellation to be very low. This has been the experience in other countries which have adopted similar practices. Consequently, the incremental cost of introducing a cancellation process is expected to be negligible on an industry-wide basis.
Q7: Why didn't MAS consider an opt-out/opt-in option (to cancel) for investors?
A: We do not propose to introduce an opt-out/opt-in option for investors as our intention is to make the cancellation scheme easy to understand and implement. An opt-out/opt-in option for investors is also likely to increase the administrative burden on fund managers and distributors.
Q8: Who should the investor approach if he intends to exercise his cancellation right? The fund manager or the distributor who sold him the product?
A: Fund managers and distributors marketing unit trusts will have to provide a clear and prominent notice in writing to investors, with details of the latter?s right to cancel. The notice should spell out clearly, among other things, the steps an investor has to take to cancel the agreement, including details of who, how and where the investors can exercise his cancellation right. Investors would have to exercise their cancellation right according to the procedures stated in the notice.
Q9: Why did MAS propose to allow redemption during the cancellation period? Would it not be better if investors could only cancel their units during the 7 days?
A: Some investors may prefer to redeem units as compared to canceling their purchases during the cancellation period. In the case where an investor chooses to redeem his units rather than exercise his cancellation rights, the fund manager/distributor must make clear to the investor that:
a) he will not be able to enjoy the benefits of cancellation (i.e., no refund of initial sales charge) and that the proceeds that he receives may be lower than the amount refunded in the event of cancellation if the appreciation in the value of the unit trusts is less than the initial sales charge; and
b) the published prices are indicative in nature and can change during the period between the submission and processing of the redemption request.
Q10: Why are investors not entitled to any upside gain when they cancel?
A: The proposed cancellation scheme is being introduced to afford investors an opportunity to reconsider a hasty investment. It offers some form of protection to investors who could have been influenced by pressure selling, or even mis-selling. It is not to be an avenue for investors to gain market exposure to a product without risk or profit from it.
Q11: Given that investors have to bear market risk during the cancellation period, how does the cancellation scheme benefit investors?
A: Under current practices, any investor who wishes to withdraw his purchase in a unit trust because of pressure selling or wrong investment advice will have to redeem his units with the fund manager or the distributor whom he bought the units from. The investor bears market risk and is not entitled to recoup the initial sales charge related to his purchase. The cancellation scheme will allow an investor to obtain a full refund of the original sum invested, including the initial sales charge, subject to any market losses.
|
