Question No. 442
Notice Paper No. 187 of 2003
For Oral Answer

Date: For Parliament Sitting on 10 November 2003

Name and constituency of Member of Parliament
Miss Penny Low, MP for Pasir Ris-Punggol GRC

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Question
To ask the Deputy Prime Minister and Minister for Finance with respect to the mandatory seven day cooling-off period for the purchase of unit trust by consumers, (a) whether the consumer will be saddled with the risk of a fall in market price of the unit trust during that seven day cooling-off period; (b) why is there a difference in the cooling period between 'pure' unit trust and investment-linked unit trust issued by insurers, when the underlying mechanisms and assets for some are similar; (c) whether there is any penalty imposed on a seller who breaches the full disclosure requirements at the point of sale and any specific remedy available to the aggrieved consumer; and (d) in the case of breach of the full disclosure requirements, whether the Government will extend the scheme to allow for full refund so that the consumer will not be at risk of a fall in market price of the unit trust during the cooling-off period.

Answer
1  The Monetary Authority of Singapore (MAS) introduced the cancellation period for unit trusts in July this year.  This affords consumers an opportunity to reconsider a hasty investment decision made under the influence of pressure selling tactics of sales advisers.  Consumers who exercise their right to cancel will get a full refund of the original sum invested, including the initial sales charges, but subject to any market loss.  The cancellation requirements for unit trusts seek to strike a balance of responsibility among fund managers, distributors and consumers.  Fund managers and distributors will have the incentive to ensure that their sales and advisory processes are fair and proper, and that the product features are properly explained to minimise the possibility of consumers changing their minds subsequently.  For consumers, having to bear the risk of adverse market movements, in turn encourages them to exercise care and discipline in selecting unit trusts and deters them from frivolously exercising their right to cancel.

2  The 14-day free-look period for life insurance was implemented in the early 1990s.  This longer free-look period is justified for life policies, because these policies can have high early termination penalties.  The 14 days will allow consumers sufficient time to understand fully the terms and conditions of the policy.  For such policies, consumers will in general also not be subject to market risk during these 14 days.  However, I agree with Ms Penny Low that investment-linked insurance policies are very similar to unit trusts, apart from the element of death benefit.  There may therefore be a case to harmonise the cooling-off or cancellation period requirements for these two types of products. MAS will study this further.

3  Miss Penny Low has asked whether any penalty is imposed on a seller who breaches the full disclosure requirements at the point of sale, whether any specific remedy is available to the aggrieved consumer; and whether in the case of a breach of the full disclosure requirements, the Government will extend the scheme to allow for full refund so that the consumer will not be at risk of a fall in market price of the unit trust during the cancellation period.  Under the Financial Advisers Act (FAA), when recommending a unit trust, financial institutions are required to disclose and explain to the consumers certain information about the unit trust. This includes the nature and objective of the fund, details of the fund provider, the consumers' contractual rights, the risks and benefits of the fund, fees and charges to be borne by the consumers, and the cancellation rights of the consumers.  Financial institutions are also prohibited from making false and misleading statements or omitting to disclose any material matter about an investment product.  A breach of these requirements, including failure to make full disclosure, is an offence under the FAA, which would cause MAS to take appropriate action against the offender. 

4  MAS does not, however, have the power to direct financial institutions to pay compensation to aggrieved consumers. Aggrieved consumers should approach the financial institutions or industry-based dispute resolution mechanisms to resolve their disputes.  MAS expects financial institutions to institute  a structured internal dispute resolution process, and has encouraged the industry to set up industry-based dispute resolution mechanisms.  Consumers may seek legal redress through the courts.

5  There is no need for MAS to extend the scheme to allow for refund of the original investment sum to consumers.  The courts and the industry-based dispute resolution schemes would be well-placed to assess whether the losses suffered by consumers are the result of the non-disclosure and if so, to direct the financial institution to make good the losses suffered by the consumers. 

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