Parliamentary Replies
Published Date: 17 November 2008

Reply to PQ on Lehman-Linked Products - Progress of Investigations Into Alleged Mis-selling and Whether the Notes are Sold to Investors in the US

Question No. 865 & 862
 Notice Paper No. 281 of 2008
 For Oral Answer

Date: For Parliament Sitting on 17 November 2008
Name and Constituency of Member of Parliament
Q865: Mr Siew Kum Hong, Nominated Member
Q862: Ms Sylvia Lim, Non-Constituency Member of Parliament

Mr Siew Kum Hong: To ask the Senior Minister (a) if he will provide an update on the progress of investigations by MAS into alleged mis-selling by financial institutions and the progress of the review of the marketing and sale of structured products; and (b) whether MAS is satisfied with the progress of the financial institutions in resolving customers’ complaints.

Ms Sylvia Lim: To ask the Senior Minister (a) whether structured notes similar to Lehman Brothers products were sold to small retail investors in the United States and in the same manner as in Singapore through bank branches; (b) if so, how disgruntled investors are being handled by the American Federal Reserve, compared to Singapore; and (c) if not, why such products were allowed for sale to small retail investors in Singapore in such a manner.

Mr Tharman Shanmugaratnam, Minister for Finance:
1. Mr Speaker Sir, as a member of the MAS' Board and in the absence of the Deputy Chairman of MAS, I'll be responding to the questions posed to Senior Minister that relate to the MAS. Mr Speaker Sir, I'll like to have your permission to take the questions by Mr Siew Kum Hong and Ms Sylvia Lim together.  Mr Siew has asked for an update on MAS' investigations into allegations of mis-selling, and an update on the review of the marketing and sale of structured products. A number of possible cases of mis-selling have been brought to MAS' attention and MAS is following up on them. MAS has confirmed that it has been conducting formal inquiries into allegations of breaches of the law, inadequate internal controls by the financial institutions (FIs) that sold structured products linked to Lehman Brothers, and poor sales practices by their representatives.

2. MAS will take firm and appropriate regulatory actions where there are breaches of law or regulations by FIs or their representatives. These regulatory actions could include fines, public reprimands and prohibition orders which bar the FI or a representative from providing financial advisory service for a specified period of time. MAS’ inquiries are progressing, and it will make an announcement on any actions it is taking when they are completed.

3. While MAS considers its current regulatory regime for marketing of investment products as fundamentally sound, it is undertaking a review in light of recent developments, not just in Singapore, but globally. MAS has announced that the review may include stronger suitability requirements for certain types of products, clearer product labeling and risk rating, and simpler descriptions of the features and risks of products so that they can be more readily understood.

4. In reviewing our current regulatory and supervisory approach, however, MAS intends to be careful not to come up with overly prescriptive rules which may not serve all investors. MAS' approach has allowed Singaporeans a wider choice of investment options to cater to their diverse needs. It is studying the specific refinements that need to be made carefully so that we do not make hasty changes that bring unintended consequences in the future.

5. Furthermore, regulation cannot be the only solution. All stakeholders have a role to play. The Boards and senior management of FIs must embed a culture within their institutions, a culture of ensuring fair dealing for customers of their institutions. In this regard, MAS has instructed the CEOs of all FIs to conduct a thorough review of their FIs' processes and procedures for their sales and marketing activities. Investors too have to play their roles, by reading product disclosures and making the effort to understand the products they purchase. This will reduce the risk of investors being sold products that do not meet their needs. Where there is no mis-selling, they have to take responsibility for their investment decisions.

6. Mr Siew has also asked for MAS' views on how the FIs have been handling the customers' complaints process thus far. MAS has been following up with the FIs to ensure that they are handling all investors' complaints, I repeat 'all' investors' complaints, in accordance with the impartial process that has been set up, and to do this with full urgency and with full seriousness. This has been communicated to the senior management in all FIs. MAS receives regular updates from the independent parties appointed to oversee the complaints handling and resolution process in each FI. The FIs have put in concerted efforts and additional dedicated resources to deal with all complaints. While there were some difficulties at the start, MAS has seen improvements. Some FIs have made good progress in the resolution of complaints, and MAS has welcomed this. Others which were lagging earlier have now put in greater effort and greater resources. MAS is monitoring the progress of all the FIs concerned.  It expects the FIs to deal fairly with all cases, regardless of the background of the investors, and regardless of whether they fall under the 'vulnerable' category or otherwise, with a view to reaching fair resolution where there is evidence of mis-selling.

7. Ms Lim has asked whether structured notes similar to Lehman Brothers products were sold in the US and how investor complaints on such products are being handled.

8. Structured notes have been marketed to retail investors in the US. In fact, recent press articles from the US have indeed highlighted how the recent Lehman Brothers bankruptcy has resulted in investors, both retail and institutional, suffering significant losses on structured notes. Structured notes have also been sold in other countries, including the UK, Australia, Germany, France, Hong Kong and Taiwan.

9. The regulatory regime for investment products in Singapore is not fundamentally different from that in other reputable jurisdictions like the US, UK and Australia. The basic principles are similar – financial institutions and issuers are required to properly disclose key product information; financial advisers and their representatives in the sales and advisory process have responsibilities to abide by as set out very clearly in the Financial Advisers Act; the role of investors, in turn, is to ensure they understand the products they invest in and where there is no mis-selling, to take responsibility for their investment decisions.

10. In Singapore, financial institutions are required to properly disclose to investors the features and risks of the products they distribute. They and their representatives must have a reasonable basis for recommending investments, taking into consideration the investment objectives, financial situation and needs of the investor. In addition, the Monetary Authority of Singapore (MAS) has published a set of good practices which financial institutions are encouraged to follow. These are good practices over and above the regulatory requirements under the law.  There is also in place the MoneySENSE national financial education programme, which aims to enhance the financial literacy of investors and empower investors to make informed decisions.

11. Ms Lim has also asked about how investor complaints are being looked into in the US. In relation to the Lehman notes, reports indicate that some investors have approached lawyers to look into pursuing arbitration claims with the Financial Industry Regulatory Authority (FINRA)[1] , previously known as NASD, which is an industry-based regulatory body.

12. In Singapore, as my colleague, Mr Lim Hng Kiang had earlier elaborated, MAS has set out a three-step dispute resolution process, including procedures to ensure the fair and impartial handling of complaints by the relevant financial institutions and arbitration of disputes between investors and the financial institutions. MAS has been active in supervising these procedures, and its priority is to ensure that every complaint is dealt with appropriately.

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[1] FINRA is the independent regulator for securities firms doing business in the US. FINRA was created in 2007 through the consolidation of NASD and NYSE Member Regulation. FINRA regulation deals with a wide range of issues - from registering and educating all industry participants to examining securities firms; writing and enforcing rules and the federal securities laws; informing and educating the investing public; providing trade reporting and other industry utilities; and administering the dispute resolution forum for investors and registered firms.