Reply to PQs on the Sale of Structured Products to Retail Investors
Question No 11 in Order Paper No 58 of 2008
Question No 12 in Order Paper No 58 of 2008
Question No 13 in Order Paper No 58 of 2008
Question No 14 in Order Paper No 58 of 2008
Question No 15 in Order Paper No 58 of 2008
Question No 16 in Order Paper No 58 of 2008
Name and Constituency of Member of Parliament
Q 11: Mdm Halimah Yacob, MP for Jurong GRC
Q 12: Mdm Cynthia Phua, MP for Aljunied GRC
Q 13: Mr Low Thia Khiang, MP for Hougang
Q 14: Er Lee Bee Wah, MP for Ang Mo Kio
Q 15: Mr Siew Kum Hong, NMP
Q 16: Mr Gautam Banerjee, NMP
Mdm Halimah Yacob: To ask the Senior Minister (a) how does the Monetary Authority of Singapore (MAS) supervise financial institutions operating in Singapore to ensure that they fully comply with the regulatory framework requiring disclosures and proper business conduct when they market investment products to retail investors; (b) whether the existing laws and regulations are adequate to protect retail investors against such high-risk investment products; (c) whether MAS will be initiating any investigations into the conduct of financial institutions to ensure that they have conducted themselves appropriately when marketing and selling to retail investors; and (d) what more can be done to enhance safeguards for these investors.
Mdm Cynthia Phua: To ask the Senior Minister (a) how does the Monetary Authority of Singapore (MAS) (i) safeguard the interest of the man-in-the-street to ensure that they are aware of the complexity and high risk nature of the financial products they are investing in; and (ii) regulate banks and finance companies in the sale of high-risk and complex structured financial instruments so as to safeguard the capital sum invested by the man-in-the-street; (b) whether MAS will be able to provide the number of Singaporeans who lost their high-risk investments following the closure of the Lehman Brothers in the US; and (c) whether MAS will require banks to determine the risk tolerance and ensure that the contracted terms and conditions are understood by potential investors before the sale of such products.
Mr Low Thia Khiang: To ask the Senior Minister (a) whether the Monetary Authority of Singapore (MAS) will investigate how structured products linked to Lehman Brothers were marketed; and (b) if there is any misrepresentation, whether MAS will assist the affected investors in negotiating with the banks to ensure fair treatment for these investors
Er Lee Bee Wah: To ask the Senior Minister (a) what are the terms of reference for the three independent consultants appointed by the financial institutions to look into the investors' complaints; (b) what are the procedures to ensure that future investors are not misinformed about high risk financial products; and (c) whether he is able to provide the information on how many of those who invested in these structured products linked to Lehman Brothers were elderly people or retirees.
Mr Siew Kum Hong: To ask the Senior Minister in view of the public concerns on the sale of structured products (a) what are the principles followed by the Monetary Authority of Singapore (MAS) in regulating financial institutions; (b) whether MAS is investigating the allegations that financial institutions have misrepresented and missold structured products to the public and, if so, what is the status of such investigations; and (c) why did MAS not appoint the three individuals reviewing certain financial institutions’ internal processes, instead of leaving them to be appointed by the financial institutions and thereby permitting possible perceptions of conflicts of interests.
Mr Gautam Banerjee: To ask the Senior Minister whether more can be done to (i) improve the level of communication and disclosure particularly on credit and market risk when complicated structured investment products are sold to ordinary investors; and (ii) provide comprehensive product and ethics training to those marketing complicated structured products to retail investors.
Mr Lim Hng Kiang, Minister for Trade and Industry and Deputy Chairman
Mdm Halimah Yacob, Mdm Cynthia Phua and Mr Siew Kum Hong have asked about the current regime that governs the sale of structured products to investors. The regulator, the financial institution, as well as the individual investor, all have a part to play in this regime. 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.
2. MAS regulates the offer and distribution of financial products. Our approach is to require 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.
3. The Securities and Futures Act governs information disclosure that must accompany any offer of securities to the public. 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. If MAS is satisfied, it will register the prospectus. MAS does not judge the merits of the investment. This is stated on the cover of the prospectus so that investors understand that the securities are not endorsed by MAS. This regime has been applied to structured products from 2004. 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.
4. The Financial Advisers Act regulates the sales and advisory process for financial products, and sets out the steps to be followed when giving advice on investment products. Unless an investor chooses to opt out of receiving advice, financial institutions (FIs) and their representatives must have a reasonable basis when recommending investments. In doing so, FIs must consider the investment objectives, financial situation and needs of the investor.
5. MAS also expects the board and senior management of FIs to be responsible for ensuring their FIs deliver fair dealing outcomes to consumers, particularly with the needs of retail consumers in mind. MAS has published a set of good practices which FIs are encouraged to follow. For example, customers who are illiterate or not fluent in English should be accompanied by someone who is able to explain what is being presented by the representative. The representative’s supervisor should also be present during the sales presentations. FIs are also encouraged to have supervisors review the recommendations made by representatives.
6. Investors must also play their part and take responsibility for their own investment decisions. MAS launched the MoneySENSE national financial education programme in 2003 to enhance the financial literacy of consumers. MoneySENSE aims to empower investors to make informed decisions. As investors, we should understand the products we intend to invest in and ask as many questions as needed. If we still do not understand the product or its risks sufficiently, we should not invest. Another sound principle is to diversify our investments and not put all our eggs in one basket.
7. The current regime is intended to achieve an appropriate balance and to avoid over-regulation or under-regulation. It recognises that investors have different needs and risk appetites, and that a one-size-fits-all rule is not desirable. As a practical matter, there are limits to which a regulator can determine the suitability of each individual class of products for particular types of investors. MAS’ approach allows a wider range of investment options for Singaporeans to cater to their diverse needs. Our regulatory framework is in line with those in other major jurisdictions and we believe it is fundamentally sound.
8. Madam Phua and Ms Lee asked about the extent to which Singaporeans have been affected by the Lehman-related products. MAS has released data on the profile of investors. The total issue size of the Lehman Minibond Programme was S$508 million, of which S$375 million was sold to about 8,000 retail investors through nine distributors. For the Merrill Lynch Jubilee Series 3 LinkEarner Notes, S$23 million of the total S$28 million notes issued were sold to about 350 investors through six stockbroking firms. Over 80% of the Lehman Minibond Programme and Merrill Lynch Jubilee Series 3 LinkEarner noteholders invested up to S$50,000, with 28% having bought S$10,000 or less. In the case of DBS High Notes 5, over 1,400 investors bought S$103 million worth of notes. More than half of them invested S$50,000 or less.
9. It is clear that a good number of Singaporeans are affected by the current situation, and the amounts involved are not insignificant. We fully understand that affected investors are very anxious.
10. What MAS did from the start was ensure that the FIs and trustee communicate clearly with investors and provide timely updates. MAS has been in close contact with the FIs and trustee. For the Lehman Minibond Programme where Lehman Brothers is the swap counterparty, MAS has reminded HSBC Institutional Trust Services (Singapore) Ltd, the trustee, that it is to carefully consider all options and to act in the interest of investors. The trustee is considering various options available, including the possibility of a new counterparty taking over the swaps. If a new counterparty is available, investors will have the opportunity to vote on this option. MAS will also appoint an independent financial adviser to help investors make an informed decision. For DBS High Notes 5, DBS has appointed KPMG as an independent party to ensure a fair and transparent valuation process for determining the final redemption amounts. For some of these products, investors may be able to realise some residual value. There are others, such as the Merrill Lynch Jubilee Series 3 LinkEarner notes, where investors would not recover any value at all. Affected investors should also bear in mind that the determination of the final payout under some structured notes could take some time, due to the need to dispose of the underlying securities under current market conditions where liquidity is low. We should allow the process to take its course, as rushing into a ‘fire sale’ would not be in the interest of investors. We expect the trustee to know whether options will be available to noteholders by the end of this week.
11. In dealing with complaints by investors, MAS’ priority is to ensure that the process is fair. MAS, in consultation with the relevant FIs, identified three well-respected individuals who have been appointed to review the complaints handling and resolution processes of the FIs for these products.
12. The role of the independent parties is to determine whether the complaints handling and resolution processes are independent, fair and transparent. The terms of reference spell out what this means. First, each complainant must be given a full opportunity to state his complaint. The complaint must be assessed by reviewers who are independent of the financial advisory arm of the institution. Second, where there is any evidence of mis-selling, there must be a process to surface this to the attention of the institution’s senior management and to MAS. Third, the independent parties are to highlight to the institution’s senior management any shortcomings in the FI’s processes or in the execution of the process. Such shortcomings must be rectified, failing which MAS must be immediately notified.
13. MAS has set a very clear timeline for the FIs to resolve the complaints. They are expected to devote all resources necessary to deal with the complaints. All the FIs have also set up internal review panels which are chaired by their CEOs. The panel is expected to conduct a thorough review of each complaint and decide on a course of action within four weeks. The decision will then be communicated to the customer. MAS is keeping a close watch on the resolution process.
14. If investors are not satisfied with the outcome of the FIs’ complaints resolution process, they can have their complaints referred to the Financial Industry Disputes Resolution Centre (FIDReC) for mediation or adjudication. FIDReC provides investors with an affordable and impartial avenue to pursue their claims. The FIDReC adjudicators are all well-respected professionals. The chairman of FIDReC is Mr Goh Joon Seng, a retired High Court judge. MAS has put in place a fast-track process for referrals to FIDReC. As over 80% of customers invested less than $50,000 or below, FIDReC is the right avenue for them to pursue their claims. In case of the affected structured notes, the FIs have consented to FIDReC to hear all deserving cases.
15. Mr Siew has asked why MAS did not appoint the three independent parties instead of letting the FIs appoint them. MAS has full confidence that the three independent parties will carry out their work objectively. The terms of reference for these independent parties are set out by MAS. They are required to provide MAS with regular updates on the progress of the complaints review and an overall report at the end of the review. The three parties who have been appointed are highly-respected individuals, whose independence I do not think is questioned.
16. In summary, MAS has set out a clear three step dispute resolution process for the handling of complaints by investors in the affected structured notes. Any investor who genuinely believes that he has been mis-sold these products should take the following steps. First, you should lodge a complaint with the FI that sold you the product. The FI will arrange for you to be interviewed. Second, you should explain the details of your case fully to the FI to allow it to make a fair assessment of your case. Third, if you are not happy with the proposed resolution by the FI, you can refer the matter to FIDReC for independent mediation or adjudication. This is a serious and impartial process that MAS has put in place. Affected investors should follow these three simple steps to enable a fair resolution of their complaint.
Calls for MAS to Investigate
17. Madam Yacob, Mr Low and Mr Siew have asked if MAS will investigate how these products were marketed and sold. MAS has said that where there is evidence of regulatory breaches, it will not hesitate to take firm regulatory actions against the FI or the representative. MAS has required the independent parties to highlight potential cases of mis-selling to MAS. A number of possible mis-selling cases have already been raised to MAS’ attention. MAS is reviewing these cases. MAS has also confirmed it has been conducting formal inquiries into allegations of breaches of the law, inadequate internal controls by the FIs, or poor sales practices by their representatives. MAS will make an announcement of any actions it is taking when the inquiries are completed.
18. Clearly, there is a range of investors who bought these products. Some are well-educated professionals. Others are sophisticated investors. The group MAS is most concerned with are the vulnerable customers. MAS is focusing on cases of mis-selling to vulnerable customers and on cases where the products were clearly inappropriate for them given their circumstances. MAS has required the FIs to give priority to these cases. FIs should not take an overly legalistic approach to mis-selling in dealing with these cases. For cases where there are sufficient indications that the product was mis-sold or that it was clearly inappropriate given the investor’s profile and circumstances, the FI should take responsibility. Several FIs have assured MAS that they will take full responsibility in such cases and we expect all FIs that have sold these products to take the same approach.
19. We must also bear in mind that the current financial environment is quite unprecedented. Stock markets have fallen sharply globally. Investments across a whole range of products have lost value, some more than others. For example, investors with foreign exchange structured deposits have lost about 25% due to depreciation of certain currencies. Any assessment of whether mis-selling occurred has to take into consideration circumstances at the time of the sale and not what we now know. For example, until July this year, Lehman’s bonds were rated “A1” and “A” by Moody’s and S&P respectively. As a result of the global financial crisis, institutions that many would have considered safe, have failed or needed to be bailed-out, taken-over or re-capitalised by their government.
Lessons Learnt, Areas to Review
20. Mdm Halimah Yacob and Mr Gautam Banerjee asked whether we could improve our procedures to enhance safeguards for retail investors. The current crisis has raised the need for MAS to review aspects of our regulatory and supervisory approach. Other countries are also doing so. MAS has announced that it will undertake a review of the marketing and sale of structured products. Some areas of review would include stronger suitability requirements for certain types of products, clearer product labelling and risk rating, and simpler descriptions of the features and risks of products so that they can be more easily understood. However, we need to be careful not to take a step backward by developing overly-prescriptive rules.
21. But regulation alone is not enough. The industry also has to do more. The board and senior management of FIs must be responsible for ensuring that investors get a fair deal. MAS is looking into how best to implement the Guidelines on Fair Dealing which we had earlier consulted upon. Mr Banerjee has also asked about improving training provided to persons who market structured products. Under the Financial Advisers Act, MAS requires financial adviser representatives to pass the Capital Markets and Financial Advisory Services examinations, which includes modules on both rules and regulations, and product knowledge. Further, MAS expects these representatives to undergo continuing education to keep abreast of developments in the industry and acquire new skills and knowledge relevant to their activities. As part of its review, MAS will consider how these areas can be strengthened.
22. Finally, it is also important for investors to make well-informed decisions. Financial education is an ongoing process that requires sustained and collaborative efforts by various stakeholders. MoneySENSE has been collaborating with various partners to deliver financial education to students, working adults and seniors. Recent events have also highlighted the need to further strengthen our financial education efforts. To this end, as part of the MoneySENSE programme, MAS will be looking at ways to enhance investor education on investment products.