"Investor Education & New Framework for Financial Advisers"
Speech by DPM Lee Hsien Loong
1st Anniversary Dinner of the Securities Investors Association (Singapore), Raffles Ballroom, The Westin Stamford and Westin Plaza
Date: 07 Jul 2000
Ladies and Gentlemen
SIAS' CONTRIBUTIONS TO CLOB'S RESOLUTION
1 I am delighted to celebrate with the Securities Investors Association (Singapore) ("SIAS") on your first anniversary.
2 The SIAS committee has not had the luxury of a honeymoon in its inaugural year. SIAS was formed in July 1999, when CLOB investors felt a pressing need to organise themselves and protect their legal rights. CLOB had become a problem. The Singapore Exchange (then the Stock Exchange of Singapore) was doing its best to resolve this problem, but the Exchange could not substitute for a well-organised group of the investors themselves, which could press their concerns and rally CLOB investors to their common cause. Private parties were presenting CLOB investors with proposals to purchase the frozen securities at deep discounts, without offering any reasonable alternatives. Had an active group not spoken up for CLOB investors, reassured them of their strong legal position, and given them confidence that someone was looking after their interests, individual shareholders might well have been intimidated into accepting unfavourable terms to settle the issue, and been picked off one by one.
3 Within months, SIAS had grown into a 50,000 strong association. SIAS provided steadfast independent representation of investors' interests. The association took a firm, measured, and constructive approach towards the problem. It tapped experienced practitioners in the securities industry, and formed a financial advisory group with the expertise to evaluate private sector offers objectively and professionally, before presenting their recommendations to CLOB investors.
4 The final solution reached in February 2000 was on terms that most CLOB investors found acceptable. This week the first CLOB securities were released back to investors for trading under the agreed 13-month schedule. The agreement was signed by the SGX and KLSE, but without SIAS the CLOB issue might have had quite a different outcome.
5 The fact that interested and public spirited Singaporeans took the initiative in this matter, and came forward to volunteer their services, was a very good sign for the development of civil society and the spirit of self-help in Singapore. The Government has sought to involve the people and private sectors in issues and decisions which affect them, because non-government organisations and industry committees provide useful inputs when the Government is formulating national policies and tackling problems. SIAS' role in the solution of the CLOB problem shows how this process works, and how valuable these outside contributions can be.
6 Now that CLOB has been resolved, SIAS must look ahead, to find new roles for itself, and stay relevant to its members. One important area is investor education, for several reasons.
7 Firstly, the reforms and liberalisation of Singapore's financial sector have caused new players to emerge in banking, insurance, and the capital markets. Singaporeans will benefit from a wider range of products and investment possibilities that promise competitive returns. However, they will also need to exercise greater care in making their investment choices. They cannot assume that the regulators will sieve out high-risk investments, and that everything available is safe and appropriate to them. Not all investors will be interested in the more complex or adventurous financial products, nor should they be. But all investors will need to understand the basics of making financial investments, if only to know what they should stay away from.
8 Secondly, as part of the liberalisation, we have shifted from a stringent merit-based regime to a more liberal disclosure-based one. The regulator no longer approves or disapproves investment products and proposals, based on his judgement as to which products are safe or have investment merit to be offered to the investing public. Instead the regulator allows companies to make their proposals, so long as basic requirements are met and the companies disclose to investors all the relevant information, so that the investing public can make their own judgements and decisions.
9 This approach of caveat emptor or "buyer beware" makes it especially important for investors to be properly educated and well-informed. Only then will they be in a position to judge the merits and risks of propositions, and to make sensible decisions based on the information available.
10 Thirdly, we are freeing up CPF rules, to give CPF members more autonomy and flexibility to invest their CPF savings with banks and fund managers. If they do this wisely, they can earn better long-term returns to meet their retirement needs. It is right that Singaporeans are given the freedom to do this, and take more responsibility for their own financial well-being. But improved returns will only be possible if the CPF members invest their funds prudently, with long term objectives in mind.
11 Fourthly, the changes to the financial scene in Singapore coincide with the rapid growth of the internet as a medium for offering financial services. The internet has cut across national boundaries, globalising the marketplace. It gives investors the impression that they have the global marketplace at their fingertips, but in fact only some of the service providers are regulated by MAS. The Government cannot block websites that offer unregulated services, and the investing public must keep their wits about them if they are not to expose themselves to unintentional risks, or worse to be fleeced.
12 Even where services are properly regulated, the very convenience of the internet exposes the public to new risks. Because it is so cheap and easy to trade shares over the internet, day trading has become a craze in the US and South Korea. The line between investing prudently and gambling recklessly is a grey one, easy to cross when transactions can be done instantly and effortlessly. Day trading by amateurs may seem fine in a bull market, when winners outnumber losers; but when the market falls there will be casualties.
INVESTOR EDUCATION: A COLLECTIVE EFFORT
13 Investor education must go hand in hand with proper disclosure of information by companies. MAS believes that promoting these twin imperatives should be a collective effort by all the players in the industry. Different bodies play different roles.
14 The Singapore Exchange has the duty of providing a well-regulated, transparent and efficient market. It makes sure that companies release corporate news and financial results promptly and fully, so that there is a smooth flow of information within the industry. The exchange will benefit from a healthy and well-informed market that will attract investors based on careful research and sound analysis.
15 The Exchange has also carried out some public education activities. For instance, it organises exhibitions from time to time, where brokerages explain investment processes like the mechanics of trading and settlement, and listed companies describe their business activities. These efforts are valuable in promoting investor education, and should continue.
16 Listed companies must establish high standards of reporting and disclosure. The principle of caveat emptor presupposes that investors are in a position to make informed decisions. To do so for share investments, they need full and prompt disclosure of material information by listed companies.
17 Disclosure standards of Singapore companies have improved over time, but we should continue to strive to reach global best standards. SIAS's Transparency Award tonight will contribute to this effort. In the ongoing review of Corporate Regulation and Governance Policy, the main committee has set up a sub-committee on Disclosure and Accounting Standards, to review our disclosure requirements and practices. We also intend to change the law to make continuous disclosure by listed companies a statutory obligation. This means that non-disclosure or late disclosure of material information will be a breach of the law that will carry a judicial penalty, and not just be a breach of SGX's listing requirements.
18 Companies should make full and prompt disclosure a major corporate priority. This is not just because disclosure is an exchange or legal requirement, but because it is the companies' responsibility to shareholders. Disclosure and transparency are essential to good corporate governance. It is in the interest of companies themselves to go beyond the bare minimum in their disclosures. After the Asian financial crisis, investors have become more sensitive to the quality of information available to them. They will reward companies which are more candid and open by valuing their shares higher. We saw an example of this in the depths of the crisis, when the local banks disclosed details of their non-performing loans, and their share prices actually rose.
IMAS and SIAS
19 The principal responsibility for reaching out to retail investors, to the man in the street, will be shouldered by industry players such as fund managers and broking firms who have a keen interest in well-informed investors. The Investment Management Association of Singapore (IMAS) representing the fund management firms, and SIAS representing the investing public, particularly retail investors and minority shareholders, will play crucial roles.
20 Investors must be taught rudimentary but universal investment principles. Not just the mechanics of calculating price-earnings ratios or dividend yields, but also the importance of taking a long term view, and the risks involved in making different investments. They should understand that the idea of investing is not to double your money overnight, but to earn steady returns over months and years. They should realise that financial markets offer no free lunches, and that higher returns usually go with higher risks. Then perhaps when they see a product that seems to offer exceptionally attractive returns, or a particularly eye-catching advertisement for a new investment scheme, they will remember to look out for the downside risks, before jumping in with both feet.
21 The SIAS committee has placed particular emphasis on reaching out to the heartland retail investors, and on re-focussing the mind-set of the investing community. This is the right direction. SIAS will be aided by an Investor Education Advisory Committee comprising senior experienced professionals from industry, and should be able to make a substantial contribution to the development of our financial markets.
22 MAS will support initiatives by IMAS, SIAS and SGX in investor education. When the associations or the Exchange have worked out details of their investor education programmes, MAS will be open to helping out with co-funding from the Financial Sector Development Fund. This is in keeping with the purpose of the Fund, because an educated and sophisticated investing public is an important part of a vibrant but mature financial sector.
23 In its role as regulator, MAS will focus primarily on setting appropriate guidelines on disclosures and prevent market misconduct. We will continue to strive for market transparency, and high standards of disclosure. We will keep our regulations updated, to facilitate sound investment planning and the provision of financial services. One such initiative is planned legislation to regulate a new class of Financial Advisers.
24 While we seek to educate every investor in the basics of financial planning and investing, most investors will still benefit from professional advice. Presently, in Singapore personal investment advisory services are largely confined within the respective asset classes. Insurance brokers and agents sell insurance, stockbrokers and remisiers deal with shares, banks and fund management companies sell unit trusts. Financial advisers who wish to provide advice and distribute different financial products have to be licensed or registered, or both, under different statutes.
25 We aim to change this model, to promote the emergence of a single class of independent advisors, who can offer comprehensive financial planning and advice on the entire range of investment options. Their interest will lie in representing their clients, rather than pushing any particular product or service provider.
26 The traditional model had its merits when insurance and securities were clearly distinct products handled by different professions. But the lines between the traditionally different types of intermediaries are becoming increasingly blurred. Insurance brokers and agents distribute investment-linked products, which are in essence unit trusts with a small element of insurance coverage. Unit trusts and share prices are quoted side by side on brokerages' web-sites. Bank staff earn commissions on successful unit trust sales. Stockbrokers, insurance agents, and independent financial advisers will all be keen to be involved in distributing or advising on unit trusts.
27 The convergence of different financial products, and the liberalisation of the industry, has whetted market players' appetites to branch into additional forms of value-added products and services. Distribution channels too are merging: banks, securities firms and insurance companies alike are all eager to provide one stop service to investors in financial planning and other personal investment services.
28 On the demand side, better investor education will increase rather than decrease demand for comprehensive financial advice. The average investor who understands the basics will realise that he needs more than the basics to work out sensible plans for himself, and therefore see the advantages of seeking comprehensive professional advice.
29 Despite this convergence, most jurisdictions still segregate the different financial activities, for example United States and Hong Kong. However, several jurisdictions like the United Kingdom and Australia have moved decisively to streamline and consolidate their financial regulations. In the UK, a class of Independent Financial Advisers has emerged, following the Big Bang of the 1980s.
30 MAS has completed a study of financial planning as part of a broader review of MAS' licensing regime. We have concluded that there are significant advantages to consolidating the legislation regulating personal financial advice. A single licence for all Financial Advisers, who provide advice to the client, will complement the single licence that MAS will be introducing for all securities intermediaries such as stockbrokers, futures traders, or fund managers, who deal in securities or manage client funds.
31 The benefits of a single licence for Financial Advisers are several. Firstly, it will establish a consistent set of requirements across what has traditionally been classified as different sectors: securities, insurance broking and banking. This will avoid regulatory arbitrage and help maintain uniform professional standards across the board.
32 Secondly, the new provisions will foster the emergence of Financial Advisers, as a new class of intermediaries who provide a wide array of value-added advice regardless of the type of financial product, and in particular offer personal financial advisory services. Because the Financial Advisers will not be connected with any particular providers of financial products, such as the fund manager or insurance firm, they will represent the interests of their clients, rather than the interests of these providers. To the Financial Advisers, the investors' interests must take first priority.
33 Thirdly, streamlining the regulation of Financial Advisers will reduce administrative and compliance costs that otherwise result from needing multiple licences, under both the securities and insurance statutes.
34 MAS will draw up legislation to regulate this new class of Financial Advisers. The new regime will cover the provision of personal investment and financial planning advice in respect of personal investment products, as well as the marketing and arranging of contracts on behalf of the end-buyer. The new provisions will also regulate life insurance brokers, in place of the existing Insurance Intermediaries Act.
35 To minimise regulatory overlap, fund managers and dealers that are licensed under the Securities Industry Act, as well as banks, insurance companies and their agents will be exempted from licensing under the proposed legislation. However, all exempted entities whether banks, securities, or insurance companies will be subject to the same standards of market conduct and practices as those imposed on the class of Financial Advisers.
36 MAS will seek the industry's comments on these changes. To ensure consistent and reasonable professional standards, MAS will also consult the industry to determine the minimum qualifications to be required of Financial Advisers, and draw up a common code of conduct that will apply to all Financial Advisers.
37 The MAS as regulator will facilitate and encourage healthy market developments. Industry participants play a crucial role in setting acceptable standards of best practices and ethical conduct. But for these new initiatives to have the full desired result, lay investors must see the merits of proper financial planning, digest the information made available by stricter disclosure requirements, grasp fundamental investment concepts and know enough about finance to discuss their needs and plans with Financial Advisers.
38 The volume and quality of local financial news and analysis have improved steadily in recent years, although there is still considerable room for further improvement. These are readily available to investors in the newspapers, numerous magazines and a plethora of brochures. The challenge is to educate people to make sense of this information, and use it to their advantage. If investors make the effort to absorb the data, and apply basic investment principles sensibly, over time their knowledge and performance will surely improve.
39 As Singapore develops further as a financial centre, we must also develop an educated and informed investor community. Then we can launch into a virtuous cycle, where discerning investors exert market discipline on service providers and listed companies, who in turn compete to outperform one another, and to upgrade their products and services.
40 I wish SIAS every success in the years ahead, and particularly in your efforts to promote investor education in Singapore.