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How does the govt define "mis-selling"? By Leong Sze Hian

Mis-selling 101 – a respond to minister’s remarks

Leong Sze Hian / Columnist

I refer to the report "Be more 'proactive', MAS" (ST breaking news, Oct 20).

The report says:

"The Minister's answers sound like the MAS shouting across the river, while watching a fire burning,' said Mr Low (Khia Thiang), who suggested the Government could form a committee 'to deal with the matter directly'.

Mr Low also asked if the investors' plight was the result of a 'less prudent regulation by the MAS' and 'the Government's decision to liberalise the financial market'.

And on Mr Low's question on disclosure and liberalisation, Mr Lim added that if financial institutions intend rolling out similar structured notes, they would have to go through a process to put out a prospectus that discloses details of the products, including a pricing statement that explains the risk.

'So our rules allow them, if they are putting out a programme of notes like in the case of the Lehman Mini-bond series...these are all similar products, so they put out a general disclosure through a prospectus.'

Mr Lim also added that with each new series FIs put out, it would come with a pricing statement that explains the risk and set price.

'It's a better approach than to say that every time you put out one of a series of notes, you have to come out with a whole process of the full prospectus.'

Mr Lim also addressed Mr Low's question on whether structured products were low-risk or safe.

The Minister said that the product's prospectus would have outlined the risks: 'These are explained in the first page or second page , that these are structured products and it's in bold print, that you can lose everything.

'So MAS has never said that these are risk-free products or low-risk products or safe products.'"

What is “mis-selling’?

I refer to the article, “Time to maker sellers beware not just buyers”, Dr Huang Shoou Chyuan’s letter “How will Govt help buyers of structured products ?” (My paper, Oct 16), and media reports that some financial institutions will in specific cases whereby evidence of mis-selling is established, they will take responsibility and compensate investors.

I checked a few dictionaries and Wikipedia, but there is no such word as “mis-selling”.

However, “mis” means “bad or wrong”, and “selling” means “to influence or induce to make a purchase”.

In the context of the structured products at issue, does “mis-selling” mean mis-information was given to the investor, or a mistake in the “selling” process ?

So, how does an investor prove “mis-selling” ?

Examine systemic issues

Instead of focusing on the sales transaction that took place, I would like to suggest that we also examine any systemic issues that may have contributed to possible “mis-selling”.

For example, what training, script, tools and marketing materials were given to and used by the representatives of the various financial institutions ?

In this connection, according to the Guardian newspaper of 8 October, the largest fine ever of 7 million pounds was meted but by the United Kingdom’s financial regulator, on a financial institution that was caught training staff to pressure customers into buying an expensive financial product.

Investors have also written to newspaper forums, citing that the product summary and brochures of some of the structured products in Singapore had wording like “for defensive investors seeking exposure to high grade assets that provide steady and enhanced yields”, “low risk and easy to understand”, etc.

In light of the above, has “mis-selling” occurred, in a sense, even before the sales transaction ?

What is “suitable” and “reasonable basis”?

I understand that according to the Financial Adviser’s Act, the investment product recommended must be suitable for the investor, and there must be reasonable basis for the recommendation.

So, what is “suitable” and “reasonable basis” ?

In my view, the test for “suitable” and “reasonable basis” is whether there is any conflict between the investment advice or product recommended, and the investor’s objectives, concerns, circumstances, risk profile, etc.

In this regard, I believe that most of the structured products’ sales transactions may have been documented as “no advice” or “product advice” only.

What this may mean could be that the question of “suitable” on “reasonable basis” may not arise, because the investor did not provide any information pertaining to his or her objectives, concerns, circumstances.

There will always be risk in investing. What in my view is the crux of the issue is not so much that some investors have lost money, but rather that so many people of modest means have lost their life savings in products which they thought were “safe”.

Notwithstanding the above issue on “reasonable basis”, the failure to address diversification , as enshrined in ISO 22222 (Personal Financial Planning), could be another consideration particularly for long-time existing customers who have their entire savings and investment portfolio with the same financial institution.

On hindsight, perhaps the lesson to be learned is that there is no free lunch in investing - how could one think that getting a few per cent more interest (payout) than fixed deposits, and some with the potential of extra returns, could be “low-risk” ?

MAS must address conflict of interest issue

I also understand that some investors have expressed concern about a possible conflict of interest, over media reports that the independent persons appointed to oversee the financial institutions’ own investigations into complaints, can negotiate their fees. To allay such perceptions, I would like to suggest that the Monetary Authority of Singapore (MAS) determine the fee and apportion it by charging the financial institutions involved.

Although the MAS’s proposed fair dealing guidelines for the board and senior management of financial institutions have not been implemented yet (consultation stage has been completed), the eyes of the world, may in a way, be on Singapore on the resolution of this saga.

The reputation of Singapore as an international financial centre may be at stake.

Financial institutions have an opportunity now to restore if not gain even the greater confidence of consumers.

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Video of the minister's statement in Parliament:

 

Part One:

Part Two:

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