Tan Kin Lian responds to Minister Lim Hng Kiang’s remarks in Parliament
Tan Kin Lian / Columnist
Several questions were asked in Parliament on 20 October 2008 about the failure of the structured products linked to Lehman Brothers. In his reply, the Second Minister of Finance said, among others, the following:
- 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.
- MAS requires 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.
- 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.
- 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.
I searched the MAS website for the prospectus of the four structured products that they have approved as meeting the requirements for registration under the SFA. I was not able to find these prospectus.
I could locate the prospectus of several hundred products listed under the category of “collective investment schemes”. Why are the prospectus of these structured products, which are approved by MAS, not listed in their website?
Nature and risk of the structured products
Many investors have stated in writing and in letters published in newspapers that they were misled into believing that these structured products were invested in the bonds of the six reference entities and that all of these entities had to fail before they were to lose their entire invested sum. They were assured that the structured products were “low risk” and that the invested sum is “capital protected”, implying that they will get back the invested sum at the end of the term.
The investors in both the “vulnerable group” and the “non vulnerable group” comprising of educated professionals and others”, were horrified to find that these structured products are “extremely high risk” and are worse than investing in equities.
They now learn that the structured products face the risk of a substantial portion or the entire invested sum being wiped out under the following circumstances:
> the failure of any one of several reference entities
> the failure of a certain number of a specified large number of the underlying assets
> the failure of the swap counterparty
The term “failure” is not used in the prospectus. The actual term used is a “credit event”. The credit event is defined in certain wordings, but it is difficult for the investor to figure out what they actually mean.
It is now clear that these structured products have quite high risks. We now have to ask these questions: Are the risks adequately described in the prospectus? Is the necessary information about this important matter easily located in the prospectus?
The Minister said “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. “
Perhaps the Minister can read the prospectus to see if he has the information that he would reasonably need to make a proper assessment of the securities.
False or misleading information
With the benefit of hindsight, I suggest that MAS should now go through the advertisements, sales brochures and prospectus, to see if the information provided are false or misleading, which is an offence under the Securities and Futures Act.
If the information is provided clearly and fairly, why are several thousand investors, including the educated professionals and the financially-savvy persons, misled into believing that they are investing in “low risk” bonds? Are these people so careless and irresponsible with their money?
Dishonest concealment of material facts
Section 200 of the Securities and Futures Act states that it is an offence for a person to induce another person to deal in securities through “dishonest concealment of material facts”.
An important piece of information is the risk of losing the entire invested sum. What is the extent of this risk? Is it 1%, 5%, 10% or 50%, during the lifetime of the investment?
Does the issuer know the extent of this risk? They probably have some idea, based on the premium received by them for providing the insurances to the counter party under the credit default swaps involving the reference entities and the underlying assets.
Should this material information be provided by the issuer in the prospectus? By failing to provide this material information, is the issuer committing an offence under the Act?
Fair dealing outcome
The Minister has also said that MAS’ approach is to ensure that the “consumers have a fair deal”. Perhaps it is appropriate for MAS to see if the structured products meet this test.
The product issuer does not disclose in the prospectus the total income received from the various investments of the structured products, including several highly risky credit default swaps. Where does this income go to? How is the income shared between the issuer, distributor and the note holders (i.e. the retail investors)?
Is the portion of the income, i.e. the target return of 5%, a fair outcome given the high risk of the structured product as reflected in the income streams?
I am not aware that any statement of account has been given to the investors in any of the structured products. Is there any breach of the Trustees Act? Does the product issuer (or product arranger) and the trustee have any fiduciary duty to look after the interest of the investors and render a full and complete statement of the affairs?
Spirit of the law
My final appeal to the Minister, Mr. Lim Hng Kiang, and the Monetary Authority of Singapore, is to see if there is a requirement under our legal system in Singapore that parties should observe both the spirit and the letter of the law.
I hope that appropriate action be taken to restore the confidence of the people in the fairness of the system in Singapore and to restore the reputation of Singapore as a financial hub that the Singaporeans and foreigners can trust to leave their money here safely.
Read also Leong Sze Hian's response to the minister's remarks: Mis-selling 101.