Tan Kin Lian
Singapore, the United Kingdom, the United States of America and Australia follow a similar legal system. Laws are passed to balance the rights of consumers and businesses. The aim is to provide an environment that businesses can innovate to improve their products and services and make a profit, and, at the same time, ensure that consumers are fairly treated.
However, when it comes to the issue of implementing the law, the approaches taken in these jurisdictions differ considerably. I wish to make some personal observations.
Fair treatment of consumers
Are consumers fairly treated by businesses?
The prevailing view is that the market can take care of this matter. If there are many competitors providing similar products and services, consumers can make their choice and buy from the most competitive source – based on assessment of the price and service level.
This concept works well for the market for physical goods – where the specifications can be compared and tested, prior to purchase.
When it comes to services, it becomes more difficult for the consumer to judge. How can the consumer know about the quality and competence of a doctor, lawyer or other professionals? What about the prices and service levels of repairers and contractors?
It is difficult for the consumer to know what is a fair market price and the expected level of service, especially as the terms of service are decided by the provider.
A bigger challenge arises with financial products, such as the structured investment products and life insurance products. The consumers are given products that are designed by the financial institutions to make a profit. How can the consumer know if the products are fairly designed, and fairly priced?
In recent years, many bad financial products have been created and marketed to consumers. These products are designed by financial engineers and embedded with high margins for expense and profit. They are marketed under exotic names, but fall under the broad categories of capital guaranteed, capital protected, credit-linked, equity-linked and currency-linked products.
These products are described in documents and prospectus that do not give fair descriptions of the risk, features and charges. To put it bluntly, they are designed to “rip off” the consumers to make a large profit for the issuer.
There is no way that the consumer can know about the undisclosed features of these products. Even a financial experts cannot make a proper assessment as some vital information are not provided, such as the likelihood of certain events that have a material impact on the outcome of the investment.
The following approaches are taken by various jurisdictions to protect the interest of consumers:
a) The regulator scrutinises and tests the products to make sure that they are safe and suitable for consumers. This is the approach taken for the approval of drugs for sale to consumers.
b) The regulator or the attorney general takes legal action against businesses that contravene the law. This is the approach taken by the New York State Attorney General in charging the banks for the mis-selling of the auction rate securities. The Financial Services Authority of the UK and its counterpart in Australia also take pro-active actions against financial institutions that infringe the law or regulations.
c) In the USA, lawyers work on contingency fees to handle class actions for consumers.
Consumers are fairly well protected by the regulatory practices and legal system in the USA, UK and Australia.
In my view, the protection of consumers in Singapore is rather weak. The alleged mis-selling of the credit linked notes has caused substantial losses to many consumers, caused by deception or negligence of the financial institutions.
Some consumers were compensated because they are deemed to be in the “vulnerable group”. But many other consumers were not given fair or adequate compensation. Their recourse is to take legal action, but it is extremely costly and risky. They will not be able to match the financial muscle of the banks in engaging the top lawyers.
The consumers worry about paying the fees of their own lawyers. They are more worried about paying the fees of the top lawyers engaged by the banks, if they should lose the case in court and bear the other party’s cost. Perhaps, there should be some clarity and reasonable cap on the other party’s cost, so that it does not become a burden for the consumer.
In Singapore, the lawyer collects a fee based on the work done, regardless of the outcome. The client has the burden of judging the likelihood of success of the legal action, based on the advice of the lawyer.
In the recent credit linked crisis, some consumers said, “I have been cheated by the banks in investing in these toxic products. I do not want to be cheated now by lawyers in taking up a hopeless case in court and paying large legal fees.”
In the past, I held the view that the contingency fee system in the US is bad, as it led the society to be litigious and ridiculous cases are taken up, as reported in the media.
I now view the contingency fee system to be fair and necessary for the protection of consumer rights. If a consumer has been unfairly treated or cheated, and the authority is not willing to take action, the consumer has to seek redress through legal action.
Under the contingency fee system, the lawyer takes the risk of the legal outcome. If the lawyer loses the case, the lawyer cannot bill the client. This system makes the lawyer more careful about taking up a case where there is a fair chance of winning.
There is a possibility for contingency fee system to be abused. However, these bad examples cannot be taken to discredit the contingency fee system. It is possible for the system to be designed to avoid or minimise these abuses.
I hope that the legal system be reviewed to give better protection to the rights of consumers.
I hope that the respective parties review the case for adopting the contingency fee system in Singapore.
Perhaps, there should be some clarity and reasonable cap on the other party’s cost, so that it does not become a burden for the consumer.