Monday, May 21, 2007

Consumer Protection - Financial Products

21 May 2007

Today Paper

Paul Chan Poh Hoi wrote in Today paper, "I see a paradox in the spirit of the Consumer Protection and Fair Trading Act".

Under this Act, several professional bodies, such as the medical association, are asked to dump their fee guidelines and let the fees be decided by market forces.

Mr Chan thinks that fee guidelines "may not necessarily be a bad thing". Without fee guidelines, consumers may be overcharged for the services, especially if the fees are not transparent. "Unwary consumers may be put at a disadvantageous position."

I agree with the views expressed by Paul Chan.

I can quote a similar situation with financial products. Under the "let the buyer's beware", a financial institution is allowed to sell almost any product, so long as they provide certain information about their product.

In many cases, the disclosed information is inadequate for consumers to make a right choice.

Some of these products require the investor to bet on how many investment counters or indices will reach certain levels over a number of years, for which they may make a loss or have a large proportion of the gain taken away. Even an actuary (like me) cannot assess the probability and the fairness of the transaction.

There are also unspecified charges that are taken away from the investment fund to pay the various parties that design, market and manage the product. The structuring do not create any value to the investors collectively. The charges eat into the total return from the investments.

I hope that the regulators can take a more effective approach towards consumer protection.

Tan Kin Lian

Read more about the structured products.

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