Hi Mr. Tan,
Much has been discussed among distraught investors about how to seek redress from the FIs which sold them the structured notes that are now in troubled water. Among other things, I think it is important for us to provide evidence of misrepresentation of the FIs when we lodge our complaints.
Going through the pricing statement of High Notes 2, the following points may be deemed misrepresentation and I would like to share my views here with those who are interested:
1. The ghost credit default clause - I call it “ghost” because this clause is not visible anywhere in the pricing statement and it suddenly jumps up from nowhere when the RMs called to informed us that another 2 defaults in the basket of securities would constitute a credit event.
According to the pricing statement, risk factors highlighted therein are:
Liquidity risk, market risk, FX risk and credit risks which includes the 8 reference entities (with a first-to-default clause), the arranger/issuer and Constellation which is described as a special-purpose vehicle collateralized with a basket of AA- rated bonds and securities. Constellation is the counterparty which entered into various derivative contracts with the arranger under the structure of High Notes 2. This description of Constellation gives investors the impression that High Notes 2 is secured with a basket of good rated securities through Constellation.
Nowhere in the pricing statement can one find anything that says the default of 5 entities in the basket will trigger a credit event. All the while many investors were given the impression that High Notes 2 is adequately secured by a basket of diversified AA rated bonds, believing that even a few defaults in the basket of securities would not seriously impact on the value of the investment.
It is only after the occurrence of 3 defaults in the security basket are the investors informed by their RMs that it takes only another 2 defaults to have the value of their investment totally wiped out, despite that the other 90 over names in the basket remain intact. This default clause which is not defined in the pricing statement suddenly makes High Notes 2 a highly risky investment. This clause was never explained to investors before by the bank and nobody knows how and where default clause comes from and how the default of 5 parties out of about 100 names can wipe out the entire value of the securities basket? Is this non-disclosure of a critical default clause in the pricing statement tantamount to misrepresentation?
Further, I feel that the bank has not acted to protect the interest of High Notes 2 investors. Knowing that the value of the Notes can be significantly affected by a small number of defaults in the security basket, the bank should have provided the investors with the names in the basket of securities when the sub-prime mortgage problems started last years, and investors should be warned of the danger of possible defaults. This is very important because investors can then monitor the market closely and if necessary cut loss by cashing out from the Notes. But nothing was done, not even when some big names in US and Europe were hit by the toxic sub-prime debts. This is rather disappointing. It was too late when the RMs called us after the occurrence of 3 defaults.
2. “Spread your risk with a basket of bank credits, each rated A- or better by Standard & Poor’s.” - This is a misleading statement given in the bank's marketing material. This marketing material is also printed with glossy paper on the lst page of the pricing statement.
This statement gives investors the impression that the credit risk of High Notes 2 is well diversified among the 8 reference banks. But in actual fact, investors are facing a higher probability of default risk. Because, with the first-to-default clause (which was omitted in this marketing material, probably intentionally) the default of any one reference bank will trigger a credit event. This is different from buying a unit trust where the funds are invested in many companies and if one of them goes bust, the value of the units will not be substantially affected. So the spread of risk as claimed by the bank is not true. I would rather have 1 or 2 reference entities than 8, because with 8 my chances of getting hit are higher. The omission of the first-to-default clause with reference to the 8 reference banks in the marketing material looks very tricky. So is this tantamount to misrepresentation?
3. High Notes 2 only suitable for experienced investors - On page 5 of the pricing statement under the sub-heading "Suitability of the Notes", it is stated that "Structured products such as the Notes issued under the Programme are not suitable for inexperienced investors."
What we know from various sources is that many of such structured products have been sold to old uncles, aunties and retirees who parted with their retirement money believing High Notes 2 to be safe investments that could enhance their nest eggs.
We all know that at the point of sales, a financial profile analysis of the investors will be carried out by the sales staff of the bank. With such precautionary exercise, I wonder how these gullible old folks can still be classified as experienced investors and considered suitable for investing into risky High Notes as some of them can't even read or speak English. I am not saying people who cannot speak or read English must be bad investors, but can they read the details given in the pricing statement and understand the risks? Surely they parted with their money after listening to the sweet talk of the sales staff. Something must be wrong in the sales process. Is there a moral issue here? The relevant authority should look into some bad sales practice in our financial market and take necessary action.
Mr. Tan, I would appreciate it if you could place this message on your blog so that I could share my views with anyone who is interested in this matter. It would be better if some one could provide legal opinion on the abovementioned issues. With more interaction, maybe we can explore some other areas of misrepresentations by the bank.
Best regards,
Wilson Tan
the basket of CDOs is not dealt with adequately and they are given the impression the chances of default in as many that constitute a credit event is unlikely and the likely defaults are in the main reference entities. This is misrepresentation. Both are equally risky
ReplyDeletePlease refer to the article by Lorna Tan in today ST on the subject of need analysis and recommendation on reasonable basis based on section 27 of the FAA.
ReplyDeleteZhummmeng also discusses this subject in TOC on 'Protect the small investors' by Mr. Tan KL.
If MAS has enforced this FAA section 27 sincerely many old folks would have been spared this agony because the need analysis and the financial circumstances of these folks would have revealed the unsuitability of these structured products.
Alas , MAS is more interested to protect the financial institutions. Look at the way it is dealing with situation, it is dragging its feet and pushing here and there.
Come on, don't kid us that MAS is unable to catch malpracticing insurance agents and bank consultant or RMs.Don't tell us that all the FIs are law abiding and complied with MAS notices?
Come clean before you lose your credibility as the regulator.
Concerned citizen
Were buyers offered a prospectus at the point of purchase ? I asked for one and was told "sorry, we run out." i said "sorry, it's no deal."
ReplyDeleteDoes the financial risk analysis find out if a prospective buyer is able to replace lost income should the investment run into a loss ?
Frankly, this lousy biz tactic didn't stop. Last week,some RM still tries to steal my mum from the bank counter queue for a 'talk'.
I used Mathematics in Context (MiC) a new, innovative mathematics curriculum developed in accordance with the National Council of Teachers of Mathematics Standards. I found that MiC helped students learn to use mathematics to understand the world, as it developed many critical mathematical reasoning skills, but by itself, it was not enough.
ReplyDelete------------
jacksen
Internet marketing
Actually the root of the problem is the greed of the banks. Each of their financial consultants/relationship managers/wealth planners (which are all in practice product-pushers)need to meet the very high sales targets set by the banks or faced termination. In such a case, these product pushers (in many cases are graduates with only a couple of years of working experience)need to sell as many products as possible, by hook or by crook. Uncles/Aunties/Retirees are easy meat with lots of spare cash, who would let them off so easily?
ReplyDeleteStructured products are actually very lucrative to the banks. My very good friend who used to be a in-house banker (read: product pusher) with a foreign bank told me this "truth" about structured products: A bank will make a bet on which direction the market moves and is usually right, but it needs to hedge its risk in case the bet is wrong. Selling structured products can help pass such risks to unsuspecting consumers, and make some fees out of the whole process. Consumers become an unwilling hedging tool.
Look like our only defence is "mis-sell" the product. Could MiniBond and Pinnacle buyers do similar things, and brainstorm on how these products were mis-sold to us?
ReplyDeleteTo us ordinary buyers of financial products, we thought all US banks are the same, and they are well regulated by US Govt. After reading Mr. Tan's blog, then we realized that investment banks (e,g, lehman) are different from commercial banks. Can it be considered as a form of "mis-representaion"?
ReplyDeleteUse the term "Buyer beware" to hold buyers responsible is just not fair.
To avoid mis-selling , misrepresentation and other malpractices need based approach is the way to go.The adviser or consultant conducting the analysis of your needs will be responsible for whatever conclusion , recommendation and the product. The KYC(know your client)form forms the basis of the contract. Whatever info revealed, needs identified and your financial circumstances and if the adviser didn't act on a REASONABLE BASIS he or she will be liable for the outcome.
ReplyDeleteIf there is a breach of section 27 of the FAA(financial advisory act)the adviser will be punished and the aggrieved consumer can be compensated in full plus interest.
Consumers must insist this approach because whatever info given to the advisers will hold the advisers to the outcome, eg,like the Minibond or Jubilee debacle and the old folks will be able to show proof using the KYC to sue the adviser and the company that they have been improperly advised and the product inappropriately recommended.
This is consumers' right to responsible and competent financial planning advice.
I feel so sorry for the old folks who lost their hard earned saving, their retirement fund, to the irresponsible and unethical practice of the consultants. I hope you check the document(KYC)to see if there was any miss-selling and misrepresentation.The KYC will definitely leave a trail of self incriminating evidence to sue the company and the adviser. Please heed my advice.
The "Buyer beware" clause is only to shield the bank from its responsibility of any mis-selling or misrepresentation after the sales. It is of course unfair because anything can be said by the sales staff of the bank but there is not record or evidence. Those who cannot read English will just sign the financial profile analysis form prepared by the sales staff, not knowing what was written by the sales staff to justify the sales of the risky products to such gullible investors who cannot read English. But I personally don't think the "Buyer beware" clause can really protect the bank in all circumstances if the buyers have evidence of mis-selling or misrepresentation. So, keep on looking for anything no matter how minor to prove the wrong doings of the bank.
ReplyDeleteI suggest all dealings with banks regarding investments be recorded, either through email or taped recording (via mobile phone) so one has evidence of any mis-selling by RMs.
ReplyDeleteaccording to the pricing statement of High Note 2, Credit event "means the occurrence of any of the following event or conditions with respect to any reference entities": (i) bankruptcy; (ii). Failure to Pay, or (iii) restructuring. therefore, whether Constallation makes or loses money on the CDO should not constititue the Credit Event under the first-to-default clause.
ReplyDeleteThe pricing statement does mention that the Notes is exposed to the credit risk of constellation, but combing all other conditions, the reasonable risk should be if the first-to-default clause applied, the preceedings of the Notes should be affected by the performance of the reference Notes. If the risk is beyond that, DBS should clarify clearly in the pricing statement.
In the summary of the invitation, it also mentioned that the Notes would be redeemed if Constelletion choose to redeem the notes early. But it does not give any detailed terms of the Constellation's early redemption. Viewing that Constelation actually belongs to DBS, 5 credit events out of the 100 entities may reflect the fact that DBS canot make much from High Notes 2 anymore, but absolutely not the reason for Constellation to redeem the notes. Without specific defintion, the only reason I can accept for Constellation's early redeption is the bankruptcy of DBS.
Thank you Wilson! You've articulated well on DBS High Notes 2. The fuzzy nature in which this product is crafted definitely requires one who could provide legal advice on whether it has breached any MAS regulatory guidelines. The subtlety of the constellation of collaterals in particular needs lots of explanation!! Why weren't the 100 secondary entities published in the prospectus? Is this tantamount to selective information release so that investors won't be able to appraise the full magnitude of the risks? In the first place, the language used in the prospectus is not for ordinary retailers or even savvy investors. Just test any of the DBS relationship managers..the truth could be appalling!
ReplyDeleteI read through the pricing statement again last night, the paragraph next to the last of the 4th page clearly states that "subsequent credit events under the reference notes do not have further impact on the issuer, and in turn, on the investors", while the paragraph before that explains the firt-to-default clause and the impact of the reference notes on it. Therefore, according to the pricing statement, investors will absolutely not buy bills for constellation's loss (if any) on the reference notes.
ReplyDeleteby notifying us that 5 credit events out of 100 entities in the reference notes will wipe out our principal, DBS is threatening us and testing our tolerating limits only, I have to say.
Also received a letter from DBS yeresterday saying that if further credit events causes Constellation not able to cover their obligation, the Notes may be redeemed early. This contradicts with the pricing statement as mentioned above. Therefore, no investor will accept it at all.
As a matter of fact, the highest risk underming the credit-linked product does not lie in the credit event causing the early redemption, but lies in the actual notes or other product that the issuer bought using the fund. just think, if the fund of High Hote 5 had not been used to buy CDO, which fluctuates a lot with the market, but had been used to buy other safer product, say goverment bond, the loss of the investor would be limited. Therefore, not clearly stating what kind of product they bought, the characteristics of the product they bought, the FIs were misleading the investors and trying to hide the potential risks.
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