Tue, Nov 04, 2008
By Larry Haverkamp
SAY you have a persuasive friend named George. He promises a high return if you leave your money with him for five years.
Five years later, you get two shocks. First, your return is much less than promised. Then you learn George has been siphoning off your money, which explains the low returns.
You confront him. He is indignant. He won't even discuss the matter. Instead, he wants to talk about you. If you can prove you are old and uneducated, George will take pity and refund part of your money.
Hey! What does that have to do with anything?
You recall a similar story from America. Banks mis-sold auction-rate notes and were later required to repurchase a whopping $80 billion of them AND pay $750 million in fines.
Even the world's largest fund - Fidelity - agreed to buy back ALL the notes it sold to investors, regardless of their age or education.
Errors in auction-rate note sales were verbal. George's mis-selling can be backed up in black and white, or rather the lack of it.
Nowhere were his charges mentioned in the prospectus or any other documents. He simply took your money without telling you.
You guessed it. The story of George is about the latest banking scandal - a structured product, called credit and equity-linked notes or 'linked-notes' for short.
Over the past 10 years, sales of linked-notes have been in the billions. They have been in the news lately due to the 15 Sep bankruptcy of US investment banker Lehman Brothers.
Hardest hit have been High Notes 5 ($103m, a total loss), Jubilee 3 ($28m, a total loss) and Minibonds ($508m, a partial loss).
A feature common to ALL linked notes is that investors never see the charges. They include:
> costs embedded in the initial pricing;
> counter-party returns in the product's risk/return structure;
> commissions from buying and selling the options, swaps and underlying bonds;
> market-making and surrender fees; and
> annual management fees, including trailer fees kicked back to distributors.
They are deducted directly from the yield. Investors are likely to attribute the low return to market conditions rather than unseen costs.
Most importantly, unit trusts and investment-linked products (ILPs) routinely publish their charges. Linked notes never do.
THREE REMEDIES
The question of the day is: 'Should non-disclosure of embedded charges invalidate linked-note sales contracts and require a refund from issuers and distributors?'
Three remedies are possible.
1. THE BEST: Banks reimburse customers for the cost of the linked-notes plus accrued interest. It is similar to the remedy used in the case of auction-rate notes.
2. THE SECOND BEST: Banks limit reimbursement to money taken without customers' knowledge. It would amount to a refund of the undisclosed charges.
3. THE THIRD BEST: Banks simply reveal the undisclosed charges. It is a non-cash settlement, but at least investors would finally learn how much money was taken from their accounts.
Most disgusting is MAS still think they are right to have hands off laws.Instead of taking a direct interest or no interest it is pushing it to the FIs to settle themselves. Make a ruling and get the FIs to fix the problem immedaitely.
ReplyDeleteBan product selling and punish any salesman, RM or insurance agent selling product without reasonable basis. How long is MAS giving to the FIs to change. It is more than 10 years and if MAS doesn't let down the guillotine the FIs will continue to abuse the freedom , so called self regulation. The FIs have no self discipline. It is what makes them more money. The RMs and the insurance agents , it is what earns them the most commission and not what is best the customers.
Stringent check on the toxic products and enforce the laws on the salespeople and punish the FIs with heavy fines.
Is MAS interested to see a level playing field for every player, with one set of rules.? Not some flexibility for some and end up every player not complying.
MAS is to be blamed for this debacle for taking a lackadiasical attitude.
It is highly unlikely that the structured investment product debacle will be ever truly revealed. It was creative fraud perpetuated at the highest level! The lax regulations, blind govt regulators, fraudulent mortgage brokers, investment bankers, ratings agencies, etc - all contributed to this debacle.
ReplyDeleteClap clap clap.....another myth debunked by TKL.
ReplyDeleteWhen will the authorities learn they cannot "pian gi na" anymore.
....you cannot fool all the people all the time.
Cheers to TKL!
The liars remained liars.
ReplyDeleteThe lied-to remained at loss.
Knowledge of lies makes no difference for past cases.
Its only safeguard against FUTURE cases.
This story is also very relevant to my experience with NTUC Income. They promised a projected return which never materialise after 20 years. When asked, they say that high profits of 10.7% and 10.8% the last two years does not mean that I will get my 5.5% because they have expenses to pay. Yet they continue to promise such projected returns with new policies. They say that the profits are used to smooth out future paybacks when times are bad so all policyholders benefit. I suspect that George has spent alot of money renovating his office and toilet at our expense. George has been living it up in posh hotels and exotic overseas trips at our expense. George even bought expensive chairs for his family's comfort and style. George did not even want to talk to me. He even asked his family not to talk to me. What can we do? Then I found out that George is actually not a Singaporean. So what can we do?
ReplyDeleteHello Mr Tan
ReplyDeleteMr Rajan Raju, Head of Consumer Banking admitted that the High Notes is “NOT a low risk product”.
He tried to defend their "For defensive investor" position by explaining that for an investor with many different types of investments, High Notes would fit in as a “defensive” play.
Further, in response to a pointed question on the actual risks inherent in HN5, Ms Frances Chan, Senior Vice-President revealed that, on a scale of 1 to 10, the HN5 product was a “8 to 9”.
My opinion is that in terms of risks, High Notes should be rated 10. They are higher risk than stocks.
When you buy a stock, if the company went bust, you will lose 100% of the amount that was invested.
In high notes, if ANY ONE of the 8 refernce entity declares bankrupt,you will also lose 100% of the amount that was invested.
Your risk is multiplied by 8 possible busted companies as compared to a single stock.
If it is that high risk, How would High Notes fit in as a “defensive” play. Instead, it will increase your risk substantially if you add this product to your portfolio.
In terms of rewards, the High Notes was only offering 5%p.a.
Stocks potentially can offer much more returns than the measly 5%p.a.
In terms of liquidity, you have to park your fund in High Notes for 5.5yrs. For stocks, you can liquidate any time.
MAS keeps telling us that Investor Education is lacking and you must do your research before investing.
Their guide to investing tells you to consider:
1) The time horizon that you can invest. If your time horizon is long, you can try higher risk product.
2) The risk that you can take.
High risk or low risk product.
3) The returns that you expect.
High risk = potential high returns
Low risk = usually fixed low returns.
I believe most of the investor believe they were sold a long term, low risk, low fixed return product. Park your money for 5.5yrs with DBS, they will spread the investment over 8 reference entity. If all 8 fails, then there is a chance of losing everything. In returns, DBS will pay you 5%p.a.
Sounds fair.
When Lehman collapse, DBS high notes turns out to be another product. A long term, high risk but low fixed return product.
The "First to default credit event" clause also sounds reasonable. As long as 1 company fail, the product cannot function as planned and has to be terminated.
Even if Lehman collapse, a lot of investors expect that they will lose some money given your risk exposure to 8 refence entity.
I believe what a lot of investors cannot accept is that the risk suddenly multiply by 8 and not divide by 8. Given the risks, returns and time horizon, DBS high notes contradict each other.
Why would high notes be so popular if it is high risk, cannot liquidate for 5.5yrs and pays only 5%? How many, in the right frame of mind would invest in such a poor product?
This is further complicated by the sales process where the RMs targets those with fixed deposit or retirement funds.
Obviously,this is a clear case of mis-selling.
Most of the world's authorities either ban this product in the first place or punish the banks for the sale of this product.
Sadly, the MAS has chosen the hand off approach, leaving everything to the bank to settle. Even ministerial statement and actions also sounds kind of pro-bank even when the banks has clearly flouted the rules. I believe a lot of investors were sadden by the MAS for not listening to investors feedback, petitions and protest. Instead MAS readily accepted banks feedback and trust that they will do the right thing. MAS still believe that the banks will honestly admit their crime and risk openly admitting being on the wrong side of the law. Again, which bank in the right frame of mind would do that even it is right thing to do? Instead of refunding, the banks are not helping to ease investor pain. They are adding to it by making the whole process long and winding. Protest in Hong Lim. Sign petitions. Identify vulnerable group. Lodge your complaint. Fill up questionairs. Attend interviews. Bring the case to Fidrec. Attend Fidrec interview. Organise class action. The banks add to the anguish with zero value letter, "you don't have a case" letters, and non-reply open forum.
Then there are still a lot of non-investors shouting "Greed", "Buyers beware", "Do your research", "Put in 4% CPF better" to add to the investor anger and grief. Even the main stream media seems to be pro-ministers who in turns seems to be pro-bank.
No one in Singapore seems to be doing the right thing anymore except you.
You are truly worth your praises that you have recieved.
A very sad Singaporean.
Chew K C
1.05pm,
ReplyDeleteHave you raised with your agent?
Were you sold the right product? What I mean is at the time of the meeting with your agent how did he arrive at this product and that this product was the product that could meet your needs ADEQUATELY.If it didn't and does not his recommendation was inappropriate ans was not of reasonable basis anf there was mis-selling ans misrepresentation. This is misconduct . This is cheating and it is a crime. The agent can be fined under the FAA .
All this can happen and inevitably a happen with product selling and pushing when the needs of the customers are ignored resulting in mis-selling and misconduct.This breaches the FAA
How many times must I say that the foreign sharks and barracudas have been let into the Singapore pond full of benign guppies. Matured guppies are fat and juicy. We should be questioning these policies that are detrimental to our interests. At the top end are these sharks and at the bottom are the bottom gropers. You have seen them both. Aggressive sharks and barracudas at the top layer concocting fanciful plans to trap our local guppies. At the bottom end the foreign street walkers and pub workers at places like Duxton who trap the male guppies and ruin their lives. Why are Singaporeans not questioning these policies by our talented administrators? Who let them in? Who let them do these? Wake up!
ReplyDeleteChew K C,
ReplyDeleteYou've hit the nail on the head.
Well said.
CC
If use of an analogy to describe the situation is considered apt, I would prefer it to be like this:
ReplyDeleteCompanies A, B, C, D and E took goods from company X, to be sold on consignment basis. The consignee-companies knew that these goods were toxic, as the goods came with literature about the plausible adverse effects for the consumer. The goods had the risk of causing death by cancer but they were nonetheless sold to the public. And what appeared to be worse was that they were marketed aggressively, because on consignment basis the more a consignee-company sells the more commission it earns, adding of course to its bottom line. Hence what was evident was that these consignee-companies churned out advertising materials, some apparently misleading or misrepresentative, and set up sales booths with their selling agents making sales pitch about the health-producing benefits of the goods. Consumers found out, belatedly, that after they had consumed these goods they became terribly ill, and death from cancer is now a real possibility.
Can companies A, B, C, D and E claim to be innocent parties? Obviously not! A few of them have admitted to their error and are now taking steps to compensate “weak” consumers who have been badly affected. Whether the other companies would follow suit remains to be seen; the pressure of course is on them as they have sold toxic goods.
For the companies:
Upside scenario:Being commended by authorities and by consumers for doing right by compensating all affected consumers; reputation untarnished; goodwill with consumers being maintained 100%;
Downside scenario:Being reprimanded by authorities for unethical or unprofessional practices; compensating consumers on a negotiated basis; reputation sullied; goodwill with consumers taking a dip.
Our dear Mr chariman of MAS has said in tonight's 10pm news that MAS cannot instruct the FI what to do for every step. This is becos' the FI is a licence bank and such action will affect the share price of the FI. Man, we the citizens of S'pore hard earned money affected or sacrifice is not an issue! Just becos' we have trusted the FI too much! How sad!
ReplyDelete"SAY you have a persuasive friend named George. He promises a high return if you leave your money with him for five years."
ReplyDeleteThing will become very different if this is what happened:
"SAY you have a persuasive friend named George. He says you can get higher return if you leave your money with him for five years, but there are some risks involved"
1.05pm,
ReplyDeletegeorge is preparing the incentive trip to australia next year for a a few hundred agents for a week stay. At least a few millions will be spent for resort, spa and luxurious rooms and perhaps pocket money for a binge at the casino. The last one at Hochhi Min was 1mill.
There will go your bonus and they expect you to bail them out with more new policies and to keep paying your premium.Have they called you to put support them with revosave and vivolife? Excellent packaging with toxic sandwithced in between.Great for their commissions to spend it at the resort. Do support them so George can have more money to invest for you.
Hi,
ReplyDeleteI have been following Dr Money's column every Monday very closely. What he says does make sense. Now with these Leman Brother's products or related structured products being exposed, I believe the MAS will have a hard time in putting out fire. We were no longer our grandparents or parents' era, we will doubt whatever the authorities do or say!
For those who may not know, RMs of FI are exempt financial advisors meaning they do not have to be licensed or take the prerscribed exams. The rationale must be that the FI will train them properly. But it is patently clear that this is not the case. So will the MAS review this waiver. Even if other financial jurisdictions have this, since it does not work in Singapore there is no need to follow blindly> We are after all as they like to say, "uniquely Singapore" but perhaps selectively so e.g high ministerial salaries is ok but others???
ReplyDelete