10 Jan 2009
Enoch Yiu and Maria Chan
The Hong Kong Monetary Authority told banks yesterday to implement seven consumer protection measures concerning the sale of investment products, and to formulate plans to separate their deposit-taking and retail securities business before the end of March.
The measures are part of a range of proposals suggested in separate reports disclosed on Thursday by the authority and the Securities and Futures Commission on last year’s Lehman Brothers minibond fiasco. On the same day, Financial Secretary John Tsang Chun-wah ordered “an immediate review” of Hong Kong’s financial regulatory structure.
The authority sent a circular to all banks yesterday requiring them to immediately add “health-warning” statements to their sales material on retail derivative products to warn of their risks. It told them to immediately introduce adequate controls to ensure sales staff were not solely rewarded for sales performance.
By the end of March, banks must instal audio systems to record client conversations on investment products sales, as well as introduce a “mystery shopper” programme – in which undercover staff monitor the behaviour of those selling investment products.
In addition, the authority told banks to formulate plans to separate their deposit-taking and investment products sales functions. Both reports said it was a conflict for bank tellers to handle deposits and sales. But the regulators have different ideas on how to solve the problem.
The authority report said banks should use separate counters and staff in a branch to sell investment products. But the SFC suggested banks be banned from using their branch networks at all for these financial instruments. Rather, they should set up a separate subsidiary, using different offices and staff.
The proposed reforms come in the wake of the collapse of the US bank Lehman Brothers in September, a crisis that left 43,700 Hong Kong investors holding derivatives it issued or guaranteed, but which had lost much or all of their value.
Many claimed they were misled by bank tellers, who sold the products as alternatives to time deposits or low-risk bonds when, in fact, they were risky credit-linked derivatives.
Raymond So Wai-man, an associate professor of finance at Chinese University, supported the idea that banks should separate deposit-taking and investment products sales.
“When bank tellers make use of depositors’ financial information and cross-sell them investment products, customers may be confused between investment and deposit taking,” he said. Peter Wong Tung-shun, chairman of the Hong Kong Association of Banks
But Peter Wong Tung-shun, chairman of the Hong Kong Association of Banks, said some banks were very small and it might not be easy to have separate counters.
Mr Wong said banks might face higher operating costs after adopting the suggested proposals. “It’s hard to say whether banks have to pass on the cost to consumers,” he said.
The authority and the SFC reports both noted that Britain, Singapore and Australia had “cooling off” periods of 14 to 30 days on some investment products in which customers can change their minds.
In Hong Kong, there is no such cooling off period. However, the Hong Kong Federation of Insurers does have a cancellation period in which customers can cancel their policies up to 21days after applying.
Chan Kin-por, lawmaker for the insurance sector, said this had helped to reduce complaints. He said 10 to 15 per cent of policies sold were cancelled in the cooling off period.
Waa, Hong Kong is real fast. What is our MAS doing or waiting for what?
ReplyDeleteUnlike MAS, the HK counter is dead serious about over hauling the regulatory structure to prevent miss-selling and misrepresentation. Is MAS considering similar tightening of the FAA?
ReplyDeleteThis must be applied to the insurance industry where miss-selling and unethical selling are so rampant and it is also equally urgent that the FAA affecting them must be enforced.
Mystery shopping at roadshows must be conducted.
For the Minibond Case, the product was misrepresented. Thus, true nature and risk of the product was never being mentioned.
ReplyDeletein that case, how effective will the cooling area?
There is this "Mahogany Notes II" which is Lemon Credit Linked Notes (Portfolio Linked Notes) issued by Lehman and sold in Australia.
Its prospectus clearly states all the reference entities, credit rating criteria on the reference entities, the impact of the default on the principal loss, etc. All these are key information on the CDS or Synthetic COD. All of these are never mentioned / disclosed in the Minibond sold in Hong Kong.
THis website has more detailed information and analysis on the related information.
Although there are various products sold in various city, all the key tricks are the same: hiding the true risk with complex cover.
http://minibondvictim.blogspot.com/
Cooling period is good if the buyer has someone , an expert or someone knowledgeable, to evalaute otherwise it is a waste of the cooling.
ReplyDeleteLike insurance products many buyers take for granted that the products sold by their trusted agents are good.Very often it is NOT true. Only LUCK that the buyers are sold correctly with the right product.
The solution to this problem is not
just full disclosure or cooling period but the honesty and competence of the agents and who have to conduct a need analysis diligently and be RESPONSIBLE AND LIABLE FOR THE ADVICE.
This will ensure the agents or advisers don't take shortcuts or short change the customers.
And to further ensure the above are carried out MAS MUST ENFORCE AND CHECK AND AUDIT STRICTLY AND FREQUENTLY. Breaches by insurance agents MUST be punished proportionately to the crime.
Is this strict? It MUST be strict otherwise the insurance agents think MAS is play play and tickling their arse only.It must be deterrent.
Hiding the truth below thick layers of rubbish is the modus operandi used by insurance companies too.
ReplyDeleteExample you take ntuc products like
Revosave and vivolife.
1.Revosave uses an anticipated endowment which pays MISERABLE return but covers up by incorporating some dubious options which if you use to invest DIRECTLY will yield better results.
2. Vivolife has very poor and low coverage and the return is so poor even after 35 years. To cover up the weaknesses vivolife has layers of other benefits like retrenchment, PA,125% coverage and so forth and used by the agents to distract the customers..
Now whole life insurance is about bolts and nuts and is about high coverage and HIGH RETURN but they don't have. To mislead customers insurance companies use other rubbish to hoodwink the customers.
Another strategy is to pay insurance agents high commission to use their relationship with trusting clients to dump these products. The commission usually is high enough to embolden and to give more courage to agents to lie and mis-sell and to misrepresent.
Such is the state of selling life insurance and investemnt in the financial industry. They must be stopped and changed. MAS is responsible for regulation and must see that these products are used properly to meet the needs of the consumers and not pushed and peddled like drugs.
Yes, if it is a case of mis-selling or misrepresentation, most people will not know the problems until something bad has happen and that is too late. So cooling period may be useful but not for all products.
ReplyDeleteEven if there was cooling off period for some investment products in S'pore. The Sales person/RM coveniently chose not to mention this during the selling process. They do not want you to regret your decision and know that you can go back to cancel the investment.
ReplyDeleteOnce Bitten
"By the end of March, banks must instal audio systems to record client conversations on investment products sales, as well as introduce a “mystery shopper” programme – in which undercover staff monitor the behaviour of those selling investment products."
ReplyDeleteWhen selling house, we need lawyer to stamp on the sale to ensure that it is legal and proper. But when bank takes customers life savings which could cost more than a house does not need third party verification or monitoring.
Recorded sales talk is really good measure. Surprising that no body thought about this where people can lose their life savings.
Actually there are already precautions and safeguards in place but these measures were never implemented or enforced. This again points to MAS for failing to police and audit the banks and insurance companies.
ReplyDeleteEg.every sale must be checked and approved by a supervisor for compliance and recommendations must be checked for reasonable basis. The question is how did all these cases escape the notice of the supervisors and also the internal audit? There seemed to be none of these.
How could MAS trust the banks and the insurance companies to self regulate? It is like putting the thieves in charge of the banks' vault.MAS must wake up that the FIs cannot be trusted and the FIs will NOT do anything to stop themselves making unethical or ill gotten money.It was literally sending out their men ans women to rob the unwary customers..
MAS is pro FIs and has own agenda. The local consumers are not important. They can be sacrificed.
ReplyDeleteGlobally, most countries are relooking into their regulating structure to prevent another debacle.
But MAS seems indifferent.
7 areas must be tightened..
the product,
the insurance agents and RMs and the way they approach the consumers,
the internal governance of the FIs,
the enforcement of the laws,
the remuneration of the insurance
agents and RMs(remove commission)
MAS itself
HKMA has gone even further , to record the conversation of the RMs and the clients. This can be adopted. Since black and white didn't help and could be tempered with recording is another safegaurd.
For insurance agents I see mystery shoppers at roadshows is good, frequent audit, making need based selling compulsory, ban product selling and gifts and most IMPORTANTLY MAKING THE AGENTS RESPONSIBLE AND LAIBLE FOR THE ADVICE THEY GIVE. This does not rely on the untrusting FIs.