Tan Kin Lian's Blog: MAS Consultation Paper

Monday, March 23, 2009

MAS Consultation Paper - Toxic Investment Products

Under the consultation paper, the issuers are required to provide more clearer information about complex financial products. But, the question is, will this approach prevent the sale of toxic products?

The credit linked notes, which were allowed to be sold, were toxic because they carry 5 to 8 times the risk of ordinary bonds. The issuer was able to package these toxic products and offer a low rate of return to the unsuspecting investors.

It will be difficult for the ordinary people to understand the risk of these products. They have to rely on the adviser. If the adviser is not aware of the risk, then the chance of mis-selling is high.

There is already an existing requirement for the issuer to provide relevant information about the product that is registered for sale to the public. If the authority is not willing to enforce this requirement under the existing regulation, will the "better disclosure standard" prevent a similar problem from recurring several years into the future?

A better solution is to have independent experts to certify the risk of the product. This independent experts must be appointed by the approving body and not by the product issuer.
If the independent experts cannot certify the products to be fairly designed and described, the authority should not allowed the product to be sold.

This is similar to the certification of drugs. If the drugs is not tested to be safe and effective, it is not allowed to be sold to the public.

I hope that MAS will consider this point. I shall be submitting this suggestion in reply to the consultation paper.

4 comments:

Anonymous said...: Having those rules in place is one thing, enforcing them is another.
It is still back to square one,
everyone doing what benefits them except the consumers.
Hope MAS keeps to their words and sincere about doing the right thing.
Remember investing is not gambling. it is about win-win-win; March 15, 2009 5:34 PM
Anonymous said...: Hi Mr Tan

Yet again - an excellent suggestion from you !

Having been involved in assisting Minibonders claim against the FI( banks ), I find that the mis-selling would never have occurred if the Minibonders had access ( in the 1st place ) to independent 3rd party reviews of the Minibond product.

We must remember that there is insufficient local expertise in designing, developing and analyzing complex structured products. Hence, the review group(s) have to be comprised largely of foreign experts.

Let their review be available on the Internet ( potential customers may need to pay a small fee to access their reviews ).

If we cant have such a system in place, then the FI's should not be allowed to sell complex structured products to the main in the street.

Then its fair to let " caveat emptor " ( buyer beware ) be the basis of level playing field for customers and banks .; March 16, 2009 8:02 AM
Anonymous said...: Mr Tan, you may like to publish this in your blog. Thank you.

Minibond investors slam HKMA
Beatrice Siu, The Standard

Monday, March 16, 2009

About 1,000 disgruntled Lehman Brothers minibond investors marched from Causeway Bay to the Hong Kong Monetary Authority headquarters in Central yesterday, accusing the government and the authority of ignoring them.
They demanded dialogue with the authorities and full refunds, similar to the offer made by Sun Hung Kai Investment Services in January.

Alliance of Lehman Brothers Victims chairman Peter Chan Kwong-yue lashed out at the government and HKMA for not following up or publicizing the investigation results, and accused them of "black box operations."

"The government failed to take further action in its call for banks to help investors by buying back the minibonds.The protest is our last resort to voice our anger," Chan said.

The investors waved banners and chanted slogans, blaming HKMA chief Joseph Yam Chi- kwong, Chief Executive Donald Tsang Yam-kuen, Secretary for Financial Services and the Treasury Caejar Chan Ka-keung, and Securities and Futures Commission chief Martin Wheatley for being "heartless, irresponsible and useless."

The group set up an altar and held a Chinese funeral ceremony outside the HKMA headquarters to signify "the death" of Hong Kong's role as an international financial center.

Tseung Sing-kwan, 40, who invested HK$200,000 in Lehman-related products at the Nanyang Commercial Bank in 2006, claimed bank staff misled her by not revealing the risks involved.

Last Friday a lawsuit on behalf of SAR minibond buyers was filed in New York against units of HSBC, Lehman and the Bank of New York Mellon for alleged failure to protect investors.

It demands the return of an estimated US$1.5 billion (HK$11.7 billion) held as collateral for the minibonds.

Right advice worth its weight in gold

Paul Ramscar, The Standard

Monday, March 16, 2009

Trusting your financial adviser will always play a key in part of the development of your business relationship - but how deep is that trust and what does it mean for Mr or Mrs Joe Investor looking for advice?
One thing that history teaches us is that people generally never learn anything from the past.

However, it is past behavior that is normally a good judge of future behavior.

So when choosing an adviser who is most likely going to be looking after your financial affairs for the next 10 years or more, you need to be quite certain that you have made the right choice.

If your current adviser has a history of making poor decisions on your behalf then it's a fairly forgone conclusion that the future won't fare much better. Granted that some poor decisions can be made as we are human after all, but there are red flags to watch out for.

When gut instinct says it's time to move on to a new adviser, then its best to start looking.

Some nightmare reports over recent months have involved clients requesting low-risk funds from their adviser only to find upon receipt of their portfolio statements they've been put into high-risk funds.

The Lehman minibond debacle is a prime example of poor advice being given to the majority who did not understand high-risk investments. Not only are these practices unethical but they are clearly against the instructions from the client.

In addition, sophisticated investors - short definition: US$1 million/ HK$8 million in liquid assets - are deemed to be fully qualified investors and, by default, know what the risks are.

The majority don't, and end up being led down a road of unwanted risk that does not end in the emerald city.

Too often clients are scared of the unknown or believe that transferring their portfolio to another firm is too much hassle.

Any adviser worth his salt will tell you that the transfer process is fairly straightforward and that he'll be able to handle it for you.

In most circumstances, only a couple of simple forms and authority letters are required in order to initiate the transfer process. Funds don't need to be sold, nor do shares or most other investments/plans. Of course, your existing adviser may not tell you this because he does not want to lose your business, but you are well within your rights to know all of this information, so just ask.

This year is going to get tougher, but there will be opportunities for those who seek them and if you are with a good adviser he'll be able to alert you to these.

Remember, money can be made in bear markets as well as bull markets.

Paul Ramscar is assistant director - Private Clients at Tyche Group, an independent financial advisory firm based in Hong Kong

e-mail: paul.ramscar@tyche-group.com; March 16, 2009 10:28 AM
Koh said...: Yes, good suggestion. In the Lehman's fiasco, the roles of Issuer & Arranger(which Lehman also assumed) were not specified on how the investment will be affected should one or the other filed for bankruptcy!; March 25, 2009 9:50 AM