Take this hypothetical example:
1. You are a senior manager of a bank with several branches
2. An investment bank approaches you to sell their innovative products and offers your bank an attractive commission of 3% to sell the product.
3. As the product looks attractive, you are confident of selling $50 million in your branches in one week. This will give a commission of $1,500,000. After deducting the incentive to your relationship managers (say 1%), you can make $1,000,000 for your bank.
4. You agree to distribute the product and sends your relationship managers for training by the product issuer. This is a short talk covering only the positive features of the product, i.e. "how to sell". It does not cover the prospectus and the negative features (as they do not help in the sales).
5. The product issuer advises you to get a disclaimer signed by the retail customers to waive liability for any loss on investing in the product.
The product turns out to be quite different from what you understood it to be. You realised to your horror, that it includes components such as credit default swaps and collaterialised debt obligations (that your bank or its relationship managers did not realise earlier).
As financial advisers, with responsibilties under the Financial Advisers Act), were your relationship managers negligent in not understanding the product that was sold to the retail customers? Does your bank share in this negligence?
What do you do?
a) Hide under the disclaimer clause?
b) Admit your mistake and offer to share the loss with the investors?
Tan Kin Lian
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Credit Linked Notes
18 comments:
The financial adviser should read the prospectus and legal documents themselves and form their own opinion first before recommending it to others. Financial advisers are not robot or stupid and thus before they make recommendations they must be sure it is suitable.
During the product training, financial advisers attending such training should ask the trainer relevant questions. If the trainer is unable to answer or did not revert back unanswered questions, this is already a signal of red flag.
A person from the industry.
For bank, I think they will choose a.
A bank that choose (b) is a bank that observes integrity and takes care of their customers.
In the past, many banks value their reptuation. Today, they want to make more profit and will neglect their customers.
I hope that top managemnets of the banks will reflect on this matter and choose (b). They can make future profits through the good will of their customers and enhence their reputation as being honorable and fair.
If the choice is very few, you don't hv alternatives.
In the past people hv many alternatives.
We are a small island with 3 local banks. Cannot afford to have bad publicity of MAS taking action against any of them. It will greatly affect business confidence and integrity of our reputation.
Same reason for not allowing illegal protests and demonstrations. The gahmen will come down hard on anyone doing that, no matter how big your grievances.
FIs may not be ignorant of the risks for investors. It is quite common for banks to have risk review bodies to examine new product risks before they are marketed. It will be interesting to look at their minutes and approvals of the credit-linked notes. Wonder if MAS might have looked at these? Then it may not be negligence but cheating, motivated by greed.
For the individual investors, there is no way for them to be able to probe into this without engaging in a legal suit or MAS's intervention. Wonder if FIDREC will delve into this as adjudicator?
SB
The advisers must conduct due diligence to check if the product will benefit the consumers. If it is not it should NOT be reccommeded to any clients.
But insurance agents are different. They will sell anything, good or bad products, to their clients.The clients trust them and the agents exploit this trust and ignorance. After all the agents don't care whether they meet the needs of the clients.
The agents' goal is to make a sale and to earn the commission. Whatever the products company produces they MUST beleive , good or bad, and they strategise and think of anything to sell or to con their clients.
MAS must make it the responsibility of the sellers for anything too and to make them liable for negligence.
The deliberation of hiding the factual risks cannot simply blame the "negligence" of RM/FIs. It should be called a syndicate "cheating" and totally against the FA act.
The worst is: MAS and FIDREC still think that RM/FIs are not liable for the crime they committed.
Look at Hongkong and Taiwan and you will see the difference as to how our regulatory body handle the issue and how FIs were well protected.
Some financial institutions have opted for (b)& share the cost of the mistake by refunding the capital to "certain" investors. But I doubt the investors will ever trust them with their monies again - once bitten twice shy!!
If the financial advisers equipped with the necessary qualifications, training and experience can act blur and absolve themselves from any responsibility, then ALL investors (ordinary folks) can justifiably do the same!
i go with (b) where there has been misrepresentation, but I think we need to prevent such an occurence from happening in the first place.
I would suggest that a Financial Planner would need license to practice (like a doctor or lawyer, perhaps linked to CFA or CFP qualifications etc) and if he is negligent in his duty (e.g. selling $100K in CDS to the poor old auntie), his/her license should be revoked. To me, using non-specialists to sell complex derivative products are like getting a NSF medic to do brain surgery.
Alternatively, an indepedent body could rate the banks in terms of the quality of their selling process (e.g. mystery shopper)and publish this. So the aggressive banks will get whacked with a F-.
Lastly, all investment products should have a recommended target audience (young, old, low risk or high risk appetite) and full risk disclosure (currency, counterparty, liquidity etc) printed in Large Bold Font at the TOP of the prospectus.
Dear Tan KL,
Think the Financial Course M1 to M8 doesn't not seem to said the person selling product is excellent!Just minimun standard!
Those who can't manage their own finance, can manage others.
Can't blame them also, American are too innovative in complex financial product.
Follow our grandmother footstep in finance! Don't know don't but! Don't put your egg into 1 basket.
Don't trust selling ppl too much they just want $$$$$$
How can someone with 4 O levels and plus some certificates in life insurance, ILPs , manage your personal finance? Manage your finance? Madness, crazy!!! sell you financial products , maybe. But managing your life insurance, investment, retirement planning or estate planning the insurance agents are NOT able to.
But consumers think they can. No wonder they get conned. No wonder the word "CONsumer" has the word con too.They are always conned.
Recently many insurers rolled out new products and they are NOT straight forwards plain vanilla products. The products are old products reshaped,twisted here and there with new wrappings and new names.I wonder how many of the policyholders will fall into their traps set up by the insurers in collaboration with the greedy insurance agents.
Consumers beware. I wish there is FISCA to review these products to check for toxic. The insurers are not the old insurers you knew.They are crooks out to rob you of the hard earned saving.Anyway before you sign on the dotted line post your concerns here.
Even if a plan vanilla product eg a single premium product, I would think thrice because I do not know if I am exposed to unnecessary and unlimited downside risk.
TM Asia Nest-Egg SP Guaranteed 3 is a single premium plan (min 15k) and pays 2.5% coupon ($375) for 5 years. The coupon rate is guaranteed and at the end of the 5 years, I get back my 15k.
Is this really simple and safe?
Thanks.
Reaction of the senior managers and the RMs who are told to sell those products.
1)Senior Managers - Wow!!!! rubbing his hands in glee, I can help my company made
S$1 million this year alone. What would be my bonus, 10%, 20% or more, wow!!!! I can buy a new car, repay part of my housing loan, buy a new house using the bonus as a down-payment, etc
2)RMs - also rubbing their hands in glee, I hope I can encourage enough clients, old or young, educated or uneducated so long have money in their banks accounts to buy those structured products, the more the merrier so that I can earn more commission - part of this to buy branded goods to keep with the Jones, to eat at more fanciful restaurants, etc, and the rest to save up for rainy days
Do RMs understand the structure of the product, the risks and rewards, etc ? - my manager surely understand otherwise they would not ask us to sell
Do customer understand the product???, Investment firm advised us to tell customers the rewards ok, the most important thing is customers buy from me than from my fellow RMs at the other branches, Customers can get about 5% returns every year and if product fails, hard luck to them, after all I have already collected my commission lah!!!! , I have already gave them the prospectus and they have signed the disclaimer forms. If product fails, not my responsibilty. Besides, I am not the only one selling the products, so many other RMs are also doing it, how to sue all of us, got money to sue meh!!!, lawyer fees so expensive.
Worse, resign, can get another job elsewhere.
The RMs drooled at the sight of structured product not because they felt the products were able to help in the financial planning of the needs of their clients but the high commission they could give to the RMs and they were easy to sell too.
Translated into dollars and sense, they meant big cars, condo, LV bags, vacations, fine winning and dinning etc.
The customers? they were living in false security.
The most ridiculous thing is, these bank employees are not even protecting their own money, they are protecting the banks' money!
UNLESS I'm wrong, and they are protecting their own money!
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