So far, all the measures that MAS has focused on are 1) training of sales staff, 2) labelling of products, 3) sales process, proper documentation etc.
However, the MAS has failed to address the root cause of all the mis-selling in the financial industry. They have failed to address the conflict of interest between the way the sales force is remunerated and the interests of clients.
Clients want good investment performance, within their proper risk profile. They want a diversified portfolio.
The sales force and the banks that set the score cards want to sell products with the highest sales revenues. The higher the sales revenue, often the poorer the investment performance for clients.
By allowing banks to sell products with upfront sales charges, the sales force have no incentive to conduct due diligence of the products. In fact, the sales force is incentivised to go for the products with the highest sales margins, often embedded in flow products, structured products and treasury products. These products often provide very limited upside but unlimited downside.
Flow products like equity linked notes and dual currency investments involve the clients selling put options for a fee. Often the spreads taken by the banks are 80%, while the client earns only 20%. Yet the spreads are not transparent. The client only knows what he has been quoted. Worse, the little fees that client earns from selling these options involve unlimited downside if the underlying equity or the currency being paired drops in value.
Sales people love such flow products because 1) they earn very high margins at expense of clients, 2) these investments are short-termed, often 1 month for an ELN and 2 weeks for a DCI, and they keep rolling the clients every time a contract expires until they customer gets converted. if the stock rises or the currency such as teh AUD rises, customer merely gets a small yield like 1% per month. But if the stock or currency falls, customer receives the underlying stock and currency. Hence, the return is asymmetric.
When the investment climate is favourable for equities, often the sales force would steer clients doing such flow products, which earn very little yields, when the clients are better off investing in mutual funds, ETFs, products that constitute a core portfolio.
There are also no controls on the spreads that a bank can take for bonds, convertible bonds, preference shares. They are quoted as bid ask with the spreads embedded. However, bonds, convertible bonds and preference shares provide much better returns to risk ratios than flow products and hence such spreads are often quite justified.
The banks cannot be relied on to treat customers fairly because they are under tremendous shareholder pressure to produce ever increasing revenues. Any one from senior management in a consumer bank will admit that their sales target rises 20 - 30% per annum, regardless of market climate. Hence, banks tend to veer towards selling products that generate the highest revenue at the expense of clients.
There are also no controls on the spreads that a bank can take for bonds, convertible bonds, preference shares. They are quoted as bid ask with the spreads embedded. However, bonds, convertible bonds and preference shares provide much better returns to risk ratios than flow products and hence such spreads are often quite justified.
The banks cannot be relied on to treat customers fairly because they are under tremendous shareholder pressure to produce ever increasing revenues. Any one from senior management in a consumer bank will admit that their sales target rises 20 - 30% per annum, regardless of market climate. Hence, banks tend to veer towards selling products that generate the highest revenue at the expense of clients.
The only way is for MAS to legislate or control the spreads earned from flow products, unit trusts and all investment products. The banks will likely find other ways to make up for the lost revenue by implementing performance fees or wrap fees, which will align the interests of teh bank with the customers.
The MAS must take this financial crisis as an opportunity to take bold steps towards reforming the way investment products are sold by banks. Otherwise, I suspect more social harm will fall on the public. If the government is willing to take steps to control the rise in property prices recently, why not take equally bold steps to reform the financial industry?
Greg Wang
The MAS must take this financial crisis as an opportunity to take bold steps towards reforming the way investment products are sold by banks. Otherwise, I suspect more social harm will fall on the public. If the government is willing to take steps to control the rise in property prices recently, why not take equally bold steps to reform the financial industry?
Greg Wang
I agree with the views put forward by Greg Wang. We have to deal with the root cause of the problem - high and hidden charges, high commission to seller, high profit margin - all at the expense of the consumers.
ReplyDeleteThe same remarks apply to life insurance products - whole life, endowment, critical illness, investment lined.
The problem is in the high hidden margins. If the margins are fair and disclosed, the life insurance products will be acceptable.
I have received many real life cases of people who lost a lot of money, more than $50,000, by investing in the dual currency products. They were never told about the risk - and were shocked to see the huge loss when it happened.
ReplyDeleteThe banks that sold the products ignored their appeals, and went to sell the same products to other customers.
What a terrible financial sector. And MAS continues to sleep ....
TKL: "What a terrible financial sector...."
ReplyDeleteAs early as late-1980s, a econ professor had written a book to warn investor and followed by many other warning..
In 2002, Mr Buffet expressed doubt of toxic product.
US regulator was sleeping....
Asia investor was in a dark.
What a costly lesson is!
Mr. Tan, also stress that the insurance industry needs overhaul in those areas that you proposed for change.
ReplyDelete1.the insurance agent himself or herself. Many are not qualified to be called consultants or planners or advisers and yet they have titles like these. MAS must control the use of these tiltles because they misrepresent. These agents are at best salesmen and women if not CON-insultants.
2.Raising the licensing qualification is a must. Currently the exams are too low and the tikam tikam format is not good. Even monkeys and donkeys can pass these exams in this format.
3.Making the agents complying with section 27 of the FAA and also enforce the conduct of need analysis and fact finding and ban product pushing which has been the cause of unethical practice.
4.Remove the commission and replaced with the model like what is practised in the medical profession. Consultation and prescription of products are separate.Over the counter products are free from commission. Prescribed products need a chit or report or recommendations by a registered practitioner. There are already enough proofs that commission is root of all evils.
5.All recommendations are to be the responsibility of the agents/advisers and liable for breach of section 27 if found not of reasonable basis.
6.MAS must license all the tied agents and to apply the same stringency as applied to FAs.
7.MAS to monitor, to police to enforce the laws on the agents and the companies especailly the CEOs and the senior management.
How you know that u/m people are telling you the truth? They could be lying.
ReplyDeleteAnyone who loses money can claim they were not told of the risk or they were cheated. So easy to say such things on the Internet.
"I have received many real life cases of people who lost a lot of money, more than $50,000, by investing in the dual currency products. They were never told about the risk - and were shocked to see the huge loss when it happened."
Greg Wang,
ReplyDeleteDon't just focus on the banks. Remember that the insurance industry needs it badly too for the next scandal and big one will come from insurance.
I think the suggestions of change by Anonymous September17,2009 10:29AM make a lot of sense . To put order and respectability into this job these changes especailly the way the insurance agents conduct the selling process and the their remuneration have to be done.These 2 key areas are the deciding areas whether consumers recieve proper advice to their interest.MAS must pay specail attention and implement as suggested
Regulate insurance products too. They are not as simple as people think. The difficulty is finding the correct one or ones to address certain needs efficiently , effectively ad at low cost and insurance agents have BIG problem doing it. They only go for the best paying commission products.This is critical and commission of the products can cause 'blindness' and it determines the preference.
ReplyDeleteI think that many are falling into the Singapore psyche trap. Anything goes wrong, ask for more government regulation. Then, when nothing goes wrong but with regulations restricting us from doing what we want and think should be done, complain government again. In the olden days in Europe, all roads lead to Rome. Now in this little island, all roads lead to government?
ReplyDeleteIf we want to help ourselves, then help overselves to be more discerning and careful. Like Hougang MP Low Thia Khiang said, the pledge began with "We the citizens of Singapore." not we the government.
I've known him many years. This is the best of his quotables in my humble opinion.
Vincent Sear,
ReplyDeletea lot of helpless consumers out there need protection from the predatory insurance agents.Long ago not much was known about insurance and people then were wary of insurance agents. This was the self protection. Not that they knew about insurance or the mechanics of insurance but rather insurance agents had a bad reputation. The agents were people who couldn't get a job, who had no education or skills. They had only glib tongue and good at bullshitting.And what they sold was a peice of paper promising a benefit to someone else should the buyer die.It wasn't the buyer who could benefit so why buy.
Have you heard of this joke? If you needed a seat at a hawker centre all you had to do was to announce that you were an insurance agent and everyone would scram and run as fast as they could. The people then knew self protection but now? The insurance agents now are more subtle , more glib tongue, dare to lie, cheat ,con dare to say and do anyhting if there is a big commission at stake and when the victims got confused and muddle headed the agents go for the kill. They are now well trained to tell half truth by the company and trainer.They got technology to help to con CONNEDsumer. They mislead consumers with titles like financial CONsultant when they don't know one end to the other of insurance or investment.
Do you see how dangerous they are, far more dangerous than their predecessors, the less educated dinosuared agents of old.
The consumers need the protection and rules to see that the agents don't breach the OBs, to see that they are not over paid for filling up forms. Therefore commission should be replaced by fees which are negotiable between the buyer and the seller.Not only that, make sure the products must be reasonable to meet the clients' needs otherwise it is breach of section 27 of the FAA.
Self regulation is better but no one in this game can be trusted. The insurers and the agents are always in cahoot to fleece the consumers. Now why make the ceos responsible for everything? They can be fined and jailed and so are the agents.This is good. This is a global trend. Obama recently asked for tighter regulation because he knows all the crooks in the financial indsutry cannot be trusted.
The Watchman
Greg Wang (not his real name) is a insider in the banking industry. He is also a whistle blower. He knows how the products are designed and how much profit is taken away by the banks. In short, he knows how bad a deal is being pushed to the trusting and unsavvy investors, who are being "ripped off".
ReplyDeleteHow shameful for these type of transactions to be allowed in Singapore, and consumers are not protected.
Greg,
ReplyDeletespeak up for those who have been screwed up by insurance agents. In fact the loss due to mis-selling by insurance agents far exceeds the minibond saga. It is new bomb awaiting to happen. It will be the greatest scandal of all times.