Saturday, November 21, 2009

SCMP:Ex-DBS broker suspended over Lehman debacle

21 Nov 2009

A former employee of DBS Bank (Hong Kong) has been suspended from providing securities-related services for three months by the Monetary Authority after being found to have failed to disclose to a client the risk involved when selling a Lehman Brothers-related financial product.

It was the first disciplinary action taken by the authority since it received complaints about problematic sale practices of products linked to the bankrupt US investment bank.

The authority said yesterday that an investigation had found that Leung Wai-yu, who was registered with the authority to run securities-related businesses, had "failed to diligently disclose and explain to the client the product's risk".

She had also "failed to complete the risk-disclosure statement for the client in accordance with the bank's internal control procedures" when she was selling a client Lehman Brothers constellation notes, a derivative similar to minibonds also issued by Lehman, in March 2006, a spokesman said. He said the authority had suspended Leung's details from its register for three months from November 20 to February 19, during which time she could not take part in dealing in or advising on securities.

"This is the first time the HKMA has taken disciplinary action against a relevant individual in connection with a Lehman Brothers-related investment product," the authority's executive director responsible for securities enforcement, Raymond Li Ling-cheung, said. "There are other disciplinary cases which have reached an advanced stage and they will be announced in due course."

Leung left DBS in 2006 and works for the Bank of Communications. The authority said it had taken into account all the circumstances of the case, including the extent of the client's losses and the fact that Leung had no disciplinary history.

The action followed Leung's withdrawal of an appeal with the Securities and Futures Appeals Tribunal seeking to review the authority's decision. As of yesterday, the authority had begun disciplinary consideration of 765 Lehman Brothers-related investments other than minibonds. It is investigating 3,097 cases of Lehman Brothers-related non-minibond complaints and seeking further information on 1,292 cases. A DBS spokesman said it had reviewed every complaint by investors in the derivatives and had compensated those in which the sale might have been inappropriate.

Hong Kong investors lost billions of dollars on minibonds guaranteed by Lehman Brothers when the US investment bank went bankrupt in September last year. Minibonds are not corporate bonds, but consist of high-risk, credit-linked derivatives, marketed as a proxy investment in well-known companies.

Socialist Market Economy - China's Key to Success

Here is an interview with Wen Jiabao, Prime Minister of China. He expressed an insightful understanding of Adam Smith's theory of economics. He pointed out that Adam Smith actually wrote two books - on the invisible hand (i.e .market) and the visible hand (i.e. role of government). When economist applied only one side of Adam Smith's theory, the results are not satisfactory. It is now time for Singapore to learn from China about economics and governance. View this interview.

Friday, November 20, 2009

A better way to pay doctors

Here are some views.

Health care reform in the USA

The business and medical community is taking ads against health care reform as they wish to protect their vested interests. They are using philosophical arguments that had proved to be groundless, based on actual past experiences. Read this report.

Here are the views of 23 prominent economists.

Action to cool down speculation

Asia is faced an asset bubble, due to speculation in real estates caused by low interest rate, due to stimulus spending by governments in many countries. Read this report.

Thursday, November 19, 2009

Visit to INRIA, Paris

Read my views about the Cycab.

Reforming the financial sector

The senator should not give way to the business lobbies. Read this report.

Dr. Lim Hock Siew speaks out


How to spot an investment scam

Mr Tan

This article may be useful to some of your readers from the UK FSA . It also points out the issues with prosecuting overseas fraud and why recovering funds is very difficult. I think a key question for an investment scheme should be who is independently auditing on an annual basis and what are they auditing.

I was disappointed that he didnt mention land banking but did feel that this quote represents the issues with many investments (stock scams, ponzis, land banking, oil etc) where big returns are offered annually (Minimum 12% return etc). Most people lose of the actual money and just see numbers on a statement or page.

It strikes me that the guys who actually get in early are the ones who are going to make the most amount out of it.


No, because what actually happens is, normally the con man is good enough to convince the first guys to leave their money in, and that normally happens, they might take out a bit of interest, but essentially they leave their money in as well, and what everybody sees is a paper profit; we see the conmen, they'll give a fancy spreadsheet, they'll open up a laptop, show a graph, and say, "That's what your money was at the beginning" (pointing to the low point of the graph) "and that’s what your money is now" (pointing to the high point of the graph), it looks fantastic.


Globalization - some bad consequences

The prevailing thinking is that globalization improves the economic wellbeing of the people in the world. Not enough attention is paid to its negative consequences.

One such consequence is the export of the harmful effects of low interest rate to other countries. During the past two decades, Japan had very low interest rates. Speculators borrowed large sums in Japanese currency to speculate in assets in other economies, leading to asset inflation. This has been named as the "carry trade".

Now, the US Dollar has become the currency to borrow for the "carry trade". It has led to the stock and property market bubbles in Asia. Some countries have decided to impose control over the flow of currency to prevent their assets from excessive escalation.

If we want to get back to more stable economic growth, we have to open our eyes and see what is really happening, rather than rely on thinking that globalization, free market and global competition are good. They may be good in some respects but they have negative consequences, which may outweigh the benefits.

Tan Kin Lian

Public transport in London and Paris

Read my observations about the public transport system in London and Paris here.

Wealth manager

A wealth manager is a person working for a bank who helps the high net worth people to manage their wealth. Usually the client needs to have assets of more than a certain sum, e.g. $250,000.

The wealth manager tells the client that they will help the client to earn a good return on the wealth and will tell some stories about how this can happen. But there is no guarantee.

In some cases, the wealth manager can help the client to make some money but in other cases, the wealth manager loses money for the client. On average, the loses outweigh the gains.

The wealth manager is usually involved in advising on short term speculations on the currency or stock markets. These speculations are at best a zero sum game. The gains made by some come from the losses made by the other speculators.

However, the wealth managers and the banks earn a large fee and commission from handling these transactions. So, in the long run, the clients tend to lose out. For each client that makes money, there is likely to be another client that loses a larger sum, due to the fees.

The experience of many clients who entrusted their wealth to be managed by the wealth managers had been disappointing during the current downturn of the market. However, during good times, they have not been great either.

The lesson: invest for the long term. Avoid short term speculations. The wealth managers cannot help you to spot winning trends. If they can, they would be wealthy on their own.

Tan Kin Lian

Wednesday, November 18, 2009

Disclosing the commission earned

Someone asked why it is necessary for an insurance agent to disclose the commission earned on selling an insurance policy, while sellers of other products are not required to disclose their commission.

The answer is, the insurance agent is supposed to give advice that is in the best interest of the client. The payment of commission create a conflict of interest.
The commission is paid indirectly by the client, from the premiums. A high commission means a high cost to the client.

The regulators in the UK, where this concept of disclosure was developed, thought that the disclosure was the best way to manage the conflict of interest. If the client is aware about the cost, the client would be able to evaluate the advice of the agent.

This belief has turned out to be naive. The consumers were not savvy. The advisers were able to hide essential facts from the clients or to give misleading information.

I understand, from comments posted in this blog, that the UK authorities have now decided that this "disclosure" does not work and intends to ban the payment of commission entirely. I have not been following this specific development, so I am not sure about the details.

I agree with the thinking that it is better for insurance advisers to be paid a fee for their advice. Some practising advisers also hold the same view, as they prefer to be transparent in their dealings with their clients.

Tan Kin Lian

Tuesday, November 17, 2009

Personal entertainment system on air flights

Singapore Airlines can learn from Emirates or other airlines on how to improve the ergonomics of its personal entertainment system. Read here.

Changi Airport can adopt the best practice

Changi Airport may be among the best in the world. It can still learn from the best practice at other airports. Read here.

Paying the right price for insurance

A good insurance product has the following features:
a) reimburse the insured for a loss caused to an unforeseen event
b) provides transparency in coverage
c) charges a fair price.

Medical bills, repair bills and loss of income are unforeseen events. Insurance serves a useful purpose in compensating the insured for the loss.

The coverage should be written in clear terms. It should be understood by both parties. There should not be uncertainty leading to disputes. If the coverage is written in language that is not obvious to the lay person and requires a court to interpret the meaning, it is not transparent.

A fair price is one that covers the cost of claims and provides a reasonable margin for expenses and profit. The claims should represent 70% of the premium, with the remaining 30% set aside for marketing expenses, administration expenses and profit margin. This applies to the risk portion of the premium.

For the savings portion, the margin should not take more than 10% of the premium.

Many insurance product in the market failed to meet the tests of useful purpose, transparency and fair premium. They may be written in a confusing manner (which allows the insurer to interpret differently and deny the claim) or has an excessive margin for expenses and profit (which is hidden from the customer). The product is designed to make it difficult to compare the price.

The insurance agent can over-exaggerate the claims and get the unwitting customer to pay an excessive premium. For example, If the rate of claim is 5% and the average amount of claim is $5,000, the pure premium should be $250. If the margin is 30%, the gross premium should be $357. If the insurance company is charging $500 or more, the premium is too high and the insurance should be avoided. If the agent said that the claim could be $50,000 and get the customer to pay a premium of $1,000,the cost is excessive.

I have often been asked by the public - is this insurance plan a good plan for consumers? My answer is, "it depends on the premium that is charged". If the premium rate is fair and the coverage is transparent, it is a good plan.

However, most insurance plans are designed to give excessive profit to the insurer and pays a high commission rate to make it attractive for the agent to sell the product. After allowing for the high cost, which has to be paid by the customer, most insurance product are not good for consumers.

One possible exception is term insurance as it is tranparent and the consumer can get a quote of similar products for several insurers. The competitive market is likely to drive the premuim rate down to a fair level.

Tan Kin Lian

APEC Leader's declaration at Singapore 2009

Here is the declaration of the Apec leaders at the Singapore 2009 meeting.

Here are some key paragraphs:

Looking beyond supporting the recovery, we recognise the necessity to develop a new growth paradigm for the changed post-crisis landscape, and an expanded trade and investment agenda that will strengthen regional economic integration (REI) in the Asia-Pacific region. We cannot go back to “growth as usual”. We will put in place next year a comprehensive long-term growth strategy that supports more balanced growth within and across economies, achieves greater inclusiveness in our societies, sustains our environment, and which seeks to raise our growth potential through innovation and a knowledge-based economy.

Supporting Balanced Growth
We support the goals of the G-20 Framework for Strong, Sustainable and Balanced Growth. We join in their commitment to:

* Work together to ensure that our macroeconomic, regulatory and structural policies are collectively consistent with more sustainable and balanced trajectories of growth;
* Promote current account sustainability and open trade and investment to advance global prosperity and growth sustainability;
* Undertake macro prudential and regulatory policies to help prevent credit and asset price cycles from becoming forces of destabilisation; and
* Promote development and poverty reduction as part of the rebalancing of global growth.

Resisting Protectionism
We firmly reject all forms of protectionism and reaffirm our commitment to keep markets open and refrain from raising new barriers to investment or to trade in goods and services, and instruct our Ministers to continue to regularly review our adherence to these commitments. These efforts reinforce the WTO’s own monitoring mechanism, and act as another bulwark against protectionist pressures by ensuring transparency in the measures taken in response to the crisis.

How lawyers overcharge clients

Read this article.

Monday, November 16, 2009

Consequence of widening income gap

Published in New York Times

To the Editor:

So the corporate C.E.O.’s and their friends now reap what they have sown. For the last two decades, they have systematically (with tax subsidies at times) stripped middle- and working-class America of the jobs, financial security and health care that they depended on to buy those same companies’ cars, “labor saving” devices, electronic devices and all other manner of stuff.

The cost savings conveniently floated up the pyramid and were split among the executives and their board members, lawyers, accountants, investment bankers and other friends.

Now Middle America is broke and can no longer support those at the top of the pyramid. Or their big bonuses. Or their friends and hangers-on.

It’s going to stay that way until they start to undo what they have done and bring jobs back — real jobs with health care.

Elizabeth A. Letzler
Baldwin, N.Y., Nov. 8, 2009

The writer is a retired former banker and certified financial planner.

Marketing of holiday and spas

Be careful about these marketing schemes. Read here.

CyCab - Driverless Electric Vehicle (2)

I am visiting Paris to see the Cycab, - driverless electric vehicle. After that, I will visit the University of Kent to give a talk to the actuarial students. I will return on Saturday.

Need to create more jobs

Read this article.

Managing to survive tough economic times

Received this humor by e-mail. Hope you enjoy it.

Unemployment worse than projected in USA

Read this report.

Virtual wallet

Here is an interesting innovation, to replace cash and credit cards.

Low birth rate and immigration

I saw a news report that Japan, which is suffering from low birth rates and an aging population, is thinking about making changes to be more attractive to immigrants. This is similar to the situation and solution adopted in Singapore.

In my view, a better approach is to deal with the underlying causes for the low birth rates. Due to insecurity caused by globalization, many people are now spending more years to get a higher education, and are starting work later. They have to work long hours to establish a career. They dare not think about the commitment to raise a family.

The people from the less developed countries do not have this same type of worry. The cost of living is low. They are willing to raise more children and supply them as immigrants to the more developed countries.

Is this type of arrangement good for the world? I think that it is better for a country to grow its own local population rather than rely on immigrants.

Insuring critical illness

I have often been asked if it is advisable to buy insurance to cover critical illness. It is difficult for me to answer this question. It is likely that the customer has been advised by an insurance agent to buy critical illness policy to cover medical bills, which can amount to $100,000 or more, and for the loss of income during the period of treatment.

The large cost of medical treatment is usually exaggerated and the chance of incurring a large bill is small, especially as there is the option to be treated in a subsidised ward.

In most cases, the medical bills can be covered by Medishield or private Shield, which pays for the major portion of large hospital bills. The patient has to pay only the deductible and coinsurance.

Some insurance agent advised on the need to insure the loss of income during treatment of the critical illness. However, you must consider the the risk of loss of income does not arise only from critical illness. It is more likely to arise from unemployment and retrenchment, which is higher than the risk of critical illness.

The best way to protect against loss of income is to have adequate savings. If you save 15% of your monthly earnings, it will take you 10 years to accumulate savings amounting to two years of earnings. This is likely to be more than the sum that you can insure under a critical illness policy.

The accumulated saving can be used not only for critical illness, but also for unemployment and other emergencies. Furthermore, you also do not have to worry about the exclusions in a critical illness policy.

If you wish to cover for critical illness, make sure that you do not pay more than 0.4% of the insured sum. If you insure for $100,000, the premium should not exceed $400 a year. If you take a critical illness term coverage for 10 years, the cost should be lower.

However, if you cannot buy a critical illness cover at a fair price. it is better for you to be uninsured. The chance of getting a critical illness during the first 10 years for a young person is quite low. The priority is to accumulate sufficient savings as early as possible. This is explained in my book on Financial Planning. Get a free copy here.

Tan Kin Lian

Choice of modes of travel

I planned a visit from London to Canterbury and was surprised to see the choice of travel by coach (cheaper) and by train (more connection times). This is an example of the positive aspect of competition between the different modes of travel. I hope that the transport system in Singapore can provide a similar choice and encourage real competition. Read here.

Distributor of torchlights

Someone expressed an interest to distribute my rechargeable torchlight with locator, but did not give any contact information. He can contact me at This offer is also available for those who are interested to distribute my books.

Sunday, November 15, 2009

Practice your skills in financial trading with Pro-Trader

You can practice your skills in trading in the futures market with Pro-Trader. It is fun. Learn about how news affecting prices of future products and the unpredictability of the markets (which is a reality in life). Learn how to respond to events and market trends. Read this document.

You can ask a few friends to challenge each other by logging into the same game, created by the first player. It can be quite fun. It is also educational, as you get the chance to interpret how events affect the prices of the various products - and see which player make the best moves. Good luck.

Fee on bank overdraft

A friend told me that the bank in America have an unfair practice to levy the overdraft fee on many transactions during a month.

For example, if the customer has a few transactions that may result in an overdraft, the bank will debit the largest transaction first to cause the account to be overdrawn. All subsequent transactions will be overdraft and each will attract an overdrawn fee. It may result in the fee being applied to many transactions in a month.

The US Congress is passing a law to disallow a bank from this kind of practice and to require the bank to debit the transactions in the chronological order that they have been received.

I find this type of practice to be dishonest. However, the bank seems to be able to get away with it, and a new law has to be passed to stop them from continuing with it. It seems that the standard of honesty has dropped to a low level and that bankers need a law to tell them what is honesty.

Cap on interest rate and bank charges

Should the government set a cap on loan interest rate and other bank charges?

At one time, it was argued that these matters should be left to the free market. Consumers can make their choice and avoid the banks that have high charges. In reality, consumers are not aware about these charges. The ignorance allows the banks to make billions of dollars in high charges and fees.

The US Congress is now considering passing laws to make it mandatory for consumers to be informed about the charges and to opt in. Some people think that this does not go far enough, and that it is better for the Government to set limits on the interest rates and charges.

Many decades ago, there was a law to limit the interest rate that can be charged by money lenders. This law was necessary to prevent consumers from being exploited by money lenders. The same reasoning can be applied to the lending by banks, especially if they behave just as bad as the money lenders.

The general argument is that the level of interest rate should depend on the market and cannot be set by law. I do not agree with this argument, especially if we look at what has happened in many countries. It is better for the government to set these caps on fees and loan interest rate, and to revise them when necessary due to changes in the market conditions.

Tan Kin Lian

Overdraft protection

What is overdraft protection? It is a nice name for fleecing the bank customer.

Low interest rate - the underlying cause

Why is interest rate so low? The simple answer is there is a big supply of money and insufficient demand for money. What cause this imbalance?

The low demand for money is caused by low consumption. The low consumption is caused by low wages and high unemployment, which has affected a large part of the population, and brought out a large disparity in income distribution in recent decades. The lower and middle class people have to work harder to earn enough to survive. They have fewer children, which also contributed to the drop in demand over the years.

The supply of money has also been increased by governments through their monetary policy and recently, through stimulus spending. With so much money in the economy and little demand, interest rate is likely to remain low for a long time.

This is bad news to retirees who have to depend on their investment income to live on. With low income from their savings, they have to spend their capital sum, which will deplete over the years.

What can retirees do? They have to invest in equities to earn a higher return. Although equities have a higher level of risk, it can be mitigated by investing in a low cost fund, such as an exchange traded fund. The return on equities is likely to be around 5% to 7%, which is much better than 2% on government bonds.

In the past two decades, there was demand for money but they were used to create asset bubbles, especially in housing. This helped to boost the world economy for some time. The recent collapse of the asset bubbles brought about the economic downturn. However, the asset bubble is being revived, but this is not a long term solution.

In my view, the solution is to generate demand by giving people a chance to work and enjoy fair wages, so that they can feel secure about their future, raise a family and spend time on leisure. With a sound economy, there will be a demand for money which will give a fair return on their savings.

Tan Kin Lian

A recovery for some

This article explains that the economy recovery in America benefits only the elites who has stock portfolios. It did not benefit the many people who are still unemployed. The same comments would probably apply to many other countries, including Singapore.

Experience with locator torchlight

I have been using the torchlight (with locator turned on) each night for the past two weeks. I found it to be useful. It is easy to locate the torchlight. I have now made it a habit to use the torchlight instead of the main light at night.

This torchlight is available at $6.50, compared to $27.20 for a branded torchlight with similar functions.

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