Here are the survey results.
Saturday, April 11, 2009
Equity Linked Notes - are the terms fair?
I was given the Security Purchase Contract Note for an Equity Linked Note. The contract note is very difficult to read, even for an expert like me. The Note was issued by bank X and distributed by bank Y to a Chinese educated elderly person (who does not understand English).
After reading the contract note, I was able to analyse the terms as follows:
a) The note is linked to two shares, A and B
b) Interest is payable at an annual rate of 12% for each day that both shares stay above the trigger price (which is 85% of the reference price). If any share fall below the trigger price, interest is not payable for that day
c) At the end of each observation period (about two months), if both shares are above the trigger price, the Note is redeemed at par, plus accrued interest.
d) On the maturity date (18 months), if any share falls below 70% of the reference price, the investor is given the shares and has to bear the capital loss (of more than 30%).
e) The Notes are principal protected at maturity (provided the Knock-in event has not occurred). There is no mention of the party providing the guarantee, but a statement as follows: "the notebolder is exposed to the credit risk of the issuer or the third party guarantor".
I find this product to be unsatisfactory in the following respects:
1) The "interest payment" is not really "interest". It is actually a risk premium given for providing the insurance against a 30% drop in any of the shares in the basket.
2) It is impossible for the investor to know if the risk premium is fair, given the unknown extent of the risk?
3) The contract is designed by bank X, which stands to gain from the margin between the true cost of the risk and the so called "interest" payable to the noteholder. This can be to the disadvantage of the retail investor, and can in an extreme case, be considered as "cheating" the investor.
There are laws against creating gambling contracts, without approval of the authority. Does this type of equity linked note fall within the definition of a gambling contract? This law was written to prevent the public from being cheated.
Outcome: The issuing bank X went bankrupt. The investor lost the entire principal, amounting to several hundred thousand dollars. The distributing bank Y was negligent in exposing the investor to a large risk - without proper diversification.
If you are in a similar situation, with a similar product, you can write to me at kinlian@gmail.com.
After reading the contract note, I was able to analyse the terms as follows:
a) The note is linked to two shares, A and B
b) Interest is payable at an annual rate of 12% for each day that both shares stay above the trigger price (which is 85% of the reference price). If any share fall below the trigger price, interest is not payable for that day
c) At the end of each observation period (about two months), if both shares are above the trigger price, the Note is redeemed at par, plus accrued interest.
d) On the maturity date (18 months), if any share falls below 70% of the reference price, the investor is given the shares and has to bear the capital loss (of more than 30%).
e) The Notes are principal protected at maturity (provided the Knock-in event has not occurred). There is no mention of the party providing the guarantee, but a statement as follows: "the notebolder is exposed to the credit risk of the issuer or the third party guarantor".
I find this product to be unsatisfactory in the following respects:
1) The "interest payment" is not really "interest". It is actually a risk premium given for providing the insurance against a 30% drop in any of the shares in the basket.
2) It is impossible for the investor to know if the risk premium is fair, given the unknown extent of the risk?
3) The contract is designed by bank X, which stands to gain from the margin between the true cost of the risk and the so called "interest" payable to the noteholder. This can be to the disadvantage of the retail investor, and can in an extreme case, be considered as "cheating" the investor.
There are laws against creating gambling contracts, without approval of the authority. Does this type of equity linked note fall within the definition of a gambling contract? This law was written to prevent the public from being cheated.
Outcome: The issuing bank X went bankrupt. The investor lost the entire principal, amounting to several hundred thousand dollars. The distributing bank Y was negligent in exposing the investor to a large risk - without proper diversification.
If you are in a similar situation, with a similar product, you can write to me at kinlian@gmail.com.
Friday, April 10, 2009
Build MRT internechange stations closer together
At Dhoby Ghaut MRT station, there is a long walk to change from the NS Line to the NE Line, and vice versa.
The NE Line was built many years after the NS Line was operational. It was not possible to build the new station closer to the old station, as it might cause engineering and safety problems.
is there a solution? Give your views here.
The NE Line was built many years after the NS Line was operational. It was not possible to build the new station closer to the old station, as it might cause engineering and safety problems.
is there a solution? Give your views here.
Thursday, April 09, 2009
Bus stops as landmarks
I have a proposal to use bus stop as landmarks to get to a destination. Read the following. Details.
Wednesday, April 08, 2009
Fear and consequence of retrenchment
If you held a steady job for many years, and you hear that your company has to downsize, what do you do? If you are retrenched, how are you going to find a similar job in a difficult job market? How are you going to pay your bills?
If you have some savings to draw down for a few months or longer, you may be able to tide over the interim period before you find a new job. What if you do not have any savings?
You can pray that you will be spared. But what about your colleagues who are axed?
It is time for us to consider the need for unemployment insurance. If 10% of the workforce has to be axed, an unemployment insurance scheme should pay them, say, 50% of the previous earnings for a period of up to 12 or 24 months. The cost of the unemployment benefit should be paid by those who have jobs. It should cost about 2% to 3% of the payroll. It is a cost that is worth paying to spread the burden.
An alternative to unemployment insurance is a relief loan to pay the above sum to the retrenched workers. As this is a loan, it should be repaid in the future. Interest should be allowed to accumulate with the loan at the same rate paid by the Central Provident Fund.
I hope that an unemployment insurance or relief loan will be introduced by the Government soon, before more people face financial distress due to retrenchment.
Tan Kin Lian
If you have some savings to draw down for a few months or longer, you may be able to tide over the interim period before you find a new job. What if you do not have any savings?
You can pray that you will be spared. But what about your colleagues who are axed?
It is time for us to consider the need for unemployment insurance. If 10% of the workforce has to be axed, an unemployment insurance scheme should pay them, say, 50% of the previous earnings for a period of up to 12 or 24 months. The cost of the unemployment benefit should be paid by those who have jobs. It should cost about 2% to 3% of the payroll. It is a cost that is worth paying to spread the burden.
An alternative to unemployment insurance is a relief loan to pay the above sum to the retrenched workers. As this is a loan, it should be repaid in the future. Interest should be allowed to accumulate with the loan at the same rate paid by the Central Provident Fund.
I hope that an unemployment insurance or relief loan will be introduced by the Government soon, before more people face financial distress due to retrenchment.
Tan Kin Lian
AFP:Hong Kong watchdog slams brokerage in minibond scandal
5 Apr 2009
Hong Kong's securities watchdog has reprimanded a major brokerage for misselling controversial financial products backed by failed US giant Lehman Brothers, a spokesman said Sunday.
KGI Asia Ltd, which has more than 40,000 clients in Hong Kong, has agreed to repay 1.4 million Hong Kong dollars (180,000 US) to five people wrongly sold so-called "minibonds", the Securities and Futures Commission (SFC) said in a statement.
The minibonds have been at the centre of major scandal in the city, after they were sold to investors -- including many vulnerable retirees -- before their value collapsed when the US bank went bankrupt last September.
Following an investigation, the SFC found that KGI Asia had not adequately assessed the risk of the minibonds and that sales staff had not fully understood the products they were selling.
KGI Asia has agreed to fully refund the five clients, none of them professional investors, the SFC statement said. The brokerage has not admitted any liability.
"This outcome resolves our concerns about KGI's past sales practices in respect of Lehman Brothers minibonds, covers present losses incurred to their clients and provides assurance that these problems will not arise again in the future," said Mark Steward, the SFC's executive director of enforcement.
The move is the latest refund by a major financial firm in Hong Kong in the scandal, which has sparked multiple protests as investors claim they were sold the products on the understanding they were rock solid.
But legislators have complained that thousands of misselling cases have still not been dealt with by the regulators, and the firms that sold the products have been dragging their feet.
More than 40,000 Hong Kong investors had put a total of 15.7 billion Hong Kong dollars of their savings into minibonds and other complex products backed by the investment bank.
Former Wall Street icon Lehman Brothers collapsed in September under mountains of debt.
Hong Kong's securities watchdog has reprimanded a major brokerage for misselling controversial financial products backed by failed US giant Lehman Brothers, a spokesman said Sunday.
KGI Asia Ltd, which has more than 40,000 clients in Hong Kong, has agreed to repay 1.4 million Hong Kong dollars (180,000 US) to five people wrongly sold so-called "minibonds", the Securities and Futures Commission (SFC) said in a statement.
The minibonds have been at the centre of major scandal in the city, after they were sold to investors -- including many vulnerable retirees -- before their value collapsed when the US bank went bankrupt last September.
Following an investigation, the SFC found that KGI Asia had not adequately assessed the risk of the minibonds and that sales staff had not fully understood the products they were selling.
KGI Asia has agreed to fully refund the five clients, none of them professional investors, the SFC statement said. The brokerage has not admitted any liability.
"This outcome resolves our concerns about KGI's past sales practices in respect of Lehman Brothers minibonds, covers present losses incurred to their clients and provides assurance that these problems will not arise again in the future," said Mark Steward, the SFC's executive director of enforcement.
The move is the latest refund by a major financial firm in Hong Kong in the scandal, which has sparked multiple protests as investors claim they were sold the products on the understanding they were rock solid.
But legislators have complained that thousands of misselling cases have still not been dealt with by the regulators, and the firms that sold the products have been dragging their feet.
More than 40,000 Hong Kong investors had put a total of 15.7 billion Hong Kong dollars of their savings into minibonds and other complex products backed by the investment bank.
Former Wall Street icon Lehman Brothers collapsed in September under mountains of debt.
Thought for the day: Exploitation by the Elite
"The history of mankind is a history of the subjugation and exploitation of a great majority of people by an elite few by what has been appropriately termed the 'ruling class'. The ruling class has many manifestations. It can take the form of a religious orthodoxy, a monarchy, a dictatorship of the proletariat, outright fascism, or, in the case of the United States, corporate statism. In each instance the ruling class relies on academics, scholars and 'experts' to legitimize and provide moral authority for its hegemony over the masses." : Ed Crane
Fascism should more appropriately be called Corporatism because it is a merger of state and corporate power: Benito Mussolini
Ho Cheow Seng
Fascism should more appropriately be called Corporatism because it is a merger of state and corporate power: Benito Mussolini
Ho Cheow Seng
Tuesday, April 07, 2009
Banks get guidelines on treating customers fairly
4 April 2009
The Editor
Forum Page
Straits Times
I refer to the article “Banks get guide on treating customers fairly” (ST 4 April).
I congratulate the Monetary Authority of Singapore for taking the appropriate steps to address this issue. However, may I raise a matter of public concern?
Does this imply that in the past, it was all right for the banks to treat customers unfairly? For example, was it all right for a bank to design a complex financial product that give a poor return for the risks embedded in the product and sell the product to an unwary public, without disclosing the relevant information that are available and known by the product issuer?
Were there already laws in place that were supposed to protect the consumers against unfair or predatory practices?
I recall that there were specific requirements under the existing section 199 and 200 of the Securities and Futures Act and under Section 27 of the Financial Adviser’s Act.
A petition was signed by 983 people who alleged that they were misled into investing in several credit-linked notes, such as the Mini-bonds, High Notes, Pinnacle Notes and Jubilee Notes. This petition was lodged with the Monetary Authority of Singapore on 8 October 2008. It requested the MAS or the Attorney General to investigate if there were breaches of relevant provisions under the existing law.
To my knowledge, there was no announcement on the outcome of the investigation, or if such an investigation had been conducted.
If the investment banks that created the products or the financial institutions that sold the products had failed in their duty under the existing law, surely it is the responsibility of the authority to charge them in court and allow the matter to be decided by the court?
If the court had found that the law was vague, then a subsequent step should be taken to clarify the law through new legislation or regulations.
Let me illustrate with this example. Someone broke into a house and took away an expensive notebook computer. The owner lodges a report to the Police. Should the Police now issue a new guide to explain what is house-breaking and theft? Surely, it is the duty of the Police to charge the culprit, with sufficient evidence, and let the court decide on the matter, based on the existing law?
Tan Kin Lian
The Editor
Forum Page
Straits Times
I refer to the article “Banks get guide on treating customers fairly” (ST 4 April).
I congratulate the Monetary Authority of Singapore for taking the appropriate steps to address this issue. However, may I raise a matter of public concern?
Does this imply that in the past, it was all right for the banks to treat customers unfairly? For example, was it all right for a bank to design a complex financial product that give a poor return for the risks embedded in the product and sell the product to an unwary public, without disclosing the relevant information that are available and known by the product issuer?
Were there already laws in place that were supposed to protect the consumers against unfair or predatory practices?
I recall that there were specific requirements under the existing section 199 and 200 of the Securities and Futures Act and under Section 27 of the Financial Adviser’s Act.
A petition was signed by 983 people who alleged that they were misled into investing in several credit-linked notes, such as the Mini-bonds, High Notes, Pinnacle Notes and Jubilee Notes. This petition was lodged with the Monetary Authority of Singapore on 8 October 2008. It requested the MAS or the Attorney General to investigate if there were breaches of relevant provisions under the existing law.
To my knowledge, there was no announcement on the outcome of the investigation, or if such an investigation had been conducted.
If the investment banks that created the products or the financial institutions that sold the products had failed in their duty under the existing law, surely it is the responsibility of the authority to charge them in court and allow the matter to be decided by the court?
If the court had found that the law was vague, then a subsequent step should be taken to clarify the law through new legislation or regulations.
Let me illustrate with this example. Someone broke into a house and took away an expensive notebook computer. The owner lodges a report to the Police. Should the Police now issue a new guide to explain what is house-breaking and theft? Surely, it is the duty of the Police to charge the culprit, with sufficient evidence, and let the court decide on the matter, based on the existing law?
Tan Kin Lian
Monday, April 06, 2009
Fat fees for speaking engagements
A reader pointed out that the leaders of the advanced democracies earn modest salary when they were in public service, but received fat fees for public speaking after their retirement from politics. There is an article in the Straits Times about the speaking fees received by a former politician.
These fees were paid by the commercial conference organizers, who were able to get the participants to pay the fees to make it viable.
They also get big corporate sponsorships It is likely that the big corporations, which made huge profits from the free market policies, now expect to assistance of the retired politicians in their lobbying. This is unsatisfactory, but is quite unfortunate.
We need a world, and leaders, that are more honorable. They should take care of the ordinary people, rather than for personal enrichment.
These fees were paid by the commercial conference organizers, who were able to get the participants to pay the fees to make it viable.
They also get big corporate sponsorships It is likely that the big corporations, which made huge profits from the free market policies, now expect to assistance of the retired politicians in their lobbying. This is unsatisfactory, but is quite unfortunate.
We need a world, and leaders, that are more honorable. They should take care of the ordinary people, rather than for personal enrichment.
Honesty and rationalisation
We think of honesty in terms of financial dealings. We also need to think of honesty in terms of speaking the truth.
If we make a mistake, we should admit it. We should not try to find some angle to explain it away. We should not "rationalise" our action, which is what smart but dishonest people are quite used to do.
If we do not know the answer, we can state the fact. We can seek advice. Or just give it a try.
In an artilce in the Straits Times today stating that Franklin Roosevelt was not sure about how to bring America out of the depression in the early 1930s. He took some bold steps, but admitted that he did not know if it would work. Barrack Obama is now taking the same approach to overcome the global financial crisis 80 years later.
There are some people who have never made a mistake in their lives, because they are able to rationalise it, and explain it away.
Tan Kin Lian
Saturday, April 04, 2009
Health care reform in the USA
Will insurers once again scupple the health-care reform? Article in Economist.
SCMP: Details urged on Minibond saga
Lawmakers are still seeking Monetary Authority chief executive Joseph Yam Chi-kwong's disclosure of its full report on the Lehman Brothers minibonds saga, after he cited reasons of public interest in not revealing it. Raymond Ho Chung-tai, chairman of the Legislative Council subcommittee investigating the matter, said if Mr Yam insisted on his position at an April 14 hearing, he and deputy chairman Philip Wong Yu-hong would arrange a closed-door meeting to ask for an explanation.
MY COMMENT
It seems that the authority can hide the truth, by citing public interest. This seems to be the practice in Singapore as well. I hope that we can have a more honest, open society, with greater transparency.
Survey: MAS guide on treating customers fairly
MAS has issued a new guide to banks on treating customers fairly. The yardsticks are:
1. Customers have confidence that they deal with financial institutions where fair dealing is central to the corporate culture
2. Financial institutions offer products and services suitable for their target customer segments.
3. Financial institutions have competent representatives providing customers with quality advice and appropriate recommendation.
4. Customers receive clear, relevant and timely information to make informed decisions.
5. Financial institutions handle customer complaints in an independent, effective and prompt manner.
What are your views on the existing situation and the new MAS guide? Survey.
1. Customers have confidence that they deal with financial institutions where fair dealing is central to the corporate culture
2. Financial institutions offer products and services suitable for their target customer segments.
3. Financial institutions have competent representatives providing customers with quality advice and appropriate recommendation.
4. Customers receive clear, relevant and timely information to make informed decisions.
5. Financial institutions handle customer complaints in an independent, effective and prompt manner.
What are your views on the existing situation and the new MAS guide? Survey.
Public Service
I respect the political leaders in the democratic countries, especially those of Europe and North America.
They entered politics as a public service. They desire to make life better for the people. They have strong values and beliefs (whether leaning to the left, right or center) and wish to influence the future of their nation.
They are happy to receive a remuneration of 3 to 10 times of the average wage of their ordinary people. They do not expect a remuneration that is 100 times or more (i.e. the salary paid in the private center for top exectives).
By accepting the modest remuneration of the public service, they are able to exercise some moral control over the excessive and unjustified salaries paid in the private center.
Tan Kin Lian
Friday, April 03, 2009
HK: Relief appears to be near for Lehman minibond holders.
There are sufficient grounds for disciplinary action against some bank staff accused of misselling the minibonds, according to the Hong Kong Monetary Authority.
And market sources say the Securities and Futures Commission is pushing big banks to follow in the footsteps of Sun Hung Kai Investment and settle with disgruntled customers.
HKMA executive director Raymond Li said yesterday that "a few cases are already at a very advanced stage of investigation,'' he said adding, "Should any case be concluded we would definitely tell the public."
According to procedures, anyone accused of misselling will have at least 30 days to make a representation and another 21 days to appeal if their explanations are rejected before their case goes public. As of yesterday, the HKMA had got 20,642 complaints, and 20,443 had cleared initial assessment.
So far, files have been opened for just 5,772 cases, of which 4,178 have gone through a preliminary investigation. Only 418 complaints relating to 16 banks were referred to the SFC.
Li blamed the slow progress on the reluctance of complainants to provide useful information in most of the cases.
But he reiterated that the authority will complete investigating at least 70 percent of complaints by March 2010.
"We are recruiting more staff both part-time and those on secondment to accelerate the process," he said. About 200 staff will be involved.
Li said a client's interest was the HKMA's priority, and if a settlement without punishment was the best solution it would get the authority's support.
And market sources say the Securities and Futures Commission is pushing big banks to follow in the footsteps of Sun Hung Kai Investment and settle with disgruntled customers.
HKMA executive director Raymond Li said yesterday that "a few cases are already at a very advanced stage of investigation,'' he said adding, "Should any case be concluded we would definitely tell the public."
According to procedures, anyone accused of misselling will have at least 30 days to make a representation and another 21 days to appeal if their explanations are rejected before their case goes public. As of yesterday, the HKMA had got 20,642 complaints, and 20,443 had cleared initial assessment.
So far, files have been opened for just 5,772 cases, of which 4,178 have gone through a preliminary investigation. Only 418 complaints relating to 16 banks were referred to the SFC.
Li blamed the slow progress on the reluctance of complainants to provide useful information in most of the cases.
But he reiterated that the authority will complete investigating at least 70 percent of complaints by March 2010.
"We are recruiting more staff both part-time and those on secondment to accelerate the process," he said. About 200 staff will be involved.
Li said a client's interest was the HKMA's priority, and if a settlement without punishment was the best solution it would get the authority's support.
The Whole Truth
Dear Mr. Tan,
Some people play with words to an extent that it is difficult to know the difference between the truth and lies.
If a business reduce the benefit significantly last year, can they now say that the action has benefited the customers, because they do not need to reduce the benefit further this year?
Similarly, can the government, after increasing tax and levy, now give a smal rebate and say that they are benefitting the taxpayer with the rebate?
REPLY
I agree with your view. It is now quite difficult to tell the difference between honesty and dishonesty. Mr. S Rajaratnam once said that there are difference between "the truth, the whole truth and nothing but the truth". We have to learn what is the "whole truth".
Submitting Income Taxi by e-Filing
I submitted my income tax returns for 2008 by e-filing.
IRAS has designed a sophisticated and expensive computer system for e-filing. It must have cost a lot of money. It was supposed to make e-filing easy for the tax-payer.
Unfortunately, it was very difficult - even for an internet savvy person like me. Why? It is a matter of mindset. The experts in IRAS designed a system that is convenient for them. They forget to make it convenient for the ordinary people.
What is a system that is convenient for ordinary people? Just provide a simple form to ask me to submit the details of my income and claim. Use a format that is convenient for the tax payer to fill in - not a format that is convenient for IRAS to do their workflow.
But, I have to commend IRAS for one excellent aspect of the system. They display the information that they have, taken from various sources, that are relevant for my tax computation. This includes my chartiable donations and topping up of CPF account for family members. I appreciate it very much.
I hope that IRAS will take my suggestion about making it easy for me to submit their annual return, especially for items that are not captured by IRAS.
Tan Kin Lian
Additional comments
It is easy to use e-filing, if you do not need to provide additional sources of income or other charges. However, it is quite troublesome to provide the additional information, for example on property, life insurance policies and deductions, as they are designed to be helpful to IRAS and not customer friendly. It is also difficult to search for the right places to provide the information, as they are placed all over several web pages and tabs.
Buy Term Insurance
Dear Mr. Tan,
May I know which company you'd recommend for buying "Term", "Decreasing Term" and "Living Benefit" policies you described in your FAQ: http://www.tankinlian.com/faq/choice.html
REPLY
You can buy Term insurance from NTUC Income (they call it i-Term). But do not allow them to convince you to buy other life insurance policies.
You can also buy i-Term from Philips Securities. They sell i-Term offered by NTUC Income. You can find out from their website. All the best!
May I know which company you'd recommend for buying "Term", "Decreasing Term" and "Living Benefit" policies you described in your FAQ: http://www.tankinlian.com/faq/choice.html
REPLY
You can buy Term insurance from NTUC Income (they call it i-Term). But do not allow them to convince you to buy other life insurance policies.
You can also buy i-Term from Philips Securities. They sell i-Term offered by NTUC Income. You can find out from their website. All the best!
Relief loan is similar to early withdrawal from CPF
I have proposed that retrenched workers should be allowed to take a relief loan, offered by a Government agency, at an interest rate of 2.5% per annum. This should also be available to workers who suffered a drop of earnings due to a reduction in working hours.
This relief loan is similar to an unemployment benefit, but has to be repaid in the future. Interest on the loan can be accumulated with the principal. The borrower has the incentive to repay the loan earlier, to avoid incurring interest charges.
My proposal is similar to early withdrawal from the CPF. The loan incurs interest charge of 2.5%, which is similar to the interest earned on CPF savings. There is no additional cost to the borrower under my proposed relief loan scheme.
My proposal is intended to protect the integrity of the CPF as a saving plan for retirement. There is a reminder on the borrower to repay the relief loan. However, if the loan is not repaid, it will be repaid from the CPF savings at the time of its withdrawal.
My proposal will also offer relief to the retrenched worker in the case where there is no CPF savings to withdraw from, e.g. where the savings have been fully used to buy a property.
Tan Kin Lian
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