Mis-selling of Financial Products 1. Introduction 2. Enforce by heapsofluvv


									2 July 2009

Mis-selling of Financial Products

1.      Introduction
Many investors in Singapore, Hong Kong and Taiwan have been misled into buying the credit
linked notes (such as the Lehman Brother Minibonds, DBS High Notes, Morgan Stanley
Pinnacle Notes and Merrill Lynch Jubilee Notes).

These credit-linked notes were, in actual fact, a combination of credit default swaps and
underlying assets, which comprised of collateralised debt obligations or corporate bonds of
various grades of credit ratings. Most of these products are incomprehensible to the ordinary
people. Even financial experts are baffled by these products.

However, the products were mis-represented by the sales representatives (i.e. the relationship
managers of the banks or the financial advisers working for the stockbrokers or other
distributors) as being safe products invested in the bonds of the named entities in a diversified
manner. In most cases, these sales representatives were not aware of the true nature of these
products and had been negligent in giving the wrong advice to the retail customers. They were
sold to risk adverse investors who normally invested in fixed deposits of the banks.

The retail customers trusted the sales representatives and invested in these credit-linked notes on
the strength of their assurances about these products.

To prevent this type of mis-selling, I wish to suggest the following remedies:

a)      Enforce the existing law
b)      Allow lawyers to act on contingency fee
c)      Introduce an agency to protect consumers

More details are set out below.

2.      Enforce the existing law
Singapore has built a strong reputation for observing the rule of law and having a fair and
efficient administration of justice. It has won high international recognition for a transparency,
consistency and justice in handling of commercial affairs.

Under the rule of law, all parties can look towards the law to be applied in a consistent and fair
manner, as it is written, and that the law can be interpreted in the right spirit, to serve justice and
fairness to all parties.

In the saga involving the Lehman Minibonds and other credit linked notes, the letter of the law
are clearly spelled in the Securities and Futures Act and the Financial Advisers Act. The law
requires the financial institutions to make proper disclosure about the financial product and
imposes a duty on financial advisers to give appropriate advice to consumers.

I could not find any part of these law that define that people should be treated differently
according to their "vulnerability", standard of education or age or other factors.

I do not quarrel with the generous decision of the financial institutions to give full compensation
to the "vulnerable" investors. I also accept that it is within their prerogative to take the
commercial approach to reject the complaints from the "non-vulnerable" investors.

However, I believe that the aggrieved investors, being ordinary people, have the right to expect
justice to be administered according to the rule of law, especially from the following parties:

a) The regulator, who has the duty to investigate and prosecute any party that is found to have
breached the law

b) The judges, who have the duty to decide in accordance to the letter and spirit of the law. This
duty also falls on the Financial Industry Dispute Resolution Center (FIDReC).

I hope that FIDReC will adjudicate according to the law and not principles of “vulnerability as
this is not stated in the law.

I believe that the investors and the distributors have to share the blame equally for the disastrous
mistake. It would be most unfair, if FIDReC were to rule that the investors are fully responsible
and that the distributors are not culpable (as they have failed in their duty to give proper advice
to the investors).

Although the distributors have asked the investors to sign a disclaimer, this does not absolve the
distributors from their legal duty under the Financial Advisers Act. I hope that FIDREC will take
a similar view, in the interest of justice.

Someone, who has knowledge of the law as applied in Singapore, told me that if an investor had
agreed to a disclaimer to absolve the distributor from liability, the investor does not have any
case at all.

I disagree with his comment. I believe that fraudulent acts, including the intent to cheat, cannot
be covered by such disclaimers. I also believe that negligent acts cannot be covered by such
disclaimer, if they cover matters that the distributor, as a financial adviser, ought to know.

For example, if I see a doctor, I expect that the doctor ought to know that certain drugs are
dangerous and unsuitable to be prescribed to a patient. The doctor cannot get away by asking the
patient to agree a general disclaimer to absolve the doctor from liability.

The existing Financial Adviser Act (FAA) are rather stringent for the sale of financial products
to customers. Section 27 of the FAA requires the financial institutions (FI) to pay damage or loss
for inappropriate sale of high risk financial product to customers. Under Section 25 of the FAA,
it is an offence for not disclosing the complete product material information to customer during
the process of sale and the contravener is liable to a fine and imprisonment. The true nature and
risks of the product were not or fully disclosed to retail investors. It is clear that there has been
mis-selling of financial product, in breach of the law.

The mis-selling of financial products in Singapore is not much different from that in Hong Kong
but the Hong Kong SFC has taken the pro-active approach in the administration of fairness and
justice to be given to their citizens.

The challenge to the consumer, in the case of the credit linked notes, is in finding the money to
take a legal case against the distributor who gave wrong advice. The consumer does not have the
means to challenge a financial institution, which has access to the top lawyers in town.

In many countries, the consumers can depend on the following avenues to uphold justice:

a) The regulator - who has the duty to enforce the law
b) The consumer association - who takes up the matter to protect the interest of consumers.
c) The politicians - who speak and act for the ordinary people to win their votes
d) Lawyers - who takes the risk under a contingency fee system

There are similar cases in America or Hong Kong where action has been taken by some of these

I hope that the regulatory authority (MAS) or the consumer association (CASE) can take up
these matters \to assist consumers in Singapore.

3.     Allow lawyers to act on contingency fee
Many investors had, as a last resort, sought to take a class action against the issuers and/or
distributors of these financial products. However, they are daunted by the huge legal cost of a
class action.

Many lawyers are not willing to take up the class action as they have existing relationships with
the financial institutions and they do not wish to jeopardise their future dealings.

A few lawyers who are willing to act for the investors required a large sum of money to be
collected to pay for their case preparation and for their fees and expenses to represent the
investors in court. Most of these lawyers are not even prepared to write down their legal
arguments and give any assessment of the chance of winning the case, prior to their formal

Many investors were reluctant to join the class action as they were not sufficiently assured about
the credibility of the lawyers or the strength of their case. Some said, “We have been cheated by
the banks. We do not now wish to be cheated by the lawyers. We do not want to pay large legal
fees, when the chance of winning is unclear or quite remote.”

It is useful for a contingency fee system to be introduced in Singapore for such cases. The
lawyers are in the best position to assess the strength of the case, and to take the commercial risk
of the litigation. They cannot expect the ordinary folks to make this assessment, especially as the
decision has to be taken by many investors with different financial circumstances and
understanding of the law.

There are some possible abuses of a contingency fee system, but these abuses can be mitigated.
This system provides the positive benefit of allowing ordinary people to seek redress against
abuses by large companies.
4.     Consumer Protection Agency
I suggest that a consumer protection agency should be introduced in Singapore, similar to the
approach being considered now in America under the Obama Administration.

This agency should have the duty to examine financial products and ensure that they are suitable
for sale to the general public. This is similar to the role of the drug authority in approving drugs
for sale to the public.

It is not possible for ordinary consumers to assess the safety and fairness of the financial
products on their own, based on the information given to them and their lack of financial
expertise. This role has to be done by an agency that has access to financial experts. In making
the assessment, the financial experts can ask relevant information from the product issuer,
including information that is not disclosed in the published materials given to the consumers.

It may be difficult for the Government to take the big step of introducing an agency that has the
power to approve or reject any specific financial product. I suggest that this agency can provide a
white-list of the suitable products that meet its criteria of disclosure, fairness and general

This approach allows the ordinary people to check that a particular financial product has been on
the white-list. Risky products can be on the white-list, so long as it is adequately disclosed and
fairly priced.

The agency can declare products as “not meeting its criteria” without having the power to reject
these products.

5.     Conclusion
I hope that the relevant parties will consider these suggestions and implement them. I shall be
happy to receive suggestsions.

Tan Kin Lian
Email: kinlian@gmail.com
Mobile: 81685845

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