I'm sure many superscale public servants worked the statement read by Heng Swee Keat. The basic strategy outlined in the statement on the issue:
- Investors should go to banks or FIDReC to resolve their complaints case by case.
- If any findings show that banks have violated regulation, MAS will act.
- MAS now confirms it is conducting formal inquiries on whether laws are broken.
In his statement, he also highlighted "vulnerable investors" - the old and uneducated. It is obvious that there is mis-selling if a 75 yr old who has been sold a product with a 5 year maturity. He also urged the banks not to be too legalistic in its dealings with customers - meaning the banks cannot just sell you anything because they persuaded you to sign on the document.
The MAS statement left a whole slew of unanswered questions. What happens if the investor is a 30 year old university graduate? Does that mean there is no mis-selling because he ought to be able to understand the product? How does one go about proving mis-selling?
It is messy to go for a case-by-case approach to sieve out who was mis-sold and who wasn't. Also, the burden of proof shifts to the individual - his words against the bank. I believe such an approach is unnecessary and time consuming if it can be proven that the system the banks put in place to sell these products is likely to result in mis-selling:
1. Incentive scheme for RMs. Were they given more incentives in terms of commissions to sell products with higher margins? If they were, it completely undermines the need to sell products best suited for the customer. Were there quotas? Were quotas linked to promotion and firing?
2. Training. Were the RMs given enough training for the products? What is the training material like and are there sales pitches/scripts used? If the training material does not highlight the risks to the RMs, it is unlikely they could have explained it to the customers and mis-selling is likely. If there is some script or instructions used in the selling of these products, these can be examined to see what evidence for mis-selling can be found.
3. Product Complexity. What margins were the banks making from these products? What is the relationship between the bank and the counterparties? What were the fees/commissions made by the bank in the selling of these products? They were sold to investors for a return of 5% a year and had maturity of 5 years. What was the real underlying returns? The answer to this will tell us if they banks have hidden the risks to make high margins on the product giving the investors a false impression of very low risks because of the low returns.
Direct investigations will throw up answers for the above questions and may help to resolve the issue without a case-by-case approach. How is an investor going to proof what he was told or not told when he was sold the product? How is he going to negotiate for a fair compensation? Individual complaints will not shed light on the whole selling process from the creation of the product, training, sales incentives, marketing etc. If there is mis-selling to vulnerable investors, there has to be a system behind that to push the RMs to make such sales. If there is such a system, there is no need for individual investors to fight own case.