Saturday, October 18, 2008

Mis-selling : Burden of proof.

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.


Anonymous said...

I was a former RM, or better known as a financial advisor some years back. I took all the necessary financial exams to get the qualifications.

Truth was, they were just exams. And like most exams, I promptly forgot most of the stuff I learnt, as soon as the exam was over.

As a former financial advisor, I pushed products. I am only the salesman, not the engineer behind the product. How on earth do you expect me to know how the product works in great detail? I read from the same brochures as my prospects and customers read.

Only thing I was good at was that I know a lousy deal when I saw it. So, I did the ethical thing; steer my clients away from certain products and stuck to pushing the safer stuff. Needless to say, my commissions not very high. I also didn't stay long.

Anonymous said...

Collective action forced MAS to act.

By giving priority to some victims, maybe the gahment hopes to divide and conquer the masses.

recruit ong

Anonymous said...

Chee Bye MAS,
why coin terms like "Vulnerable Investors"

Why not invent terms like "Predatory Marketeer" represented by DBS or even "Sleeping Regulator (or Deregulator if you like it)" represented by your fine institution :-)

ONLOOKER said...

But you see, The saga and the players involved are not fully exposed yet.

Anonymous said...

There are many ways of saying no.

Anonymous said...

why made so much fuss, if you think that was unfair to a well educated people get a lawyer to sue the bank just proof it you were misleaded. But for the eldery and non educated people allow someone to help them.

Anonymous said...

To 9:41pm

If a thief was caught, you report to police and the police will handle it right, why do you need to spend money to get lawyer ?
Police are paid with taxpayers' money and it is their duty to help all victims.

SO the same with the "bankdits" of these FIs, MAS is our police and they are paid to regulate the banks. If there is fraud, they must investigate all cases. If they don't, then why should educated people's money go to feed these world-class salaried MAS offices doing a low-class job ???

Anonymous said...

To 4:46 PM

But the banks did nothing wrong. So police no need and can't catch. If I sell you a house, you sign on the dotted line, tom property price drops, whose fault? Buyers can start heaping the blame on property developers and sellers whenever the property price drops? People who bought shares and stocks that depreciated can start calling police lah?