Thursday, October 09, 2008

Mis-selling....time for "SELLER BEWARE".

Many holders of mini-bonds and DBS High Note 5 have signed a petition urging the authorities MAS and CAD to start investing possible mis-selling of these products. Tan Kin Lian has to be applauded for his effort to aid investors helping to organise this petition.

"But that’s life — if you want to have a good rewards, you’ve got to take risk. ...Otherwise, leave your money in your CPF ... Four per cent is a fabulous return without risk " - SM Goh Chok Tong
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"Is it good leadership to tell the people "that's life" when they really feel cheated..." - Lucky Tan
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Billions have been lost in the stock market. But do you see a single investor complaining that he has been cheated? The answer is no because people understood the investment they were making- they took a risk and accept the losses. However, in the case of structure products, there is great mismatch between the outcomes and the expectations. There is a huge gap between customers expectations formed from what they were told and the actual outcome.
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The potential for mis-selling is there if you consider:
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1. They were sold to people who were highly conservative and previously only kept money in fixed deposits for absolute safety. Such individuals do not fit the profile of people who should be investing in credit spreads and complex derivatives.
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2. In a number of cases, the product was sold to old folks in their 70s and the product is meant to be held until maturity.
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3. A number of RMs have cited pressures to meet quota on the sales of certain products. The commissions paid to RMs does not align their interest with that of the customer.
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4. These products cannot be understood by ordinary folks. The 100 page prospectus, the underlying complex financial model and the lack of transparency on how much the banks make pushing these products hides the risks to the investors. Many RMs themselves don't seem to understand the products and they are explaining it to people who are less likely to understand it.
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The banks may have protected themselves legally with all the fine print but that does not mean they have not mis-sold the products to investors. If you go to a shop and the sales guy tells you he is selling you an LCD TV but delivers a plasma, there is no way you will accept it....you will feel cheated and you will seek justice by going to the police. That is why the petition has asked the CAD to investigate if mis-selling has occurred. Lets get all the facts out. It is important for authorities to send out a strong signal against mis-selling as a deterrence to those who think they can get away with it by hiding behind fineprint and lawyers. Banks have a fiduciary duty to its customers that has to be put above profits - otherwise we will end up with a Countrywide Financial or a Lehman Bros. If they ever forget this, make sure they remember the next time.....

11 comments:

Razorwindsg said...

This would be quite an unpopular statement, but I still think i should voice it out here.

In my opinion, the banks that sold these products can be lauded for unethical behavior. However, the hardest thing to prove in court is usually intent.

Whether banks themselves knew what they were selling and holding is unknown at this point. If they did knew, they would not even have bought it. BUT if they bought it without knowing, then knew what crap it is, and intend to slid it under the carpet by selling it to common folks, then we have a case for it.

To let the discussion remain aligned to the topic. I ASSUME the bank is fraudulent,and is guilty of unethical conduct. (Emphasis: Assume)

The bank should be held liable for their unethical actions, don't get me wrong. If the intent is proven, I think the people should be compensated for their damages.

But lets take and hold the alternative assumption that the bank is innocent. Hardly anyone would think so, cause if they did they would not get their money back.

I would guess this would have to deal with tort law. And whether it was "Force majeure", or an freak of nature that the "reasonable man" in the bank could not have forseen this, or did they take "reasonable care" to mitigate this risk. (Plz correct me if i am wrong)

If circumstances are such, the bank would at most only be liable to fork out a portion that is reasonable, and not the full refund.

Why the government is saying things that imply "too bad", "u got cheated" is mainly because they cannot assume that the bank is fradulent. At least till the court case has been settled.

It would be more proper to take and assume the bank was not fradulent for the time being and wait for more facts. Goverment bodies do not want to be caught wrongly accusing large corporations, unless the facts are found (E.g. San Lu is a extreme case on the other spectrum)

As much as it pains the politicians to say it, I think they don't have much of a choice to express personal opinion because they represent the country afterall.

However, I am against the idea that the bank has to refund back the money or even part of it (Like in Hong Kong) just because the people lost their savings in it.

Seriously speaking, the "reasonable man" in my defination, at least knows of "High Risk, High return, Low risk, Low return". Anything that has a higher return that a fixed deposit would already imply it has more risk than a fixed deposit.

Investors do have to bear the risks themselves. And the government risk going into a "moral hazzard" in the case of a "bail out" for the people.

However, I do recommend the government to come out with some welfare package to help the needy. Like natural disasters, tsunamis, earthquakes, etc. I think this financial "disaster" is hardly foreseen by many, and the devastation are just as heavy as any other natural disaster.

A thing to note would be I predict that the banks in Singapore would not be asked to compensate or refund the customers. But would be asked to "donate" or "provide aid" to those who suffered losses. Even though the amounts might be the same, but the wording is different.

On the other end, if banks are found to be fraudulent, I do hope that the government sees to it that justice is served.

I myself do not think I have ALL the information and facts and figures to prove either case. That is why legal courts are created for. Which is why I seem a bit wishy-washy on both ends.

AlphavilleSG said...
This comment has been removed by the author.
AlphavilleSG said...

Razorwindsg, consider this excellent deal, I am going to sell you bags of sweet juicy Fuji apples by the weight, but what I've withheld from you is the fact that half the bag consist of lemons...

Of course there's intent, there's deception and misinformation. Hardly an assumption.

How is it not mis-selling when the name of the product does not even reflect what it held?

Lehman minibond wasn't in anyway tied to credit worthy bonds, they are structured products consisting of risky derivatives like CDS which has no guarantee of solvency backing these.

Some of the buyers even thought the 5% return was simply redemption of coupons! Did RMs explain that to them? Before the credit crunch I haven't even heard of mezzanine CDOs!

The worst thing that came out of this is the regulating authority renege on its duty, asking culpable banks to appoint their 'independent' investigations! Huh? WTF?

Razorwindsg said...

Ok, I know where you are coming from.

I think the largest difficulty is proving that the bank knows there are lemons in the basket when they sold the product.

This is the case in law here. Whenever it comes to criminal law, the onus lies on the plaintiff(or victim) to find evidence to prove the defendant guilty.

So which means to say, one has to prove that the banks had the intent to cheat on others. But the bank can claim innocence and state that the "reasonable bank" would have done the same.

So, which means, you might have to go to the extent where you provide hard proof within the bank's internal communications and records that such fraudulent intent was present.

I am not really defending the banks in anyway btw. I am just thinking it will be a tough fight for the victims to sue for fraudulence.

I have heard rumors (not proof) that some banks claim that the funds are principal-ensured when they sold the products. So yes, this is a good piece of evidence if one can find it.

But other than that, if the victims don't have concrete proof, they should try to go more for tort than criminal means.

This is as in tort law, the onus is on the bank to prove that it has done everything to prevent an situation from happening. Victims can usually fight better here, but they get less of course.

Cos in tort, what you would be doing is to say that the bank did not do sufficiently enough to ensure a "low risk" product stayed and remained as "low risk". And that the financial crisis is a "freak of nature" that affected everyone.

Would someone with proper legal background advice on this?

Anonymous said...

lol. If the bak did not know, they are guilty of negligence. Also can sue what. =)

Anonymous said...

This is the danger of the govt becoming involved as an investor in major businesses through GIC or Temasek. How can you expect the govt to be impartial, or to right the wrong, or to actively help the people when all they would be doing is slapping their own hand/business?

Conversely the govt can never win as long as they keep putting their fingers in every honeypot. For example if NTUC slashes prices to help the poor, citizens will think that this is expected of the govt. But if NTUC messes up one day and for example does something very bad, citizens will blame the govt - because they know that the govt is behind NTUC. Same with all other businesses such as Power, Water, Gas etc. Which might explain why the govt is flogging off our power stations....so they can claim later that "It's not our fault that prices are so high." ?

The govt should have just left the market to be free and not interfered in everything that seemed to be making money. They squeezed out the small businessmen years ago from many industries because of the relentless pursuit of money and profits for Singapore Inc, and to bring as many citizens as possible under their govt's employ either directly or by proxy. We all know how scared civil servants are of voting opposition at election time.

Anonymous said...

"But that’s life — if you want to have a good rewards, you’ve got to take risk. ...Otherwise, leave your money in your CPF ... Four per cent is a fabulous return without risk " - SM Goh Chok Tong

When the peasants lost their hard-earn monies, they are deem to be greedy and 'that's life'.


When the Temasick/GIC lost billions, I wonder what that should be?

Anonymous said...

It just boils down to this:

the PAP lackeys are sitting on the board of the banks as executives.

those who voted for PAP, what do you think? Let's hear your thoughts.

Anonymous said...

I think wooden Goh was right when he said, "that's life....".

It's literally life savings that were lost. And he said it as a matter of fact--with a straight face.

Anonymous said...

Makes you wonder if they are waiting for more than life savings to be lost before they act.

elbert chanty said...

those who voted for PAP, what do you think? Let's hear your thoughts

I did not vote PAP neither was I able to vote the opposition. I do have shares in DBS group and from the informations I heard from the man on the street many months before the crash, the products sold, sound like fixed deposit, look like fixed deposit and obviously we now know are not deposit. There is certainly misselling, but where to find proof? Now you know why I bought DBS share. It is very protected without my effort.