Nov 12, 2008

Damage Control Exercise for DBS

ST Nov 12, 2008
DBS overhauls sales tactics
Customers will be asked tough questions before investing, says chairman
By Ignatius Low

SINGAPORE'S largest bank is making big changes to the way it sells investments to customers, as it continues to battle criticism over losses suffered by those who put money into its High Notes 5 product.

DBS Bank plans to ask more detailed questions about a customer's background and how he got the money he is investing. And it will turn away those who are not suitable for a product, even if they insist on buying it.

The bank has drawn flak for arranging and selling structured products that have been rendered worthless by the collapse of American investment bank Lehman Brothers.

Some customers claim that the risks were not explained to them.
All of the above is good stuff. But it fails to address the essence of the problem. And the essence of the problem is the way that the sales staff (not just in DBS, but in other banks too) are rewarded and remunerated.

They are rewarded and remunerated for selling financial products. The more they sell, the better. And if they don't meet the sales quota, they are sacked. Simple as that.

Naturally, the salesperson focuses more on closing the sale, than on whether the product is suitable for a particular client.

It's a little like running a school. The school may have a nice-sounding mission statement which says that it aims to cultivate good character, moral values and all-round development in its students. But if the principal assesses and appraises the teachers mainly by counting the number of A1s that each teacher's students produce, then academic grades will be what the teachers focus on.

Are there any alternative methods, for rewarding the sales staff in banks? Sure. The alternatives aren't new ideas either. Many financial advisory firms use them.

For example, DBS sales staff can be rewarded based on the total amount of investments that their clients continue to maintain with DBS, through that individual salesperson, over the years. This incentivises the salesperson to build a long-term relationship with the client, instead of just trying to close a quick sale and get the commission. This also means that the salesperson will be more careful not to sell inappropriate products which have a higher chance of triggering a dispute with the client later.

Another alternative is to ensure that the percentage of commission/recognition that a salesperson gets for selling a product, does not vary from product to product, but is tied instead to the amount actually invested by the client. Since the salesperson would have no personal vested interest to sell, say, Product A over Product B, he would focus instead of recommending whichever product (A or B) he genuinely thinks is most suitable for a particular client.


darth said...

I dont get it. Their internal compliance department should already have those rules in place years ago. It's nothing new.

They're called "risk profiling" and "anti-money laundering". Don't be fooled by the article. DBS or any other bank/financial firm ALREADY have those in place.

It's the enforcement of those rules that is the problem.

klimmer said...

well darth,

The trouble is, all these high risk structured products (SP) weren't high risk before. It's an institutional failure, where even supposedly independent rating companies, government watchdogs failed to rate these SP properly. So there's really nothing to police/enforce then.
As for Lehman's failure, that was unthinkable less than one year ago. Their collapse happened so quickly as well.
No one expected such a massive failure of credit or grasp its implications since there was no precedence before this crisis.

yamizi said...

Then the banks will have big headache 'cos my hunch is that they are still very much profit-driven. If they don't tie the commission to the product, how are the banks going to push the salesman to sell more profitable products?

There's an interesting phenomenon, in the CBD area, many banks having road shows. I remember this particular local bank (which I shall not named) had a very unprofessional salesman.

He's trying to push this credit card product to a lady happened to walk past the little road show station. He went up to her, did a quick intro and try to shove the brochure to the lady. She tried to avoid by walking sideway to go past the salesman. But this salesman actually chased after her and stood in front of the lady.

That was very very unpro.

The said...

The sales people can be rewarded like what insurance agents get in the past. Say, he gets 50% of the first year premium, 40% of the second year premium, 30% of the third year premium and so on. We can even tweak this around if we really want to encourage long term relationship. Say, the agent is paid 10% of the premium/fees/commission in the first year, 20% in the second year and 30% or more for subsequent years.

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

To klimmer:

IF the failure of Lehman was unthinkable, then why is there a product in the market insuring against their bankruptcy (and another 7) in the first place?

The first great issue is misrepresentation. Saying 'All 8 banks fail, you lose all your money' is VERY DIFFERENT from 'ANY of the 8 banks fail, you lose all your money'. Anyone with sound grounding of statistics and probability will have seen how despicable this is.

Furthermore, yes, each of the banks can be rated as AA or AAA. But piecing them together where you can lose all your money on a first-to-default basis is essentially making the risk of the product much much worse than AA. Worse, you do not get a bite on the assets of the underlying company, unlike the case of bonds. Even junk bonds are not as bad as these products.

Secondly, I don't understand how a bank can sell a product such a single isolated event can trigger a loss of all of one's life-savings, or 100's of thousands of dollars. This is not a result of good risk profiling and management. Our politicians attempt to dismiss simply such events as a result 'risk-taking' is simply atrocious and misleading.

As I told others before. There are ways manage risks. There are ways to manage losses to eliminate exposure of such risks. But the banks simply have not done their due diligence to prevent such an event from happening. They have only themselves to blame, because they pushed these products to the customers.

If the person come to a bank and bought this product voluntarily, then it's a different issue altogether.

Mr Wang Says So said...

"IF the failure of Lehman was unthinkable, then why is there a product in the market insuring against their bankruptcy (and another 7) in the first place?"


Excuse me hor ... That's just the credit market. There are products in the market providing credit protection against the bankruptcy of the Singapore government too.

TeE said...

Is it just me or did I sense a subtle dig against the establishment? HAha

The said...

/// Excuse me hor ... That's just the credit market. There are products in the market providing credit protection against the bankruptcy of the Singapore government too. ///

Just got my insurance policy for my house. Was quite tickled to see that I have to pay the first $200 for damages arising from, inter alia, earthquake, tsunami, typhoon, etc.

Swear, I am not making this up!

David said...

Mr Koh boon Hwee mentioned something like cannot just simply get foreign talent for the top management? Is he implying something? But have you all also noticed that most these FTs for the top post are of investment banking background? Are these somehow related to the current mess DBS is in now?

WL said...

Whenever I read sensible comments by you and sometimes from other bloggers too, I am amazed why the banks, and sometimes other bodies, who are being paid handsomely, do not think of such simple things. Despite the present crisis, many banks and other bodies are still focus on short term and not on long term.

darth said...


not sure how your insurance remark is related to Mr Wang's post of protection against govt default.

The reason why you've to pay the first $X is to discourage people from making trival claims. Moreover, if you have to make a small $200 claim, you might as well not buy insurance in the first place. Just pay the $200 out of your own pocket.

The said...


You think typhoon, earthquake and tsunami are likely in Singapore?

Fighting fit said...

The ST photo of Koh Boon Hwee sure made him look like some tough guy talking. Then again, it's still all talk.

Btw, I think the DBS structured products that are linked to Lehman Bro were not rated by any rating companies. Lehman and other reference entities (the other big Wall St. banks) were rated, but whatever financial products that DBS or other banks created to be sold were not rated.

It was really up to regulator to oversee, which they probably wanted to do with a light hand, and the investors to study and decide. It seems the local business paper had one or two stories highlighting the risks on the High Notes 5 but that paper doesn't have a very big reach so the retirees who bought the products probably weren't part of the newspaper's readership.

Chee Wai Lee said...

This policy sounds like an over-aggressive reaction to the current crisis. Feels almost uniquely Singaporean - "we get to decide if this is good for you, whether you like it or not".

Whatever happened to just simple analysis/advice on risk? If the customer does not fit the risk-profile for the product, advise the customer against purchasing the product. If the customer insists, get him or her to sign a declaration of purchase against advice.

I really do not see why things in Singapore have to be "one way or the other" ...

hojiber said...

Wang, ask you 3 questions:

1) DBS Directors got monthly report on sales and customer breakdown for them to strategise or not? I believe got lah, otherwise they not Management.

2) They got notice the retirees, etc in huge investment sums in High 5 Notes and Lehman thing or not? If not, you got to be kidding me.

3) How come they never sound the alarm?

Either way, they should be sacked.

Mr Wang Says So said...

You see, at the time that the Lehman Minibonds was launched, Lehman was considered an excellent credit. Very, very unlikely to fail, and therefore very, very safe.

Thus the key point was really whether a credit derivative product should be sold to the retail public (because credit derivative products are rarely sold to the retail public, and therefore not well-understoodby the retail public).

SO DBS, Maybank decided that they would be the pioneers, be the industry leaders, and sell this to the public.

What happened next ... Well, you know the financial crisis caught the whole world offguard. Lehman's bankruptcy is just the Asian tsunami, before it happened. You think of it as one of those things which must theoretically be possible, but which you really don't expect to happen ... untilit happens.

hojiber said...

Wang, like that say hor, means the DBS Management DECIDED that the minibonds and High 5 Notes were safe for the investors. They SAW they crap, and DECIDED it was alright.

It is a mis-selling.

darth said...


it doesn't matter whether anyone believes that tsunami will hit Singapore. That part of the insurance contract only comes into play when it does actually happen. By then, it won't be important whether anyone believes. It's all about how much can be claimed. LOL.

I do remember reading some article that claims mainland SG is not immune to tsunami? Can't remember the source though.

darth said...

Hi Mr Wang,

while it's unexpected that Demon Brothers would collapse, the main problem with some (not all) of the structured products is a terrible risk-reward ratio.

It doesn't help that each issuer has so many series of each note (series 1, 2, 3, 4, 5...etc) that are VERY differently structured even though they're named the same.

I am an intemediary that can transact such products (not highnotes, but minibond, pinnacle notes, jubilee...), but I don't even dare to touch! I've a Banking/Finance degree, but the moment I saw that the prospectus was done by law firm, i thought: forget it...

klimmer said...


I don't disagree with you. Mr Wang explained it very well. Before the credit crisis, such SP were considered to be of good credit and very safe investments, until it became toxic.


all companies focus on profits. Securities and banks are all about money. Their money to be exact. As a rule, the bank assumes as little risk as possible, while taking as large a share of the rewards as possible, for themselves. That's while bankers are paid so much - to pass the risk to the stupid end user, be it a corporation client or a retail client.

Today, they face an angry mob of stupids calling for their heads. haha....

Mr Wang Says So said...

Let's put it this way .... In the past year or so, there have been cases going to the UK court, where a bank is sued by a much more sophisticated client than your typical ah ma / ah pek. In fact the key case was a case against JP Morgan by a hedge fund.

Basically the hedge fund lost a huge amount of its money in a certain structured investment, and went to court, and despite the fact that the hedge fund was run by top finance professionals (including ex-traders from investment banks), the hedge fund ran all the same arguments that the ah mas / ah peks are now running against DBS.

In other words, the hedge fund claimed: "I didn't understand ... the bank did not explain the risk ... I so poor thing, now I lost all my money ... it's not fair ... there is misselling ... they shouldn't have sold it to me ..." Etc etc.

Well, the decision was very clear. The court threw out the case. The hedge fund lost. In a nutshell, the court said: "Excuse me, you're a hedge fund. You guys are professional investors. You looked at the documents, you signed all the documents, you should know what you're doing. Lose money, your problem, dun come here complain complain hor."

The first moral of the story is that you can be a super-sophisticated hedge fund, or you can be a Singapore ah ma / ah pek, and either way, you could have gotten burned really, really bad in the financial crisis if you had bought the wrong sort of structured product.

The second moral of the story is that if you did get burned very bad, it is better to be uneducated, old and stupid, than to be smart, educated and financially-savvy.

hojiber said...

Moral of the story, put your money under your pillow. Only if you are young, educated, sophisticated professional. Hehehe

And don't bank with DBS ever again!

Or if you see the FT CEO run road, you must fast fast terminate your policies with them!

Jon said...

Internal compliance is meaningless when a bank's priorities are:
1 - profit
2 - profit
3 - profit

Banks in HK will exercise greater prudence in screening future retail products as they know that banks will ultimately be held responsible when a meltdown occurs.

numbernine said...

There is nothing wrong with the sales side of the business. It is perfectly alright for the sales people to sell as many products as they possibly can. So long as those products are good.

In a market there are good products and bad products. The problem is that the dynamic of the market is such that the good stuff gets sold out easily, and you have to start selling your customers shit in order to boost up your sales. This is just like selling melamine milk: real protein is expensive, so you just sell them tainted products.

The other thing is that some investments of DBS have turned out to be not so good. They just structure the more risky parts of the investments and dump it on customers, who will take the rap when those investments inevitably fuck up. This is extremely unethical but insufficient regulatory oversight has allowed this to take place.

DBS is taking the logic and standing it on its head. It is the customers who have to ask tough questions of DBS before they invest. What has to happen is that DBS must be subjected to a tough inquisition every time a new product is launched. When DBS asks tough questions it is like saying, "hi, I'm going to fuck you in the ass now. I want to know whether you are strong and healthy enough that your ass can handle it."

Mr Wang Says So said...

No .... With hindsight, it is easy to say which products are "good" or "no good". But as I have mentioned, the events in the past 17 months have caught most people (from ah ma / ah peks to professional investors + banks themselves) very offguard.

Eg 17 months ago, if you look at a much more basic and simple product (eg stocks of a blue-chip SGX-listed company), you may well say, "Ah that is good. It is a solid, stable company with a great track record."

Well, all the blue-chip SGX-listed companies have sunk big-time as well.

numbernine said...

There is a degree of foreknowledge involved. People are not completely stupid. I heard mutterings about shit hitting the fan EIGHT MONTHS ago. Even if not all bankers are aware, the senior management know.

Yes, all forms of money go downhill together with the market. But there is a difference between blue chips going down, and products that you know are toxic, but you are deliberately selling to the public so that you can divest yourself of the risk. Bonds that are tied to companies that the banks know are in trouble. Bonds where you are a secondary claimant to the lender's assets, ie the other bond holders get the first pick to strip assets when the company goes bankrupt.

Regulation cannot enforce foresight, but if you were to completely castrate banks which engage in such practices other banks will be watching and learning.

Mr Wang Says So said...

"But there is a difference between blue chips going down, and products that you know are toxic, but you are deliberately selling to the public so that you can divest yourself of the risk."

You're mistaken ... Many structured products are not created BECAUSE the bank wants to divest itself of certain risks.

Actually the bank never had that risk in the first place. It deliberately takes on the risk, SO THAT it can create the desired structured product.

Example - the bank thinks that investors would be interested in gaining exposure to the high-grade US financial institutions. SO it buys Lehman, Goldman debt etc AND out of that, creates a structured product.

numbernine said...

Guess that makes it even worse. I thought that banks are evil. Now I know that they are evil and stupid.

You should gamble only if you can make good bets. What you are saying then is that banks, in order to feed their insatiable need to gamble (perversely they call this "sales") will make bad bets when all the good bets have already been made.

In a way it doesn't make a difference whether banks are evil or stupid, they are equally culpable.

Mr Wang Says So said...

No, not really.

Let me put it to you this way. What risk will YOU, numbernine, like to assume?

(Bearing in mind that no risk means no reward).

Then the bank will structure a product to give you the risk you want.

Trebuchet said...

Well, your school with the nice-sounding mission statement could be worse. They might grade teachers on loyalty to the principal rather than work done with the students, for example. You can take this literally or metaphorically; both cases would correspond to real-life examples!

numbernine said...

You've already said that the bank creates structured products that it doesn't really have to create, in order to satisfy demand. Sometimes it's not even for satisfying the demand of the customer. Sometimes you have a manager, he has a sales quota to meet, he'll just package something and sell to a customer who wants something with an x% return. Then on the other side he'll make an x% loan to some idiot who's not going to pay back. The more such loans you make, the laxer your vetting standards. Eventually the system starts to buckle under the weight of a whole load of non performing loans that were created precisely because the bankers were willing to compromise on their standards.

What risk am I willing to take? That is a trick question. Nobody ever wants to take on risk. Under the capital asset pricing model you have the assumption that high risk means high reward. But that's a properly functioning market where everybody knows what they're investing in, they know what are the events that will make them lose their money. There is a symmetry of information. Most importantly there is a mechanism by which you know the market rate of risk / reward, and nobody is going to make any bets that fall outside that bracket.

Now, given that recent events have shown that we have such a poor understanding of risk, are you going to tell me that this system works?

When you go to a casino, you know what is the event that will cause you to lose your money. The ball goes to the wrong slot on the roulette wheel, the dice fall the wrong way, the banker gets a better combination of cards than yours. Structured products are worse than gambling because you don't even know how these things work.

This is what happened. In the beginning, the banks said, "I'm only going to lend money to the pigs that build their houses with bricks." That was fine, until all the pigs with brick houses were fully financed. Then the bank boss said, we got to make the sales targets. We got to innovate, this is the new economy. So they started lending to the pigs that build their houses with wood, because there weren't many pigs with brick houses wanting a loan. Eventually they started lending to pigs that built their houses with straw as well.

One day the big bad wolf came and we all know what happened next.

Anonymous said...

In an interview with the BBC, the Governor of the Central Bank of Canada, pointed out that banks are abrogating their responsibilities as banks when they depend on credit rating agencies to assess the credit worthiness and risks of companies they are dealing with. We often hear, "Who would have thpught Lehmann Brothers could fall?" That is not the issue. The issue is whether the banks conducted rigorous and appropriate investigation of the products they are selling. Banks can't get away with the poor excuse that they do not expect credit events. If they use this as an excuse then any other failure by the bank can be explained away. It also raises the question why bankers are paid so much in the first instance - to twiddle their toes?