Feb 1, 2009

The Saga of the Structured Notes - What Next for the Suffering Investors? (Part 1)

According to news reports, 58% of the investors will get some or all of their money back. Any investor who is unhappy with his outcome may seek further recourse through the Financial Industry Disputes Resolution Centre (FIDREC).

Of course, many of those unhappy investors who turn to FIDREC will be the ones to whom the banks had offered no compensation at all.

A little bird has just told me that the banks, in deciding which investors to compensate, seems to have relied heavily on their internal risk classification of the clients.

What does this mean?

Before a bank sells you a product, it is supposed to ascertain your risk profile. The salesperson goes through a questionaire with you, and you answer various questions about your age; your savings; your financial goals; your willingness to take risk etc.

Based on your answers, the salesperson then determines your risk classification. It's common for banks to use a 5-tier system. For example, the customer could be classified as either "Aggressive", "Moderately Aggressive", "Balanced", 'Moderately Conservative" or 'Very Conservative".

Based on your risk classification, the salesperson will recommend suitable products to you. For example, if you are a "Conservative" investor, the salesperson will recommend lower-risk products (which are safer, but also offer lesser chances of a high return). If you are "Aggressive", the salesperson may recommend riskier investments to you.

Back to the Lehman Minibonds and the High Notes. At the time that the customer first made his investment, the bank would have determined his risk classification. And now, it seems that the banks are relying heavily on that risk classification, to decide whether they will compensate that investor or not.

For example, it appears that as a general rule, DBS is not compensating High Notes investors who had been classified as "Moderately Aggressive" or "Aggressive". In other words, DBS is taking the position that the High Notes were a suitable investment for "Moderately Aggressive" or "Aggressive" investors. Therefore these investors do not deserve compensation.

In my next post, I will discuss the problems in this line of reasoning.


Anonymous said...

that's with the assumption that the RM filled in the forms correctly, according to the info that the customers shared.

that;s presuming the RM didn't manipulate the customer into giving the answers that the RM wanted to hear. If you've ever come up with a survey form, you know answers can be manipulated. Also depends on how the qns were verbally asked, or the examples that the RM used.

Anyway, enough of slamming RMs. I remember the comment in one of your entries about an "uneducated" lady claiming mis-selling, even though the bank had a record of her writing an ENGLISH letter for a credit card with the same bank :)

Not all RMs are evil, neither are all customers right. It's probably somewhere in the middle.

Anonymous said...

it's not fair to not compensate the aggressive investors.. even aggressive investors will invest in supposedly conservative instruments as to balance their whole portfolio. unless when they sold the product, they had already specifically mentioned that the High Notes were relatively riskier investment tools.

Onlooker said...

Because Aggressive investor benefit the creator of the (financially deadly) structure Notes the most?

Anonymous said...

Also depends on who you buy from. If you bought from independent advisers, sorry lah, even if you are not well educated or aggressive.

Read the New Paper 31 Jan 09 on one elderly couple who lost $250K. Even if you file civil suit, no guarantee of winning and may even have to pay cost to other party if you lose.

Very sad. Many will be suffering from depression and the suicide rate may be going up with such cases and the terrible recession.

yh said...

The notes were not high yielding. The "Aggressive" and "Moderately Aggressive" were willing to take on high risk for a chance at more profits, the structure notes cannot provide that. So, in a way, it was these groups of people who were mis-sold the product; yet they now receive no compensation.

The products were sold to investors with widely differing levels of risk appetite. What kind of product did the banks really think the notes were?

Jolly Jester said...

The crux of the matter should be how the product itself was marketed and presented to the buyer. The risk profile should be secondary and only a small factor.

As an earlier anon has pointed out, having an aggressive risk outlook does not mean one puts 100% into high risk high reward investments. The minibond could have been intended as part of the conservative 10% of the portfolio.

Anonymous said...

The Hongkees got their refunds. Alas but peanuts - market value at that point in time.

Nothing is safe my fren.

The Bible says it's better to keep our treasures in heaven safe from the moths and whatever.

yamizi said...

Anon @ February 1, 2009 11:12 PM,

Well not everyone believes in the Bible or has the need to.

Anonymous said...

I am just a simple ah beng without the sophistication of thought. But I believe one of the most important consideration factor the possibility of mis-selling: WHY should one be penalised, even if he is an aggressive investor, if he was misled into buying, thinking the the product is safe. An aggressive investor does not necessarily buy only 'risky products'?! The principle of compensation seems flawed.. hmm ( Wang, zun3 ma1? :P)