Laymen and judges think differently about the law. Here is one of the differences.
A customer is angry with his bank. He takes the bank to court. The customer feels that in some way, the bank has treated him unfairly. The customer has come to the court to present his case and to seek some form of redress or compensation.
The customer is really just thinking about his own problem. However, the judge has to think deeper than that. Achieving justice and fairness result in this particular case will not be the judge's only consideration.
The judge also has to think about public policy. The way that he handles this one case will affect all similar future disputes between banks and their customers. The way that he handles the case will even influence the future direction of the retail banking business as a whole.
FIDREC is not a court. But the way it handles the structured note disputes will similarly have an important effect, above and beyond the actual cases. Banks and retail investors alike are watching the FIDREC cases. The eventual outcomes will influence:
(1) the way banks make decisions about the type of products they sell to the retail public;
(2) the way banks manage their selling process; and
(3) the level of confidence that Singaporeans have in their banks.
When FIDREC starts hearing its cases, it should bear in mind the wider context of these disputes. Worldwide, many events in the global financial crisis have exposed serious flaws and weaknesses in the ways that banks are being regulated and managed. Many of the old ways just don't work any more.
FIDREC must be wary of mechanically following and adopting the old ways of thinking. FIDREC needs to boldly push its cases in the new directions towards which the banks ought to evolve.
Back to my previous post - where I had discussed the customer risk-profiling process. Here we have a very basic, very fundamental problem. In Singapore, the risk-profiling process is carried out by the very same salesperson who's going to try to sell you some structured product.
In other words, there's a conflict of interest. Suppose I am a bank salesperson. I will get a big commission from selling riskier products. However, I can only sell riskier products to customers who have a more "aggressive" risk rating. At the same time, I am the person who hands the questionaire to the customer and guides him through all the questions. The customer is not a financial expert and may not fully understand the questions and their implications. Therefore I am in the position to influence the answers that he gives.
And of course, it is to my own benefit to influence the customer to give answers that lead to a more aggressive risk rating. Then I can make more money by selling him riskier products.
(Apparently the Hong Kong Monetary Authority has recently caught on to this problem. It was reported that HKMA is now preparing a new set of regulations. One of the new rules is that the the customer risk-profiling process should be carried out not by the salesperson, but by another bank officer who will not stand to gain any fee or commission. The salesperson is allowed to meet the customer only after the risk-profiling process is completed).
As mentioned in my previous post, it appears that a few banks have decided not to compensate investors, on the basis that they had been classified "Moderately Aggressive". The bank's position would be that the structured notes were suitable for such investors.
I don't agree with this. Among other things, the banks' risk classification of these investors as "Moderately Aggressive" must be treated with suspicion. After all, this classification was the result of a process that is fundamentally flawed (because of the conflict of interest).
As a matter of public policy, FIDREC must be wary about allowing a bank to defend itself on the basis of its own flawed processes. The bank would be disincentivised from improving and cleaning up those processes.
As for the retail investors, think back to the time when you did that questionaire at that bank. Did you really pay attention to what was being asked? Did you understand the questions? Were they properly explained to you? Did you really know the significance of the questionaire, or were you led to think it was just some kind of not-very-important formality? Were you just happy to go along with the answers that the RM suggested you should be happy to go along with?
Do consider whether you were fairly treated, during the risk-profiling process. If not, go to FIDREC and challenge your "Moderately Aggressive" rating.