ST Sep 24, 2008I've never really had to deal with such issues at work. I have years of experience within the banking industry, but the clients I deal with have always been the MNCs, the government bodies, the hedge funds and other banks.
Minibonds worry: 'How is the layman supposed to beware when the prospectus is filled with jargon that even the sellers do not fully comprehend?'
MY WIFE wife and I are joint account holders of Maybank Singapore. We purchased $100,000 of the Minibonds Series 5 from Maybank's investment banker around August last year. We were under the impression then that these were supposedly very safe bonds.
Every few months, I would even call up Maybank to ask about the performance of our Minibonds and whether I should still hold on to them. Each time, I was informed that these bonds were still sound, and there wasn't any need to bail out.
Now that Lehman Brothers is bankrupt, and the public disclosure that our Minibonds investment has, in fact, nothing at all to do with bonds, but are instead Collateralised Debt Obligation (CDO)-related derivatives, we are extremely disappointed, distressed and upset with Maybank's lack of professionalism and poor product knowledge.
The investment advisers are more interested in closing the deal and going through the motions during the investors' risk-analysis.
We fully understand the concept of buyer beware. However, in this situation, how is the layman supposed to beware of what they're being sold when the 60-odd-page prospectus is filled with legalese and technical jargon that even the sellers themselves do not fully comprehend?
Ngo Chee Keong
We call these clients the "big boys". A big boy is a strong, powerful client who knows, or should know, what he's doing.When we do business with a big boy, we usually sign some form of a "big boy" letter (or other written agreement). In a big boy letter, both parties confirm to each other that they understand the risks of the transaction; neither party is advising the other party; and neither party is relying on the other party for advice.
The idea is that neither party will hold the other party responsible, for any losses that it may subsequently suffer.
"Big boy" letters are not possible with the man in the street. If a bank sells complex financial products to Mr Tan Ah Kow, the law requires the bank to assess the customer's needs; to recommend suitable products, and to give appropriate advice. Furthermore, complex financial products generally can't be sold to the retail public, unless they satisfy a range of regulatory requirements.
One of the common regulatory requirements is a prospectus. This is a thick document with a lot of small print describing the financial product in great detail and setting out all the relevant risks. If a bank fails to disclose all the relevant risks, it could be committing a criminal offence. Therefore banks are very eager to disclose as many risks as they can think of.
Consequently, prospectuses tend to grow into very long, detailed documents. Inevitably the prospectus is packed with technical terms. Finance is a technical field, and if you want to properly describe the risks fully and properly, you will need to use all the technical financial terms.
And of course, the thicker and more technical the prospectus is, the less likely it is that the retail customer will actually attempt to read it. That's the irony.
50 comments:
Mr Warren Buffet once in his annual letters to shareholders said: "All man's troubles come from not knowing how to sit still in one room."
Most retail customers while making trips down to banks to do normal banking services most likely to experience an "introducer" trying to make you sit with a pretty relationship manager. Like this how to sit still??
All business deals that we make, we make sure that its written without the mumbo jumbo so there's no confusion. If there's any clarificlations that need to be done, we let em know. "Big Boys" are something else....
The man with the comforting smile in a sharp suit and tie, with the diamond cuff links is just a glamorised law protected daylight robber.
Q: why is your hair always short?
A: Because I always ask my barber
if I need a haircut.
Cheers,
Economist with a heart :)
"And of course, the thicker and more technical the prospectus is, the less likely it is that the retail customer will actually attempt to read it. That's the irony."
Anything u sign but is not drafted by u means u are the weaker party .... that is the troublesome part.
There's no point for a CASE here. Our CASE here anyway just like NTUC cannot make a case for itself anyway.
The irony comes due to the divergent interests of the banks and investor.
The warning signs were there years ago, when Ah Pehs were introduced products when they wanted to renew their FDs.
Perhaps in the future, all financial products sold by banks will have a picture of money burning displayed prominently - just like ciggys.
if the "main-in-the-street" or even the RM could not understand fully the risk of the product, then it should not be marketed at all to the masses.
I really wonder what is the MAS going to do about this....
I was under the impression that our country has been storing up its reserves for an emergency. I also wonder what kind of emergency is our government waiting for before it takes some of its reserves to help us.
It's worse than that. A lot of the products in the market are simply rubbish for the retail investor.
What's worse is that CPFIS allows you to invest in rubbish far more freely than investing in plain old shares, bonds and the such. You know, stuff that actually has value?
In an event of serendipity, I've also just written about the crap that is peddled as gold in the Singapore market.
http://almostinfamous.blogspot.com/2008/09/investments-in-singapore.html
Synchronicity, not serendipity.
Derivatives will bring down a lot of people with it to derivatives demise.
Just like the imaginary numbers in calculus.
The Profits are all imaginary :)
Derivatives are quite misunderstood by the general public.
Did you ever realise that a fixed deposit is actually a funded self-referencing credit derivative transaction?
For example, if you place a fixed deposit with DBS, you are actually:
(1) taking the risk that DBS won't go bust;
(2) being rewarded by the FD interest, for taking on such risk
(3) parking your money with the very same entity whose credit risk you're taking.
HahAaaahahaaa!
(Ok. I understand that not that many people will get the joke).
Khayce:
Read your post.
One big reason why the expense ratio for index funds in Singapore is higher than those in, say, Europe is as follows.
(a) For a fund to be offered in Singapore, it needs to be regulated in Singapore.
(b) A fund regulated in Singapore is sold primarily to Singaporeans
(c) Singapore is a small country, therefore the aggregate amount of monies invested tends to be smaller than it would be, if we were larger
(d) due to the small fund size, the fund lacks economy of scale, in managing its expenses
(e) the expense ratio goes up.
Mr Wang,
Question partially answered. It doesn't explain, for example, why there's a frontload. I've never seen that among any of the offshore index funds.
Plus, I be looking at the recent ETF's released and none of them have an expense ratio above 1%. Most hover around the 0.4 - 0.75 % region. Presumably what you say about this index fund applies to all index funds in the region, including index fund substitutes like ETF. So why is their expense ratio so low while the fund I've highlight charges such a high ratio?
Sure buyers beware. But sellesr who have sold products to buyers without alerting them are surely liable. I am a housing agent, for instance. I know that a house has structural weakness. I sold it to buyer "X" wihout informing him (in other words I suppressed the information). In Oz I would get into very serious trouble. Yes, Singapore has many laws but the laws should be there toprotect citizens as well.
"But sellesr who have sold products to buyers without alerting them are surely liable."
True. That is why the seller gave the buyer a 60-page document alerting them on all the risks.
Dear Mr Wang,
It goes beyond this, ""But sellesr who have sold products to buyers without alerting them are surely liable."
True. That is why the seller gave the buyer a 60-page document alerting them on all the risks."
General comments and warnings that are vague cut no ice with juries in oz when the seller is aware of something that is specific or that could be regarded as specific. These vague comments is of the same order as saying a house may collapse with time. Those who suffer should sue!
"General comments and warnings that are vague cut no ice with juries in oz when the seller is aware of something that is specific or that could be regarded as specific."
That's the thing. The comments and warnings are not general and not vague. They are highly specific, and highly detailed.
If they were general, you wouldn't need 60 pages. 2 pages would be sufficient.
A highly specific, highly detailed prospectus however, doesn't help investors if:
(a) they don't read the prospectus;
or
(b) they are incapable of understanding it.
So, if you feel you cannot understand your prospectus, please stick to self-referencing funded credit derivative transactions such as fixed deposits. Heheh.
Retail has long been recognised as a riskier proposition - Mr Wang, you should have a look at the Joint Association Committee principles which touch on product appropriateness, client suitability and the responsibilities of a product provider versus those of a distributor. Porco visited a number of regulators in the course of this year and they had no idea either.
Porco:
I'm in the working group. A sleeping member. :P
And I bet today is the first time you realised that a fixed deposit is a self-referencing funded credit derivative transaction, right? :D
In developed countries, the 60 page prospectus will not protect seller from class action\law suits and hefty fines.
Unfortunately, Lehman is already bankrupt.
Dear Mr Wang,
I am not a frequent visitor to your site but happen to surf by it today and was frankly flabbergated by the tone of your reply,
"A highly specific, highly detailed prospectus however, doesn't help investors if:
(a) they don't read the prospectus;
or
(b) they are incapable of understanding it.
So, if you feel you cannot understand your prospectus, please stick to self-referencing funded credit derivative transactions such as fixed deposits. Heheh."
Is the impending loss of the hard earned money of many investors a laughing matter for us to chortle over? Please don't plead irony because that is not an excuse or reason. If we all adopt the same tone then it is not surprising the banks and investor houses get away with it.
I'm not pleading irony.
As I had mentioned earlier, it was a joke that few people will get.
You see, many people regard credit derivatives as something mysterious, risky and dangerous.
And even among credit derivative professionals themselves, self-referencing credit derivatives are widely considered PARTICULARLY mysterious, risky and dangerous.
For example, some banks refrain from engaging in such transactions entirely, while other banks require extra-intense scrutiny from very senior people (typically including the Reputational Committee), before such transactions can be approved. Law firms have also written copious articles and essays about the "complex" legal issues surrounding self-referencing credit derivative products.
However, most people do not realise that a fixed deposit essentially has the same economic features as a self-referencing credit derivative product:
--> An entity is paying you to take on its own risk of becoming bankrupt.
That is what I was laughing about.
"In developed countries, the 60 page prospectus will not protect seller from class action\law suits and hefty fines."
--- For retail products, the prospectus would have been approved by the regulator itself, after long reviews and discussions with the issuer. The prospectus CANNOT be issued, unless the regulator is happy with it.
Therefore hefty fines, for inadequate disclosure, is unheard of (as far as I'm aware). A regulator would not fine a bank for issuing a prospectus which the regulator ITSELF had previously given approval for the bank to issue ....
"I sold it to buyer "X" wihout informing him (in other words I suppressed the information)."
If you dishonestly withheld material information, then of course you would be in trouble (and you would deserve it).
Fact is that events in the past year have caught everybody, including GIC and Temasek, by surprise. It's not as if your average banker KNEW what was going to happen, and deliberately withheld information from Tan Ah Kow and Lim Ah Seng, so as to make them suffer losses.
I remembered quite recently one of DBS/POSB bank tellers that attended to me while I was doing some banking transaction was trying hard to convince me to put some of my money into buying some of this instruments.
Obviously she had the privilege of knowing the balance of my savings accounts. I just wondered isn't this an outright abuse by DBS Bank being privy of the client's financial position.
Even if a fixed deposit is actually a funded self-referencing credit derivative transaction, it is one which
1) is accorded higher seniority & priority when a bank's assets is liquidated to meet various liabilities;
2) is covered under the deposit insurance scheme for up to 20k per bank;
3) doesn't attract hard-selling or possibly mis-selling for their sales commission by a relationship manager;
4) is easily understood by most people and there is unlikely incidents for mis-selling by the bankers.
This is yr most sensible post yet. You should stick to such subjects. The real problem in my view is that there's a terrible mismatch of understanding between the average customer and the financial institutions, as reflected in the following ridiculous letter that was sent to MAS,a copy of which was 4warded to me:
Subject: $20,000 is very low protection for bank deposits
To: consumers@mas.gov.sg
Dear Ms Angelina Fernandez
I read in your article in the Straits Times today about insurance companies in Singapore needing to set aside 120% for their liabities to all policyholders. This is reassuring, as it means that there is 100% protection for all premiums put into insurance policies. Annuities, for example, can be redeemed or must be honoured 100% minus any payouts already paid out by the insurance company to the policy holder, even if the company goes bankrupt, I conclude.
However I was alarmed to read that for any depositor in any major bank in Singapore, the MAS ruling is that only $20,000 is protected. So if, for example, a person has $40,000 in savings and $60,000 in fixed deposits, the depositor can lose $70,000 of his savings. The protection of $20,000 is far too low! It may cover 80% of depositors. But what about the 20% who have deposited more than $20,000 in a bank through hard work?
There should be 100% protection of one's savings in banks. I am not talking about risky financial instruments like unit trusts or structured deposits. The stock market is extremely volatile, all over the world. Many people have already lost a lot of money. Not everyone who has more than $20 k in a bank has enough money to buy property. Where do we put our savings for retirement or old age? Under the bed or inside a mattress? Most would likely put our money in a bank, even though receiving only paltry interest rates. It is improtant to have money saved for emergencies, major illnesses, unexpected happenings, etc.
Now it seems that savers can lose all their savings which are more than $20 k ! It is not impossible for any bank to go under or bankrupt, even in Singapore, especially if it undertakes risky investments on a wide scale.
It is time for MAS to protect the needs of all bank depositors, as many stand to lose as much as several tens of thousands or even some millions deposited trustingly in our banks. Savings and fixed deposit depositors are conservative with money and deserve to be much better protected by the banks, and by MAS. It is time to review your policies.
Therefore hefty fines, for inadequate disclosure, is unheard of (as far as I'm aware). A regulator would not fine a bank for issuing a prospectus which the regulator ITSELF had previously given approval for the bank to issue ....
But the regulator itself could be found guilty in law for being negligent in its duty.
One example to my mind is the US Florida Department of Insurance, which is being sued for not doing its job.
I supposed in uniquely Singapore's legal system, regulators are considered to do no wrong so can't be sued.
In the UK, there is a push for financial prospectus to use plain English.
Also another feature of any financial product that you buy, it is required by regulatory agency to illustrate what you can potentially earned based on government projection. Of course, there is a danger that people might take that as illustration, but what it does is show you what you might earn, minus the charges, etc, in some many years.
It will have to illustrate with at least two scenario one of which is an optimistic one and the other based on (government projected interest/actuarial rates). Of course the provisio past performance is no guarantee for future performance. And a risk rating system based on financial instrument classification (i.e. Hegdge fund high risk, saving low risk).
Simple straight to the point.
Also another thing about the UK is the BBC financial programme. Many of the high class presenters like Evan Davis and other investigative journalist when reporting about financial affair try to speak in laymen term.
Whereas in Singapore, listening of ChannelNewsAsia especially, there is no attempt to really speak in plain English. I guess maybe it's because they like to speak in tech speak just to hide they inadequacies. Maybe they think by speaking in plain English makes them look stupid.
hmmm..my oh my Mr.Wang..same debacle..different views in HK and Singapore, probably different outcomes too.
The thing that I don't understand about Singapore is that when a humble boy goes up the society's ladder, sometimes on the back of the poor and disable using public funded scholarships no less, he becomes a totally different creature.
He says from the top of the ladder, "you poor lot never study hard enough that's why you lot deserved to be cheated by people who are more clever/smarter/intelligent than you"
In Singapore, compassion is dead.
Dear Mr Wang,
As you wrote,"not as if your average banker KNEW what was going to happen, and deliberately withheld information from Tan Ah Kow and Lim Ah Seng, so as to make them suffer losses."
Ah there's the rub. At what stage did they know? A question which is often asked by an investor (I am talking about your average Joe) is, "How secure is my investment?" and "What exactly are the risks?" I have as yet to hear an IO just say, "Read the prospectus." Usually they would reply and provide an opiion. That opinion could be misleading. What then? The IO to say, "But you should read the prospectus." Sure but what if your reply does not highlight the relevant parts of the prospectus?
/// Anonymous said...
In the UK, there is a push for financial prospectus to use plain English.
September 26, 2008 3:23 AM ///
I think those in Singapore are already in plain English. Look at the prospectus in the link below and see how plain it can be.
http://masnet.mas.gov.sg/opera/sdrprosp.nsf/936bad13609791c948256b3e001ed49f/DF9E0F70EB99FC994825747800232980/$File/001%20-Preliminary%20Prospectus.pdf
The Prospectus comprises 231 pages, with 10 pages detailing all kind of risks. Examples:
We operate in the highly competitive sports fashion and other footwear industry.
We may face rising labour costs in the PRC.
As stated by Mr Wang, the problem is not that the risks are not specific, in small prints or not spelt out. The main problem is that they are spelt out specifically in minutiae and they are so kiasu that they thrown in the whole laundry list, so much so that most investors just ignore them, treating them like SOPs.
"Ah there's the rub. At what stage did they know?"
Know what? That Lehman was going to file for Chapter 11?
I guess that would be around the time when it was reported in the news.
LOL, you must think that bankers are psychic.
Do I know if any other banks will go bankrupt in the next six months? No, I don't.
Can I guess? Sure, so can you. So can Temasek. So can GIC. So can Tan Ah Kow.
And some of us will be right. And some of us will be wrong. Simple as that.
"Also another feature of any financial product that you buy, it is required by regulatory agency to illustrate what you can potentially earned based on government projection."
Government projections? LOL, no.
Why are there Financial Expert, Specialist, Consultants, Analyst, planners and what not if these people are incapable of reading the markets? Will there be a day when the accountant of a commercial house saying he/she does not know his companys' account.
Financial meltdowns are not like earthquakes or whirlwinds that give no sign before wreaking havocs.
There are professionals I mentioned above in Cyberspace that seem to think that the People in GIC and Temasek do not or are unable to read the markets. Many appear to think that there were plenty of signs indicating problems in those Financial Houses and yet GIC/Temasek dived in with fervour. Does this implies that the People in GIC/Temasek incompetent?
Please pardon me for my curiosity.
patriot
Hi Mr Wang,
You're a lawyer. I'm a doctor. Your post made me remember what I always felt we doctors/surgeons should do with regards to taking consent/disclosure of risks of surgery/procedures etc....
Go the legal way. Fill pages and pages FULL DISCLOSURE of all the possible things that can go wrong with the surgery in super small fonts filled with all kinds of medical jargon.
I mean hey if the banks and insurance companies do it, why not surgeons and doctors right?
/// Will there be a day when the accountant of a commercial house saying he/she does not know his companys' account. ///
Enron & Authur Anderson.
AIG, Lehman, Freddie Mac and Fannie Mae are currently being investigated for their creative accounting.
I was actually looking to invest some fund. Walking by the SC bank branch office in suntech.
I went in, and enquired about investment options for foreign exchange deposits.
Straight away, i was introduced to a structured deposit.
To quote " You can bet on how the AUD moves against the SGD"
That really put me off.
Then i tried to find out more information on structed deposits, high notes etc.
Well, after i read a couple of pages, i realised that it was so complicated...
That i just stayed away from it.
Shrug, if you cannot understand, its better not to buy.
No matter what the people gives in verbal assurances by the sales folks at the front lines...
sayn
(My post didn't show up, let me try again.)
I believe MAS will be forced to guarantee all bank deposits. Otherwise, the bank runs will be unimaginable.
(This is my opinion, not an advice. :-))
$20K covers 80% of the depositors, but it could just be 20% of the deposits.
about the china milk scandal.
imagine if San lu group also applies what is common practice by the banks - to provide a 60-70 pages of a risk disclosures to consumers in a prospectus hardcopy/softcopy in their website. milk-drinkers once purchase their toxic milks are deemed to be read & understood all risks and San Lu is not liable for any damages or losses suffered by the drinkers.
likewise is this going to be fair for the aggrieved investors just because they signed on an iron-cladded toxic contract for the credit derivatives
Do you actually know how many pages in a 60-page prospectus are devoted to "risk factors"?
And how may pages are there jut to provide all the information and answers that the investor might want?
i dun actually know the answers and appreciate your sharing.
LOL... hilarious. If the banks know lehman will file chapter 11. The market won't come to a standstill on tuesday. The money markets for overnight dollar rates shot up to even 13%! If banks are psychic, lehman wouldn't fall.
Of course it takes two hands to clap when it comes to signing the contract. Ordinary investors who do not read the prospectus should not have signed it anyway. Warning signs for retail investors should be existent since the product is not marketed as capital protected anyway.
Who is going to pay the retail investors who lost money in the lehman deal? MAS? Isn't it unfair for tax payers who didn't sign up for the structured products??
when someone enters a bank to deposit his money, and as requested to fullfill some forms is very common, it is our daily life, but later days the banker notice you your money is wiped out. then somebody feels confused. and frustrated, cheated ,the banker says he got the doc.you
signed, imagine how shocked you are, that is the story about DBS HIGH NOTES 5 event's story ,maybe you are the next victim ,a great banker should have high moral blood circulating within his body,have mercies on the layman's coffin's and hard-earned money. they are not capitalist, they just
want to have a living only.
To the folks who commented on deposit insurance:
MAS isnt going to step in to cover deposits above 20k. In fact, MAS doesnt pay anything to cover the deposits - the banks do, and the premiums are based on the size of their deposit bases. Since the Deposit Insurance Corporation was only established some 3 years ago, it will likely take quite a while before sufficient premiums can be gathered to cover even a run on a smallish bank. Should deposits above 20k be covered? It's arguable, but gotta bear in mind that you get exactly what you pay for. Banks will simply have to pay much higher premiums, and primarily to cover those folks who have more than 20k per deposit account (less than 20% of depositors if you trust the statistics). Those premiums will get passed on to you, dear customer, in the form of lower interest on your deposits. And all to help out the richer folks among us. I can think of an easier solution - just make sure you maintain no more than 20k with each FI in savings and deposits. Not too hard for average joe.
As for the structured pdts debacle:
I think that MAS communication on the matter hasnt been as slick and forthcoming as the HKMA. Having said that, just because HKMA talks tough about directly investigating banks that sold the pdts to retail customers, im more interested to find out what exactly can be done, all the tough regulatory posturing aside. The likely fact of the matter in both HK and Spore: Customers signed off on the prospectuses, which while very thick and technical, gave ample warnings of the risks involved in rather clear language (i read them so im familar). I also know that the prospectuses were inadequate in fully describing the risks in some areas, but they were so inadequate that they served as red flags in themselves. So this will ultimately reduce to the lowest common denominator of "he said she said" btw the RM and customer. Im personally not too hopeful of a legal outcome in favour of the retail customer, though I can emphathise with the pple who lost money through bad advice.
Actually, now that this has happened, retail customers as a whole will probably benefit from the educational experience. No point talking airy fairy about credit/legal risks - nothing like seeing your neighbour lose money and kao beh bao bu to give you a right good scare. It's no point pretending that all retail customers lost out bec of inadequate regulation - just those careless enough to think that everything that a 20 something RM says must be the gospel truth. Now that this has happened, retail customers will become more savvy about who they are banking with and what type of pdts they will buy. I've always doubted that this increase in customer awareness could come abt without a blowup of some kind and now that blowup has arrived.
Honestly, I struggle to blame MAS for this incident - But so much easier to blame the authorities than your own greed and carelessness.
The SDIC protects the first $20k. What I'm saying is that MAS has to guarantee the rest, otherwise a bank run -- for the amounts beyond $20k -- would be unimaginable.
Covering 80% of the depositors sounds impressive, but if the top 20% holds 80% of the cash (say), then a bank run would be very damaging.
Of course, the bank may just merge with another to save itself.
i think to save everyone grief, MAS should come up with simple-to-understand, must-include summaries like:
1. Risk: High/medium/low (rated by MAS - which is a regulatory authority anyway)
2. Capital protected? guaranteed?
Will u get back 100% of your capital without premature withdrawal?
3. etc...
Something which the layman can actually appreciate. If they have to be frightened into understanding the risks, so be it.
If we can do it for cigarettes, hell we can do it with investment products. Show a picture of a burning pile of $100 notes as a warning on all prospectuses. ;)
3.
to nhyone:
the Deposit Insurance (DI) only pays out on bank failure i.e. post bank run and upon winding up. So being unable to pay the bulk of the large depositors' cash deposits (20% of the population) isnt going to have much marginal impact after something earthshaking like a bank closure - the bank is gone, confidence is gone - the rest is collateral damage on the top 20% of society. Guess they can't finance their third houses. I can hear the heartlanders shedding a tear already.
I should also add that the DI covers net liabilities. This means that if you have taken a mortgage from the bank in excess of 20k, the bank doesnt owe you anything on your 20k deposit. Unfortunately the converse may not be true depending on the the govt agent appointed to oversee the winding up i.e. you may still have to make good on your debts. So if youre totally paranoid, make sure ur large loans are from banks that you don't have deposits with, and put all your deposits in banks you dont take loans from. Otherwise, u might find all your liquid assets being netted off from your mortgage obligations.
These investors have tons of money in FD before they got conned, didn't they? Shows that they have faith in their banks.
If you can't convince, confuse
That's what all these prospectuses do anyway...
Even for someone in the financial industry, I feel it a challenge to really understand how these structures work without combing through the prospectuses, let alone the man on the street!
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