STRUCTURED NOTES

STRUCTURED NOTES:

(MAS' supervision of financial institutions): 1.

Mr Lim Biow Chuan asked the Senior Minister (a) whether MAS could have done more to supervise the management of the financial institutions involved in the selling of the high risk structured notes; (b) in view of the small amount of compensation made by the financial institutions, whether MAS is satisfied that the 10 affected institutions have treated their customers, whether vulnerable customers or otherwise, fairly; and (c) what else will MAS do to ensure that similar management lapses by the financial institutions do not recur in the future.

2.

Ms Sylvia Lim asked the Senior Minister with regard to the investigation report by the Monetary Authority of Singapore (MAS) into the sale and marketing of products linked to Lehman Brothers (a) whether the action taken by MAS against the offending financial institutions is meaningful and adequate; and (b) whether MAS has itself contributed to the fiasco through lax regulation.

The Minister for Trade and Industry (Mr Lim Hng Kiang) (for the Senior Minister): Mr Speaker, I have previously set out in this House the regulatory regime for the offer and distribution of

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financial products in some detail and explained that our regime is in line with practices in other jurisdictions. So I will not set this out at length again. However, let me respond on the specific issues raised. There have been commentaries that MAS should not have allowed structured notes to be offered to retail investors in the first place. Under our disclosure-based regime, MAS’ role is not to judge the merits of the product being offered. Rather, MAS checks that the issuer discloses the features and risks of the product, and that there are no false or misleading statements. MAS does so based on the information provided by the issuer and its advisers. This regime applies to all investment products including structured notes. This approach provides investors with investment choices, in recognition that they have different needs and risk appetites.

In its supervision, MAS assesses whether financial institutions have proper systems and controls in place to comply with their regulatory obligations and the standards expected of them in the sale and marketing of investment products under the Financial Advisers Act (FAA), FAA regulations, notices and guidelines. This is conducted by way of thematic reviews. From time to time, MAS conducts reviews on specific issues, such as switching of investment products. Where issues are identified, MAS has required the financial institution to rectify these specific problems. MAS has also used these reviews to highlight areas for the financial industry to improve on, and has published examples of good practices adopted by financial institutions. These are the ways in which MAS has worked to lift the standards across the industry generally. However, MAS’ reviews are not intended to, and cannot, replace the primary role of the Board and senior management of financial institutions to ensure that the controls and processes

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put in place to meet regulatory requirements are implemented robustly by all staff in all their dealings with customers, at all locations. MAS does not, and cannot, micro-manage financial institutions in their operations, including the sale of structured products.

In MAS’ recently released investigation findings, MAS found that the financial institutions that distributed the structured notes had policies, procedures and controls in place. The extent of non-compliance, which varied among financial institutions, was in respect of the due diligence and levels of internal controls expected of them under MAS notices and guidelines. These failings identified by MAS' investigation were taken into account by the financial institutions in the complaints assessment framework. The financial institutions have generally adopted MAS' recommendation not to take an overly legalistic approach in resolving customer complaints. They did so even though they generally took the view that the documentation signed by clients, where the clients acknowledged that they were aware of the features and risks of the product and the role of the distributors, meant they do not have legal liability to the clients. On 7th July 2009, MAS published details of the settlements offered by the financial institutions. A total of about $107 million in settlement offers have been made to about 3,900 investors. Where partial settlement is offered for Minibond notes, investors will retain all or a portion of their notes, and will keep any residual value arising from the notes retained. The residual value, if any, will depend on the ultimate value of the underlying securities.

Despite this, there are cases where it has not been possible for settlement to be reached through this process. This could have arisen from conflicting accounts of the facts and circumstances for a particular transaction. In such cases, the matter should be referred to the Financial

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Industry Disputes Resolution Centre (FIDReC). At FIDReC, both parties have the opportunity to present their case and submit relevant evidence through the adjudication process. Let me emphasise that MAS’ approach was for financial institutions to review complaints on a case-by-case approach. Settlement offers are made taking into account the particular facts and circumstances of each investor and transaction. MAS’ investigation findings do not support an across-the-board general settlement for all investors, irrespective of their individual circumstances. This is because the nature and extent of failings identified and their potential impact on the sales process and customers differed for each institution and for each customer. While not all investors may accept the case-by-case approach, we believe it is the correct approach that is fair to the individual investor. The process has not been overly legalistic and is not subject to political pressure. This way we serve the interests of all parties, and also serve the wider public interest of growing Singapore’s reputation as a credible and reliable international financial centre.

Ms Sylvia Lim asked whether the regulatory action that MAS has taken against these financial institutions is meaningful and adequate. As mentioned earlier, the investigation findings were about non-compliance with MAS' notices and guidelines as well as lapses in the financial institutions’ internal controls. MAS banned the sale of structured notes by these institutions. The period of the ban ranges from a minimum of six months to a minimum of two years. MAS is of the view that the regulatory actions taken are proportionate to the nature and impact of the lapses identified, taking into account the steps taken by these financial institutions to rectify the lapses, and the extent to which they accepted responsibility and resolved investors' complaints.

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MAS’ publication of detailed findings in the investigation report and the imposition of a ban are unprecedented. These actions have consequences beyond the immediate financial impact on the financial institutions. There have been adverse implications on financial institutions' reputations. Analysts and commentators have observed that since this is the first time MAS has taken such action, financial institutions’ reputations have "already taken a beating" and this reputational "hit" would affect how financial institutions do business more than the direct financial impact from the ban. The financial institutions will not be allowed to distribute structured notes even after the expiry of the ban, if MAS is not satisfied that the financial institution has rectified all the weaknesses identified, and strengthened all internal processes and procedures for the provision of financial advisory services for all investment products. The scale of this global financial crisis has been unprecedented. Institutions that many, including rating agencies, had considered strong, sound and safe have failed or needed to be bailed-out, taken over or re-capitalised by their government. This has led regulators around the world to re-examine aspects of their regulatory and supervisory approach. MAS has been doing the same.

MAS has reviewed the regulatory regime governing the sale and marketing of unlisted investment products. The consultation paper was issued in March this year. The proposals aim to promote more effective disclosure, strengthen fair dealing in the sale and advisory process, educate the investing public, and enhance MAS’ powers to investigate and take regulatory action. MAS received many useful comments from consumers and the industry and has started work on some initiatives. One example is developing the content and format of the Product Highlights Sheet together with industry representatives. MAS will be conducting

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consumer testing on the effectiveness of this document. The Association of Banks in Singapore has informed MAS that its member banks have started adopting two of the proposals. Bank tellers at bank branches will be prohibited from referring customers to representatives for the purchase of investment products, and investors will be entitled to a seven-day cooling off period for some structured products. MAS is evaluating the feedback received for the other proposals and will be publishing its responses shortly.

MAS has recently reiterated some of the steps the financial industry will have to take to win back the trust and confidence of their customers. MAS’ Fair Dealing Guidelines emphasises that the Board and senior management are responsible for achieving fair dealing outcomes by their institutions. They must monitor the implementation of policies and procedures by their staff. They must step up their efforts on training for their staff, and ensure that their representatives are better trained to deal with and offer quality advice to customers. On the supervision front, MAS has said it will be intensifying its supervision of financial institutions. More resources will be devoted to this. In addition to assessing whether financial institutions have proper systems and controls in place to comply with their regulatory obligations, MAS will examine the steps taken by the Board and senior management to ensure fair dealing in areas such as product approval due diligence, pay and incentive structures as well as the training and supervision of staff. At the same time, investors must be responsible for equipping themselves with knowledge and skills to make investment decisions, so as to be able to better safeguard their interests. For investors, the basic tenet remains that if you do not sufficiently understand the nature and risks of a product, you should

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not buy it. MAS and its partner agencies will step up the MoneySENSE financial literacy education efforts. For example, the recently launched MyMoney seminars aim to help investors understand common financial products. A major initiative in the coming year will be to develop a financial literacy core competency framework for financial decisions at key life stages. Ten million Singapore Dollars from the Financial Sector Development Fund have been set aside for financial education programmes over the next three years.

Mr Lim Biow Chuan (Marine Parade): Supplementary question. Can the Minister confirm that MAS had previously received complaints or feedback about these financial institutions' method of selling such structured products in the past? What did MAS do to follow up on this feedback and would MAS be able to look into those complaints and feedback earlier such that the mis-selling does not occur?

Second question is to ask the Minister whether in view of the fact that there is such a large amount of monies lost and some of this is in part due to untrained sales staff, would MAS not consider a more severe reprimand or action against senior management of the bank, that would cause them to be more cautious or careful to ensure that there is no such similar management lapses?

Mr Lim Hng Kiang: Mr Speaker, Sir, structured products like these started to be in the market around 2005 and then took off soon after that. MAS has done several surveys, for example, to monitor customer service, particularly in the sale of such products.

In October 2005 to early 2006, for example, MAS conducted a mystery shopper survey of the financial institutions marketing investment products and MAS announced the results in 2006. In the

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mystery shopper survey, there were not many complaints that MAS uncovered.

Similarly, in 2007, MAS conducted a survey of customers' responses to the service standards provided by banks and the financial institutions, and in that survey, the number complaining was not very significant.

So MAS does regularly monitor the situation conducted over the counter, on the ground. During that period of 2006 to 2008, there were some complaints, but not a significantly large number of complaints in relation to structured products.

But having said that, let me reiterate the context of this structured products episode in its entirety. As I mentioned earlier in my reply, when these products were marketed, many of the underlying institutions and the underlying securities were all well-rated, and this is an unprecedented event. If there was mis-selling, this was uncovered during the investigations. This was uncovered and dealt with on a case-by-case basis, and as a result, one-quarter of the complaints were refunded in full, another one-quarter had compensation of more than 50% of their underlying investments and another 17% had less than 50%. So two-thirds of the complainants (for the three banks and one finance company) had compensation given to them.

Ms Sylvia Lim (Non-Constituency Member): Sir, two supplementary questions for the Minister. MAS has decided that as punishment for the offending financial institutions, they will receive bans from selling the structured products. But given that the market for such products has totally collapsed, would the Minister agree that actually such a punishment is actually no punishment at all, because there is no demand for such products at this point in time?

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Secondly, in the MAS report, it was stated that there is on-going investigation into regulatory actions to be taken against individuals and I presume that would be individual relationship managers (RMs) for mis-selling. But the investigation report documents very clearly that some of the RMs in fact were more or less victims in the process. They may have been given wrong instructions by the banks themselves, allowed to sell the products even though they did not go for training. So would the Minister not agree that actually the banks bear a large responsibility for the mis-selling part of the whole fiasco and really stiffer action should be taken against the banks rather than punishing individual RMs?

Mr Lim Hng Kiang: Mr Speaker, Sir, as I mentioned in my reply, the situation is more complicated. First of all, it is not the same situation in all the financial institutions. In some of the financial institutions, they assessed the risk of the product and they assessed it correctly. They had proper training for the relationship managers. They also had proper advisory process, for example, they had risk-profile taking and they did proper matching between the investment needs and the products. So we should not take a single approach to all of them because the institutions behaved differently, and some of the lapses are in the due diligence and in the implementation of the processes and regulations.

Having said that, of course this is not an episode that we are very happy with. Having done investigation, MAS found fit to go beyond a reprimand and in fact banned the financial institutions involved from selling the structured products from a minimum of six months to a minimum of two years. Ms Sylvia Lim asked whether this punishment is appropriate because the market for such structured products has collapsed. Again, as I mentioned in my reply, the impact on the financial institutions goes beyond just the financial

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implications on the banks, it is also a big impact on their reputation. This move by MAS is unprecedented, as many analysts and commentators have observed, and I think the banks and the financial institutions take this very seriously. Having been given this report, and the shortcomings in the due diligence and implementation of the regulations pointed out to them, I think they will take all steps to restore their reputation.

As to the actions against the relationship managers, this is under investigation, and it is premature for me at this point to say what the results are. But I would take Ms Sylvia Lim's point that in this episode, the financial institutions bear responsibility, but in some specific cases where the relationship managers have been responsible for the mis-selling, then this should also be investigated.