MIS-SELLING OF STRUCTURED PRODUCTS BY FINANCIAL INSTITUTIONS

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MIS-SELLING OF STRUCTURED PRODUCTS BY FINANCIAL INSTITUTIONS:

(Update on investigation by MAS): 6.

Mr Inderjit Singh asked the Senior Minister (a) if he will provide an update on the resolution of complaints concerning the sale of structured products by various banks; (b) whether the banks have satisfactorily concluded their handling of all the complaints and reported the final outcomes to MAS; (c) how many consumers have raised complaints to the Financial Industry Dispute Resolution Centre because they were dissatisfied with the banks' findings; (d) whether MAS has done any investigations into alleged wrongdoings by financial institutions and what is the outcome of these investigations; and (e) whether MAS has planned any new measures to further protect consumers with regard to the sale of structured products.

7.

Mdm Cynthia Phua asked the Senior Minister (a) if he will provide an update on the investigation by MAS in the mis-selling of financial products; (b) what is the cause of the delay in the investigation; (c) what is the redress open to investors if they are not satisfied with the financial institutions' (FIs) handling of

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the complaints and the resolution process; (d) how many investors have lodged appeals to the Financial Industry Disputes Resolution Centre to seek compensation for their investments; and (e) how many cases have the FIs made partial or full refund and how many cases are still outstanding.

8.

Mr Siew Kum Hong asked the Senior Minister (a) how many complaints over mis-selling of Lehman Brothers-related structured products have been filed with financial institutions; (b) of these complaints, how many have resulted in (i) investors receiving a full refund (with or without interest) and of these, how many are "vulnerable investors"; (ii) investors receiving a partial refund; (iii) investors not receiving any compensation; (c) how many claims have been filed with FIDReC and of these, how many have been resolved; and (d) if he will provide an update on MAS' investigations into this matter.

9.

Ms Sylvia Lim asked the Senior Minister in relation to investors in Lehman-linked structured products who filed their cases with financial institutions or FIDReC (a) how many claims have respectively been upheld, rejected, or still pending; and (b) how many cases of investors who do not fit the age or education profile of "vulnerable investor" have had their claims upheld.

10.

Mr Sin Boon Ann asked the Senior Minister whether the Government will consider specific legislation to reduce or streamline the current legal complications arising from the recovery of investments linked to Lehman Brothers.

The Minister for Trade and Industry (Mr Lim Hng Kiang) (for the Senior Minister): Mr Speaker, Sir, may I have your permission to take Question Nos. 6 to 10 together?

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Mr Speaker: Yes.

Mr Lim Hng Kiang: Mr Speaker, Sir, I thank the five MPs for raising these questions. It gives MAS the opportunity to update the House on this issue.

To recapitulate, MAS has set out a three-step dispute resolution process to ensure the fair and impartial handling of complaints by the relevant financial institutions (FIs). A wide range of investors bought these products. There were different FIs involved and the circumstances under which investors made these investments also varied. Therefore, each complaint had to be assessed individually on its merits. The FIs' decisions have been based on an assessment framework developed in consultation with the independent parties (IPs) appointed by the FIs. Both the Consumer Association of Singapore (CASE) and the Securities Investors Association of Singapore (SIAS) have said that they are supportive of this process and regard it as being in the best interest of investors.

This process established by MAS was designed to achieve three main outcomes. First, to ensure that there is a consistent and rigorous process for the review of the complaints by the FIs. Second, to ensure a fair basis of decision, with the FI and investor taking due responsibility. Third, that the offers of settlement made to affected investors be regarded as reasonable and credible in the circumstances. MAS gave an update on 16th January 2009 on the handling and resolution of complaints for DBS High Notes 5, Lehman Minibond Programme Notes and Merrill Lynch Jubilee Series 3 LinkEarner notes. Looking at the progress made by the FIs and the results of the FIs' review of the complaints, as overseen by the IPs, I am of the view that the process put in place by MAS has achieved these outcomes.

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In all, the 10 FIs that sold DBS High Notes 5, Lehman Minibond programme notes and Merrill Lynch Jubilee Series 3 LinkEarner notes received 5,381 complaints as at 14th January 2009. All complaints received on or before 14th December 2008 have been considered by the FIs' internal review panel, apart from a small number of complainants who have declined to be interviewed and cases where the FIs are still obtaining further information. The FIs are in the process of communicating the outcomes from the reviews of complaints to the individual investors. This could take a few weeks, as FIs intend to communicate with the investors face-to-face.

I welcome the support from SIAS and CASE for the three-step dispute resolution process. They have also given useful advice to investors to take a practical and realistic view when considering any offer of settlement they may receive. They have also highlighted to the FIs the importance of handling communications to investors promptly and making sure that investors fully understand the terms of any settlement offer.

As a result of the review of individual complaints by FIs, based on the cases decided by the FIs as of 14th January 2009, 58% of complainants will receive full or partial settlement. This comprises 25% of complainants receiving full settlement and 33% receiving partial settlement. Mr Siew Kum Hong has asked out of these offers of settlement how many are for "vulnerable investors". While MAS has asked the FIs to pay particular attention to this priority group of complainants based on some general characteristics, such as age, education and investment experience, a single characteristic such as age or education alone does not determine if an investor will be vulnerable to being mis-sold the products. For instance, someone with

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little formal education may be a successful businessman. The person may have prior investment experience or could have invested in structured products jointly with, say, a younger family member. Nevertheless, all these cases were carefully reviewed by the FIs using the same assessment framework as for all other complaints. The FIs have told MAS that the outcome from the review process for investors who are elderly with little income, low levels of formal education and little investment experience is that most of them have been offered full or partial settlement. For the few cases among this group who do not receive any offer of settlement, the IPs together with the FIs have informed MAS that they have reviewed these cases and are satisfied that there are good grounds for the FIs' decisions.

Overall, this is a fair result. The process has worked as intended. The FIs have been responsible and co-operative in their overall efforts to ensure a fair resolution for affected investors. The independent parties have acknowledged the FIs' efforts in ensuring that the process is fair and rigorous, and that investors' interests are upheld. This reflects well on the way that the FIs involved have responded to the requests from MAS and to their commitment to upholding fair dealing.

Let me provide more details on the settlement offers made by the FIs. For DBS High Notes 5, 8% of complainants will receive offers of full settlement, and 16% will receive offers of partial settlement. For the Lehman Minibond Programme Notes which were sold by banks and one finance company, 34% will receive offers of full settlement and 41% will receive offers of partial settlement; for those sold by stockbroking firms, 1% will receive offers of full settlement and 12% will receive offers of partial settlement. As for the Merrill Lynch Jubilee Series 3 LinkEarner Notes sold by

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stockbroking firms, 2% will receive offers of full settlement and 9% of partial settlement.

The differences in the settlement figures reflect the varied target profiles of customers of the various FIs and their different business models. For example, stock broking firms mostly performed the role of executing transactions on instructions from their customers.

For Pinnacle Notes Series 9 and 10, it was announced on 14th November 2008 that these notes would be subject to early redemption. I have been informed that the five FIs that sold Pinnacle Notes Series 9 and 10 have received 471 complaints as at 14th January 2009. MAS is in contact with these FIs to ensure that they handled investors' complaints according to the serious and impartial process that these FIs have already set up to deal with complaints relating to the earlier notes that I mentioned. Mr Hwang Soo Jin has agreed to oversee the complaints resolution process of the securities brokers for Pinnacle Notes Series 9 and 10. The other FIs are in the process of appointing independent persons to oversee the complaints handling processes for these notes.

Investors who consider they have a genuine claim that they were mis-sold the product or that the product was misrepresented to them should follow the same three-step process to resolve their complaints. Investors should first lodge their complaints directly with the FI that sold them the product. They should then provide full details of the case to the FI to allow the FI to make a fair assessment of the case. Finally, they can choose to accept the decision of the FI or refer their complaint to FIDReC where a fast track process has been put in place to deal with such cases.

Let me now turn to the cases referred to FIDReC. Mr Singh and Mdm Phua have

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asked about the FIDReC process and for an update. Investors who are not satisfied with the outcome of the FIs' review of their complaints may choose to have their complaint referred to FIDReC. Should an investor decide to refer his case to FIDReC, any offer from the FI will no longer be available to him. FIDReC will consider the merits of each case, including all relevant evidence presented, whether in written or oral form. The decision of FIDReC is binding on the FI but not on the investor. Investors should bear in mind that the outcome from the FIDReC process could be more or less favourable than the outcome of the FIs' review of the complaint. If an investor is not satisfied with the outcome of FIDReC, he may pursue other options for recourse.

As at 14th January 2009, there have been a total of 227 cases received by FIDReC. These cases are a subset of the total number of complaints lodged with the FIs. Fifty-five of these cases relate to the DBS High Notes 5, 136 cases to the Lehman Minibond Programme Notes, 30 cases to the Merrill Lynch Jubilee Series 3 LinkEarner Notes and six cases to the Morgan Stanley Pinnacle Notes Series 9 and 10. These cases are currently being processed for mediation and, when necessary, for adjudication. Two cases have been successfully mediated so far. The time taken to resolve any particular complaint will depend on factors such as the complexity of the dispute and when the parties involved are available for meetings or hearings.

Mr Singh and Mdm Phua have also asked for an update on investigations by MAS. MAS has announced that it is looking into any FI-wide issues, such as the selling practices and policies within each FI, as part of its formal investigations. The investigations cover, among other matters, the FI's due diligence into the structured notes, the procedures used at the point of sale, including how the FI ensured that the notes were sold to

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clients whose investment objectives and risk tolerance matched the risk profile of the notes, and the training and supervision of relationship managers. Where in the course of its investigations MAS identified issues relevant to the FIs' assessment of individual complaints, MAS has worked with the independent parties overseeing the complaint resolution process to ensure that these were incorporated into the complaints assessment framework.

MAS will be communicating its preliminary findings to the CEOs of the financial institutions involved. As part of due process, MAS will give the financial institutions a reasonable opportunity to respond to its preliminary findings before making a final decision. Until MAS' findings are finalised, it will not be appropriate for either MAS or the parties involved to comment further on the matters under investigation as it could be prejudicial to the investigation and the parties involved.

Mr Inderjit Singh has also enquired whether MAS has planned any new measures with regard to the sale of structured products. MAS has previously announced that it would undertake a review of the regulatory regime in light of these developments. The review is in progress and MAS will conduct a public consultation on the proposals by mid-March 2009. The review will consider stronger suitability requirements for certain type of products, clearer product labelling and simpler descriptions of the features and risks of products so that they are more readily understood. Proposals being considered include enhancing the regulatory regime for advertising and marketing materials and introducing product summary documents. There are already requirements that the sale of investment products in banks is to

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be undertaken only by financial advisers who are not to perform any bank counter staff functions. However, the review will also examine whether any enhancements should be made to ensure there is an even clearer separation between a bank's traditional deposit-taking business and its investment products sales and marketing activities.

Mr Sin Boon Ann has asked whether the Government will consider specific legislation to reduce or streamline the current legal complications arising from the recovery of investments linked to Lehman Brothers. The review being conducted by MAS is also looking into possible measures to address the legal complications that have been noted in relation to the Lehman Minibond Programme Notes. One proposal being considered is introducing a requirement for the appointment of an approved trustee with prescribed powers for certain investment products such as structured notes.

In reviewing its current regulatory and supervisory approach, however, MAS will have to be careful not to come up with overly prescriptive rules which may not serve all investors. MAS' current approach is intended to allow Singaporeans a wider choice of investment options to cater to their diverse needs. MAS is studying the specific refinements that need to be made carefully so that hasty changes are not made, which could bring along unintended consequences in the future.

Another area where there is more work to be done is in investor education. Much has been achieved through the MoneySENSE programme, with the support of CASE, SIAS and various financial industry associations. However, these efforts will have to be stepped up. MAS is working with various stakeholder groups, in particular those representing investors' interests, such as CASE and

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SIAS, as well as the relevant tertiary institutions.

Mr Inderjit Singh: Sir, I have two questions. One is on the role of the independent person that was appointed. Did the role include deciding who gets how much or would the person be involved in ruling on the process?

Secondly, there is also a whole group of people who had not made complaints to the FIs. Will they be allowed to make complaints and go through the process, now that the rest have been reviewed?

Mr Lim Hng Kiang: Throughout this process, we have found that the roles of independent persons have been a very positive one. First of all, we have an overall assessment framework and the independent persons (IPs), working together with individual FIs, have been able to help in the process to make sure that the cases are properly investigated, that the assessment framework is enforced and there is consultation between the IPs and the FIs to make sure that cases, especially those cases involving the so-called vulnerable investors, are carefully reviewed.

The IPs also helped MAS make sure that there is consistent and rigorous assessment throughout all the FIs because we must recognise that there are many FIs and institutions involved and this involved 5,000 over cases of complaints. So I would say that the whole process worked out very well.

As to the second question about people who have not complained, in fact many of the FIs have taken the initiative in combing through those who have not complained and where cases which they classified as worthy of compensation and settlement, they have in fact approached them. But those who have not complained, it is up to them if they want to proceed on this three-step process.

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Mr Siew Kum Hong: Sir, I have five supplementary questions, of which three are really requests for greater clarity on the information that has been released.

Sir, my first question is, how many of the investors who received partial or no compensation had been recorded as opting for the so-called option 4 in the sale process, that is, the no advice option, which on paper will seem to have absolved the adviser of the responsibility of ensuring that the product was suitable for the investor.

Sir, my second question relates to the information that has been disclosed which has been aggregated across all FIs divided into categories. So what is the breakdown of the resolution of complaints by each individual FI? This information will assure Singaporeans that each of the FIs have indeed been fair in their approach.

Sir, my third question: what was the total amount of compensation paid out? In particular, what was the total amount of compensation for the 1,282 investors who received full compensation and what was the total amount for those who received more than 50% compensation. This is important to assure Singaporeans that the FIs did not only compensate those investors with small claims.

Sir, my fourth question: MAS has explained, and the Minister has explained, that dissatisfied investors can proceed to FIDReC. Can the Minister confirm whether legally-trained employees of financial institutions can represent them before FIDReC whereas investors cannot be legally represented? If so, how would MAS ensure that the FIDReC process would be fair to investors?

Sir, my final question: MAS has announced, and the Minister has explained, that there will be a public consultation in March after feedback with the CEOs of the FIs. Can the Minister

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assure Singaporeans that the full findings of MAS' investigations will be made public, subject to confidentiality concerns? Can the Minister also confirm whether investors can wait until those full findings are released before deciding whether to accept the compensation offers from the FIs so that they can make a fully informed decision?

Mr Lim Hng Kiang: Mr Speaker, Sir, on the first question, obviously if those who opted for option 4, which is the no advice option, if we have excluded them I think the figures would have been much lower. So I think the figures included even those who opted for no advice option, but I do not have the figures right here with me.

On the second question on aggregated numbers and the breakdown of each FI – what I have given is what is a useful breakdown in terms of the character of the review. There is a distinction between the FIs and the finance company versus the stock-broking companies. As I mentioned in my response, the stock-broking companies generally just execute the instructions given to them. They do not undertake a full financial advisory role so their responsibility is much less and therefore again this is reflected in the outcome. So if you look at the outcome for the Lehman Minibonds by the FIs, 75% received full or partial settlement, which I believe is a very fair outcome.

Third, on the total amount, it is not possible for us to give the total amount-compensated right now because, as I said, the FIs are in the process of making the offers individually and some may turn down or not all will accept. So the final outcome of the compensation will really depend on who finally takes up the compensation that is offered to them. The FIDReC process does both a mediation process as well as an adjudication process, and I think if you go

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on to the website you will find that it is a very equitable process.

Finally, on the findings of the investigation and whether investors should wait for the findings to be known before they accept the offer, I would urge investors to look at the offer given to them. Whether they accept or not, it is entirely up to them. Even if they go for the FIDReC process, as I mentioned, there is a cautionary note – they may or may not receive more or less than the offers. So investors should study the settlement offered to them carefully and make the right decision.

Mr Low Thia Khiang (Hougang): Sir, I would like to ask the Minister whether FIDReC provides assistance to those complainants who do not understand English or who are not proficient in English?

Mr Lim Hng Kiang: I am sure they do. Just like in the courts and adjudication process, the facilities are always there.

Ms Sylvia Lim: I have two questions. First, I wonder whether the Minister could answer part (b) of my Question which is, "how many cases of investors who do not fit the age or education profile of "vulnerable investor" have had their claims upheld" which I had filed earlier.

My second point is that the Minister is aware that the Hong Kong's Monetary Authority had already issued a list of recommendations for banks and financial institutions to implement to prevent such things from happening again in the interim. And the public is actually noticing that the MAS' review is still pending and seems to be slower than the Hong Kong's Monetary Authority in issuing guidelines. I wonder whether the Minister would like to comment on that.

Mr Lim Hng Kiang: As I explained in my response, the process is actually very

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bottoms-up. The FIs and the IPs look at every case on its own merits. So even though we found it useful to have what we call "vulnerable groups" to make sure that this is given priority in the review, actually, on the ground, every case is looked at. Even those which are not vulnerable are assessed on its own merits and the numbers show that many of them are also given full compensation and partial compensation. It is not meaningful to categorise "non-vulnerable" because, as I have explained in my response, each specific criterion, like age, education or size of investment, does not, in itself determine the merits. It is the overall combination of, first, what is the risk assessment of products versus the risk profile of the person to make sure that there is matching and, therefore, there is no inappropriateness in the products sold to the person. Then, in assessing whether it is inappropriate or not, we have to look at the person's ability to make his investment decisions, his education, his track record and the way he has been investing his funds. So it is a holistic assessment of each case.

As to Hong Kong's approach versus ours, I know we are similar. There are pros and cons in proceeding in different ways. In Singapore, we have decided that we should do this in a deliberate manner. The fact that we have resolved the 5,000 over cases in a very rigorous and fair manner shows that the process works, whereas, in Hong Kong, the resolution of such cases is still pending.

On the second part of the regime itself and the processes, again, MAS believes in doing this in a deliberate manner with proper consultation. As I have mentioned in my response, there are some ideas of what to do and we are putting them up for feedback both to the FIs as well as to the general public. When we have assessed the feedback, then we would make a decision. I think this process serves us well.

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Mdm Cynthia Phua (Aljunied): Sir, I just want to ask the Minister whether the FIs are required by MAS to inform the investors of the reasons for rejection or partial settlement?

Mr Lim Hng Kiang: I am sure the communication process is a two-way process. The investors would ask and the FIs would respond accordingly.