INVESTIGATIONS INTO ALLEGED MIS-SELLING OF STRUCTURED PRODUCTS BY FINANCIAL INSTITUTIONS

INVESTIGATIONS INTO ALLEGED MIS-SELLING OF STRUCTURED PRODUCTS BY FINANCIAL INSTITUTIONS:

(Update): 1.

Mr Siew Kum Hong asked the Senior Minister (a) if he will provide an update on the progress of investigations by MAS into alleged mis-selling by financial institutions and the progress of the review of the marketing and sale of structured products; and (b) whether MAS is satisfied with the progress of the financial institutions in resolving customers' complaints.

2.

Ms Sylvia Lim asked the Senior Minister (a) whether structured notes similar to Lehman Brothers products were sold to small retail investors in the United States and in the same manner as in Singapore through bank branches; (b) if so, how disgruntled investors are being handled by the American Federal Reserve, compared to Singapore; and (c) if not, why such products were allowed for sale to small retail investors in Singapore in such a manner.

The Minister for Finance (Mr Tharman Shanmugaratnam):

(for the Senior Minister): Mr Speaker, Sir, as a member of the MAS’ Board, and in the absence of MAS' Deputy Chairman, Mr Lim Hng Kiang, I will be responding to the questions posed to Senior Minister that relate to the Monetary Authority of Singapore (MAS).

With your permission, could I take the first two questions together?

Mr Speaker: Yes.

Mr Tharman Shanmugaratnam: Mr Siew Kum Hong has asked for an update on

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MAS' investigations into allegations of mis-selling, and also an update on the review of the marketing and sale of structured products. A number of possible cases of mis-selling have been brought to MAS' attention and MAS is following up on them. MAS has confirmed that it has been conducting formal inquiries into allegations of breaches of the law, inadequate internal controls by the financial institutions that sold structured products linked to Lehman Brothers, and poor sales practices by their representatives.

MAS will take firm and appropriate regulatory actions where there are breaches of law or regulations by the financial institutions or their representatives. These regulatory actions could include fines, public reprimands and prohibition orders which bar the financial institution or a representative from providing financial advisory service for a specified period of time. MAS' inquiries are progressing, and it will make an announcement on any actions it is taking when they are completed.

While MAS considers its current regulatory regime for marketing of investment products as fundamentally sound, it is undertaking a review in light of recent developments not just in Singapore but globally. MAS has announced that the review may include stronger suitability requirements for certain types of products, clearer product labelling and risk rating, and simpler descriptions of the features and risks of products so that they can be more readily understood.

In reviewing our current regulatory and supervisory approach, however, MAS intends to be careful not to come up with overly prescriptive rules which may not serve all investors. MAS' approach has allowed Singaporeans a wider choice of investment options to cater to their diverse needs. It is studying the specific

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refinements that need to be made carefully so that we do not make hasty changes that bring unintended consequences in the future.

Furthermore, regulation cannot be the only solution. All stakeholders have a role to play. The Boards and senior management of financial institutions must embed a culture within their institutions of ensuring fair dealing for customers of their institutions. In this regard, MAS has instructed the CEOs of all financial institutions to conduct a thorough review of their financial instutitions' processes and procedures for their sales and marketing activities. Investors too have to play their roles, by reading product disclosures and making the effort to understand the products they purchase. This will reduce the risk of they being sold products which do not meet their needs or which are beyond their ability to absorb in terms of the risks that need to be absorbed. Where there is no mis-selling, investors have to take responsibility for their investment decisions.

Mr Siew has also asked for MAS' views on how the financial institutions have been handling the customers' complaints process thus far. MAS has been following up with the financial institutions to ensure that they are handling all investors' complaints – and I repeat – all investors' complaints in accordance with the impartial process that has been set up, and to do so with full urgency and seriousness. This has been communicated at the most senior levels of each of the institutions. MAS receives regular updates from the independent persons who have been appointed to oversee the complaints handling and resolution process in each financial institution. The financial institutions have put in concerted efforts and additional dedicated resources to deal with all complaints. While there were

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some difficulties at the start, MAS has seen improvements. Some financial institutions have made good progress in the resolution of complaints, and MAS has welcomed this. Others which were lagging earlier have now put in greater effort and resources. MAS is monitoring the progress of all the financial institutions concerned. It expects the financial institutions to deal fairly with all cases, regardless of the background of the investors and whether they were investors that fall within the vulnerable category or otherwise, with a view to reaching fair resolution where there is evidence of mis-selling.

Ms Sylvia Lim has asked whether structured notes similar to Lehman Brothers products were sold in the United States and how investor complaints on such products are being handled.

Structured notes have been marketed to retail investors in the United States. In fact, recent press articles from the US have indeed highlighted how the recent Lehman Brothers bankruptcy has resulted in investors, both retail and institutional, suffering significant losses on structured notes. Structured notes have also been sold in other countries, including the UK, Australia, Germany, France, Hong Kong and Taiwan.

The regulatory regime for investment products in Singapore is not fundamentally different from that in other reputable jurisdictions like the US, UK and Australia. The basic principles are similar - financial institutions and issuers are required to properly disclose key product information; financial advisers and their representatives in the sales and advisory process have responsibilities to abide by, which are set out very clearly in the Financial Advisers Act; the role of investors, in turn, is to ensure they understand the products they invest in and, where there is no mis-seeling, to take responsibility for their investment decisions.

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In Singapore, financial institutions are required to properly disclose to investors the features and risks of the products they distribute. They and their representatives must have a reasonable basis for recommending investments, taking into consideration the investment objectives, financial situation and needs of the investor. In addition, the MAS has published a set of good practices which financial institutions are encouraged to follow. These are good practices over and above the regulatory requirements which are specified under the law. There is, of course, in place, quite importantly, the MoneySENSE programme – a national financial education programme that aims to enhance the financial literacy and sophistication of investors and to empower them to make informed decisions.

Ms Sylvia Lim has also asked about how investor complaints are being looked into in the United States. In relation to the Lehman notes, reports indicate that some investors have approached lawyers to look into pursuing arbitration claims with the Financial Industry Regulatory Authority (FINRA) – previously called NASD – which is an industry-based regulatory body.

In Singapore, as my colleague Mr Lim Hng Kiang elaborated at some length a month ago in Parliament, MAS has set out a three-step dispute resolution process, including procedures to ensure the fair and impartial handling of complaints by the relevant financial institutions and arbitration of disputes between investors and the financial institutions. MAS has been active in supervising these procedures, and its priority is to ensure that every complaint is dealt with appropriately.

Mr Siew Kum Hong (Nominated Member): Sir, I have three supplementary questions.

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My first question for the Minister is whether MAS will expand the scope of its review to include how such products are structured, in particular to examine instances where retail investors end up effectively insuring the originator of the product as with the mini-bonds. And will MAS also consider whether originators and distributors of structured products should be required to clearly disclose their profit margins and commissions earned, as with insurance products?

Sir, my second question is to ask what is MAS' view on the recent complaints by investors that DBS has been acting too slowly and, in some cases, has even been non-responsive.

My third question is whether MAS is taking proactive steps on other structured products not linked to Lehman Brothers where mis-selling could, nevertheless, have occurred.

Mr Tharman Shanmugaratnam: Mr Speaker, Sir, I would like to thank Mr Siew Kum Hong for those questions. On the first question of whether the MAS would expand its review to look into how the products are structured – ie, whether there is some element of the product that requires the retail investor to effectively be insuring the issuer or any other aspect of structuring the product, and whether there should also be disclosure of commissions – MAS is undertaking a thorough review on all aspects (advertising, marketing the products, all aspects of the sale process, and post-sale process of risk assessment within an institution). It will look at all aspects, but I think it will not want to substitute the regulator's judgment for that of the financial institution and the investor for any product. What is formal, useful and, I think, a far better way of ensuring that diverse needs can be met of the investing public is to ensure simple, clear and good

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disclosure, and to ensure fair and reasoned financial advice that takes into account the investor's risk profile and means. Those are the two most important precepts – disclosure and sale practices – which have to be sound, well reasoned and taking into account the interest of the investor, rather than MAS substituting its judgment for that of financial institution and the investor as to what type of products to be in the market and how they should be structured. So I think that should be the general approach, but I say this without wanting to pre-empt MAS' review. It is going to be a thorough review and all aspects will be looked at, including the issue of commissions which Mr Siew Kum Hong has mentioned.

On DBS being too slow, I would rather not comment on specific financial institutions. I have no reason to believe that DBS, in particular, has been slow in processing of complaints. Let us leave it to the MAS in its dealing with those institutions and leave it to the MAS in its inquiries and investigations into this whole episode to derive conclusions.

On whether the MAS is looking at structured notes more generally – yes, it is. MAS has a good handle on this. It has been very careful and deliberate in its statement so as to serve the interest of investors best. MAS is not simply being reactive.

Ms Sylvia Lim (Non-Constituency Member): Three supplementary questions. The first question is whether the Minister can confirm that there were certain structured notes sold in Singapore which were actually under a selling restriction of not being allowable for sale to US citizens.

Secondly, can the Minister confirm that, under the US law, there are certain structured products which can only be

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sold to accredited investors, as defined under their Federal law, who are basically sophisticated investors or investors of certain high net worth?

The third question is whether the MAS is considering a ban on the sale of structured products to the mass retail market altogether – in other words, setting strict qualifying criteria for investors who wish to buy such products?

Mr Tharman Shanmugaratnam: I do not have full knowledge of the full landscape of structured products being sold in the United States. But I can say that structured notes similar to what we have seen being sold in Singapore – the Lehman Minibonds and other structured notes – are indeed marketed to the retail public in the US, the UK, Germany and some of the other countries that I mentioned. We are not unique in this respect.

Again, I do not want to pre-empt MAS' review.

I happen to think that it will be a bad idea. And I doubt MAS will want to conclude that all structured products should be banned from the retail public. First, because that is a large universe of products, a whole range of equity-linked notes, some of which are fairly basic notes but with a little kicker based on equity prices, and some of which are more complex. There are notes which are credit-linked notes such as Lehman Minibonds, Pinnacles, and some others, which involve a higher degree of risks because it is linked to default of the referenced entities. So there are varying degrees of complexity and risks. And I think it is very hard to draw a thick black line around what you consider safe, not so safe, and positively risky. It is going to be extremely difficult for the regulator to substitute his judgment for that of the market and the investor.

Mr Inderjit Singh (Ang Mo Kio): I have two supplementary questions. First is on

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this issue about the investigations conducted by the financial institutions. There has been some feedback from my residents and also members of the public that the panel set up by the financial institutions and the banks may not be independent enough to review these things. In fact, the investors feel they may be disadvantaged if they do this. Would the Minister consider setting up an independent panel, perhaps by MAS, to investigate the selling of such structured products, ie, the issue that we are talking about right now?

Secondly, I have heard that some governments have set up high-level committees to investigate any regulatory breaches in the sale of the structured products – the same products that were sold here. In view of the seriousness of the issue, would the Minister consider, perhaps, setting up a parliamentary committee to investigate any regulatory breaches by the financial institutions and any related parties with regard to these structured products?

Mr Tharman Shanmugaratnam: I would like to thank Mr Inderjit Singh for his two questions which are related to some extent. His first question was whether there should be an independent panel to evaluate complaints rather than to go through the financial institutions. And his second question, if I got him right, was whether there should be a high-level committee, for instance, a parliamentary committee, to look at whether there have been breaches of regulations. I think the desire for independence in this process is an important one and a valid one, and that is precisely what MAS' approach is providing. This is exactly the approach which MAS has taken – ensure that at each step of the process, there is independent evaluation of investors' complaints. I will come in a minute to the investigation into financial institutions themselves.

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For the investors' complaints, at each step of the process, it ensures there is independent judgment being applied, and it has not been tilted in favour of the financial institution or in favour of the investor. What we have done essentially is to ensure independent and fair resolution of the disputes without either being overly legalistic and without politicising the process. And to do either of those, to be either overly legalistic or to politicise the process, will not be in the interest of investors. It will drag out the process, it will push the financial institutions to the wall – it will have their backs against the walls – and they will slow everything down, they will be overly legalistic, and investors are far less likely to get fair restitution. So the approach being taken is not one which is not independent. The approach being taken is one which ensures independence at each step of the process without being legalistic and without politicising the process. And I think the MAS has got the balance right.

If I can explain it further – first step in the process is investors' complaints are assessed by each financial institution. It was not left to the financial institution alone to assess it. The MAS required that they appoint independent persons approved by the MAS, reputable independent persons that are not linked to those institutions, to oversee the process. And that is not casual oversight. I can tell you the three independent persons. I am not sure if they are being paid but, if they are, it is probably a pittance. They are putting in a lot of time into this process, evaluating the questions being asked of investors, evaluating the way in which investors' responses are being recorded, evaluating the way in which judgment is reached on whether there was mis-selling, whether there was partial mis-selling, or whether, in fact, it was the investors' own responsibility. It is a matter of details, it is a painstaking and laborious matter, but the three independent parties

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have been very actively overseeing this process, and they have been in close contact with MAS throughout this process.

Second step – if investors are still unhappy with the outcome of the process at the level of the financial institutions, they can take it to FIDReC. What is FIDReC? It is an independent body set up specifically to be able to provide fair and objective arbitration between the investor and the financial institution. It is manned by highly qualified people, adjudicators, most of whom have legal experience who are experienced in arbitration. FIDReC is independent, it is qualified and it is a second level of check in the system.

And, thirdly, of course, investors can, if they wish, seek recourse in the courts, which are, of course, independent. So at each step of the process, there is independence but it is not one which required investors to jump immediately to the courts where things will necessarily have to go according to the strict letter of the law. And we think this process where you have judgment being applied in the financial institution on what happened, some judgment being applied as to how investors can be fairly restituted where there is some element of mis-selling or some element in which they were misguided, is a superior process for the investors, and it is more likely to lead to a fair outcome for the investors.

And to be quite frank, if you ask me where my sympathies are, if you ask Senior Minister where his sympathies are, or Mr Lim Hng Kiang, our sympathies are with the investors. How do we go about ensuring that the investors' interests are met is the issue at hand, not whether we sympathise with them, because we do. For many of them, it is actually very sad what has happened. But how do we go about ensuring their interests are met? If

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we either politicise the process or take an overly legalistic approach, as opposed to this case-by-case evaluation in the financial institutions and FIDReC, there is less likelihood that we will get a fair outcome for investors. So we are doing this in a way that may not appear to be making bold political headlines, or it may not even be politically unpopular at each stage of the game, but it is the right thing to do, it is the fairest thing to do, and we have the investors' interests at heart in doing it this way.

On his second point, I am aware that Hong Kong Legico, not the government, has set up a sub-committee – I think that is what it is called – to look into whether there were breaches of regulation. That is one approach. Our approach is different. We have the MAS as an independent body – I do not think anyone questions its independence – staffed by highly-qualified personnel to look thoroughly into every possible breach of regulation – law regulation and sales practice. They are working day and night on this. This is not a softly, softly approach. And when they get results, arrive at their findings, they will take action. And along the way, when they arrive at findings, they also inform financial institutions of the assumptions that need to be made in evaluating each individual investor's appeals, because what MAS determines in general for sales practices in financial institutions should also influence how the financial institution deals with each individual investor. So there is some interaction between those processes. So this is again a way of doing it which ensures independence, rigour but without politicising the process. And I think that will provide the fairest deal to the investor.

MAS has been receiving feedback throughout this process from individual investors, through the email, through phone calls and through letters (some handwritten letters). It listens to all

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feedback. It also receives petitions from Mr Tan Kin Lian and others. And MAS has an open mind of all the feedback it receives, but it has to go about this – not as judge, not substituting its own judgment on cases – by preserving a system that is independent, fair, and a system that has recourse to the law.

It is easy if Senior Minister, Mr Lim Hng Kiang or me wanted to try and put pressure on MAS to put pressure on the financial institutions, we may look good politically, but not only is it not likely to get the outcome we want for investors, it is also going to be the way in which investors' interests will be hurt in future. The next time banks want to come up with products, the next time we go through any episode, we will be best served by having rule of law, good practices within the institutions, rather than a system that has to act by the whims or the convenience of political interests. That is our approach. So make no mistake about this. MAS is not cloistered – I do not know what number Shenton Way it is but it looks like a very formidable building – they are listening to feedback all the time, they are interacting with institutions, and I should mention to you also, they have been in very close contact with the trustees and receivers for Lehman Minibonds to ensure that every restructuring option that can be in the interest of investors is looked into. MAS has been very active in this game with the trustees and receivers to make sure that every restructuring option that can serve the interest of investors is being looked into.

Mr Speaker: Last question, Ms Olsen.

Ms Eunice Elizabeth Olsen (Nominated Member): I would like to ask the Minister two supplementary questions. Sir, up until now, the men-on-the-street have placed their trust in our banking institutions such as DBS, which truly is a Singapore brand name. And because trust

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is not a word that the Government or the people take lightly, and we have been told that we can trust our institutions, I would like to ask: is it fair that the men-on-the-street, who clearly do not know much about these investments and many of them who were clearly working on the basis of trust, end up being the ones who lose out? And if this was the case, will this erode trust in our system?

Secondly, will the Minister agree with John Peterson, an article in TODAY , when he said that banks were selling complex products for which they were never correctly licensed and over which they have been poorly regulated, and his proposal that regulators separate the simple banking licence from the licence to sell products, and that we should allow banks to be one or the other and not both?

Mr Tharman Shanmugaratnam: First, on her question of trust, if indeed an investor has been sold a product that is clearly unsuitable for his or her profile, given his age, experience in the markets, income, or if he has put into that product a very large proportion of his total assets, and if there are clear-cut cases of a mismatch of product with the investor, then the financial institutions and FIDReC will ensure that the investor gets proper restitution. That is the way in which we will preserve trust in the system. But if the investor knew what he or she was doing, took a risk, and it turned out wrongly, then the way to preserve trust in the system is not to ask the financial institution, "Never mind, you cough up". That is the way to weaken trust in the system. So I think we will have to be fair and objective about this. Err on the side of the investor where there is a good measure of doubt as to whether the investor was given proper advice, but keep the basic precepts of the system that this is not a bully system, this is a system where you got to operate by rules, guidelines and sound management prac

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tice. I think that is the way we preserve trust in our system and that is how investors will benefit, not just in this episode but in future.

I am sorry I have not read that article she mentioned. But I am sure the MAS in its review of products and the institutional practices that lie behind the sales of products will look at all views. The view that she mentioned, from my hearing it at the first time, was a little simple, a little black and white, because this has been debated extensively in the US and other places for a long time, and they have moved away from a clear separation of investment banking and commercial banking. There is now in fact universal banking being practised across many institutions. It makes the task of the regulator more complex. But it is not necessarily a safer system to simply separate these things out into different institutions. Huge problems have happened in Monoline insurers. Huge problems have happened in institutions that are dedicated and specialised to just certain segments of the markets. So, at the end of the day, it is about corporate governance, risk management, sound supervision and disclosure practices that allow investors to make sound judgments.