UNIT TRUST PURCHASES (Cooling-off period)

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UNIT TRUST PURCHASES:

(Cooling-off period): 10.

Miss Penny Low asked the Deputy Prime Minister and Minister for Finance with respect to the mandatory seven-day cooling-off period for the purchase of unit trust by consumers, (a) whether the consumer will be saddled with the risk of a fall in market price of the unit trust during that seven-day cooling-off period; (b) why is there a difference in the cooling period between 'pure' unit trust and investment-linked unit trust issued by insurers, when the underlying mechanisms and assets for some are similar; (c) whether there is any penalty imposed on a seller who breaches the full disclosure requirements at the point of sale and any specific remedy available to the aggrieved consumer; and (d) in the case of breach of the full disclosure requirements, whether the Government will extend the scheme to allow for full refund so that the consumer will not be at risk of a fall in market price of the unit trust during the cooling-off period.

Mr Lee Hsien Loong: Mr Speaker, the Monetary Authority of Singapore (MAS) introduced the cancellation period for unit trusts in July this year. This affords consumers an opportunity to reconsider a hasty investment decision made under the influence of pressure selling tactics of sales advisers. Consumers who exercise their right to cancel will get a full refund of the original sum invested, including the initial sales charges, but subject to any

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market loss. The cancellation requirements for unit trusts seek to strike a balance of responsibility among fund managers, distributors and consumers. Fund managers and distributors will have the incentive to ensure that their sales and advisory processes are fair and proper, and that the product features are properly explained to minimise the possibility of consumers changing their minds subsequently. For consumers, having to bear the risk of adverse market movements, in turn encourages them to exercise care and discipline in selecting unit trusts and deters them from frivolously exercising their right to cancel.

The 14-day free-look period for life insurance was implemented in the early 1990s. This longer free-look period is justified for life policies, because these policies can have high early termination penalties. The 14 days will allow consumers sufficient time to understand fully the terms and conditions of the policy. For such policies, consumers will, in general, also not be subject to market risk during these 14 days. However, I agree with Ms Penny Low that investment-linked insurance policies are very similar to unit trusts, apart from the element of death benefit. There may therefore be a case to harmonise the cooling-off or cancellation period requirements for these two types of products. MAS will study this further.

Miss Penny Low has asked whether any penalty is imposed on a seller who breaches the full disclosure requirements at the point of sale, whether any specific remedy is available to the aggrieved consumer; and whether in the case of a breach of the full disclosure requirements, the Government will extend the scheme to allow for full refund, so that the consumer will not be at risk of a fall in market price of the unit trust during the cancellation period. Under the Financial Advisers Act (FAA), when recommending a unit trust, financial institutions are

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required to disclose and explain to the consumers certain information about the unit trust. This includes the nature and objective of the fund, details of the fund provider, the consumers' contractual rights, the risks and benefits of the fund, fees and charges to be borne by the consumers, and the cancellation rights of the consumers. Financial institutions are also prohibited from making false and misleading statements or omitting to disclose any material matter about an investment product. A breach of these requirements, including failure to make full disclosure, is an offence under the FAA, which would cause MAS to take appropriate action against the offender.

MAS does not, however, have the power to direct financial institutions to pay compensation to aggrieved consumers. Aggrieved consumers should approach the financial institutions or industry-based dispute resolution mechanisms to resolve their disputes. MAS expects financial institutions to institute a structured internal dispute resolution process, and has encouraged the industry to set up industry-based dispute resolution mechanisms. Consumers may seek legal redress through the courts.

There is no need for MAS to extend the scheme to allow for refund of the original investment sum to consumers. The courts and the industry-based dispute resolution schemes would be well-placed to assess whether the losses suffered by consumers are the result of the non-disclosure and, if so, to direct the financial institution to make good the losses suffered by the consumers.

Miss Penny Low (Pasir Ris-Punggol): Sir, will the Deputy Prime Minister give an indication whether the harmonisation would be in favour of 14 days or 7 days?

Mr Lee Hsien Loong: Mr Speaker, Sir, I have not studied this in detail but, off

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hand, I would say we are more likely to harmonise on the unit trust rule because, in fact, investment-linked insurance products are almost entirely investment and only a very small part for insurance.

Miss Penny Low: Sir, given that there have been quite a lot of disputes and unhappiness over the sale of unit trusts and the high pressure sales tactics, would it not be more prudent to harmonise in favour of 14 days?

Mr Lee Hsien Loong: Mr Speaker, Sir, I think we have to have a set of rules which are fair and which encourage responsibility. When you enter into a contract, it is a serious matter. You have signed. You are an adult. It has been explained to you. There is a procedure. There may even have been a fact-find to ascertain your ability to bear risks and your financial needs. Then you sign on the dotted line. Under normal law, that is settled and you are bound. But because we recognise that consumers sometimes are pressured by high pressure sales tactics and may not fully know what they are doing and may conceivably regret what has happened, we have provided a 7-day cooling off period. But if you have an after-thought, you should have your after-thought quite soon. You cannot look at the way the market moves. When the market moves down, you say, "Oh, dear". Then it is not an after-thought but it looks like you made a bad bet,

and you want to cancel your bet after seeing the cards. I think that is very difficult. So I would not be in favour of having a long free-look period. If you have a long free-look period nobody will want to sell you unit trusts, because I am getting you a free option - market goes up, you are happy; market goes down, you return the deal to me. I think that is a very difficult business to do.

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Miss Penny Low: I have recently paid a visit to a personal financial planner just to check out what are the current practices in the market. What I found to my dismay was that even the sellers themselves who sat at the bank counter did not quite know what they were selling. So, in many cases, the ordinary consumers who walk into a bank and are introduced to various types of unit trusts may not know what are the relevant questions to ask. They are given a prospectus and that is, in many cases, considered a full disclosure which may not be adequate. In recent years, many of these products have also become very complicated and difficult to understand. Is the Ministry making some checks on the unit trust sellers as well as requiring a certain basic level of education for financial planners that is over and above what is required today under the FAA?

Mr Lee Hsien Loong: I would say, firstly, if the Member will tell me in confidence who this financial planner is, I will look into the matter immediately. Secondly, the solution really is financial education for the public. So if they understand what they are doing and they know what they do not know, that is the purpose of the MoneySense programme. We are not trying to make everybody an expert or a financial wizard but at least be aware of what major financial categories we are talking about. Is it an investment, is it a deposit, are you going for an up and down ride, or is it a risk-free investment? So, at least, you must have some basic understanding of what is involved. Thirdly, of course, the most important thing which you must learn when you get your financial education is if you do not understand it, do not put your money in it.

I read last week in the newspapers that somebody received a notice from the Diamond Bank of Nigeria and invested $300,000. I am not sure who his MP is. I feel a bit sorry for him, but perhaps

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others will learn from his experience and will be more cautious.