March 15, 2009
SALE OF INVESTMENT PRODUCTS
'Tell more' rules in the works
MAS proposals require greater disclosure and transparency in marketing investment products
By Lorna Tan
Consumers can expect more information disclosure and better protection of their interests when new proposals on investment products take effect soon.
Last Thursday, the Monetary Authority of Singapore (MAS) issued a 49-page consultation paper as part of a major review of investment products that are not listed on the Singapore Exchange. It sought public feedback on its wide-ranging recommendations.
The primary objective of the review is to promote a higher level of disclosure and transparency in the marketing of such products. It covered three product groups: structured notes, unit trusts and life insurance.
The review is a response to complaints from the large number of investors who lost money on structured notes linked to collapsed United States investment bank Lehman Brothers' Minibond Series.
Many have cried foul and claimed they were given the wrong impression by the banks that such products were safe and low-risk.
Products at the centre of the storm were Merrill Lynch Jubilee Series 3 LinkEarner Notes and DBS Bank's High Notes, all of which have exposure to Lehman.
Wondering how the new proposed Product Highlights Sheet might look like in practice? From the myriad funds here, Lorna Tan randomly selected the prospectus of Aberdeen Singapore Equity Fund. This is her take on how the Product Highlights Sheet might look in this case.
What are you investing in and who are you investing with?
This tells investors the nature of the product and states the parties involved
Based on the Central Provident Fund (CPF) Board's risk classification, the Aberdeen Singapore Equity Fund is a higher-risk unit trust.
It is narrowly focused because it is based on a portfolio of Singapore stocks. The fund manager is Aberdeen Asset Management Asia.
What are the key risks you face?
This spells out the key risks of the investment.
Investments in the fund are subject to factors such as market risks, fluctuations in interest rates and foreign exchange rates and political instability.
You should be aware that the price of units in the fund and the income of the fund might fall or rise, and that you may not get back your original investment. As the fund is invested solely in Singapore stocks and cash, it is less diversified and riskier than other funds with holdings across several economies.
What will you gain or lose in different situations, including the worst case?
This tells investors what they could potentially gain or lose, including the worst-case scenario.
You gain when the value of the portfolio of Singapore stocks rises and vice versa.
The fundamental risk associated with any equity portfolio is the risk that the value of the investments it holds might decrease in value, and the fund manager may at its discretion terminate the fund. Please refer to the prospectus for more information on risks and other termination clauses.
For whom is the product suitable?
This will help investors decide if the product meets their needs.
This fund will be suitable if you have a higher risk appetite and have a positive medium to long-term view of Singapore stocks.
How much are you paying for this investment?
This tells investors of the minimum investment sum and the distributor's fees
The minimum initial investment sum required is $1,000 for SGD class and US$5,000 (S$7,700) for USD class.
There is an initial sales charge of up to 5 per cent for cash and 3 per cent for CPF monies.
There are also other fees charged to the fund by the manager, trustee and other parties, like the annual management fee.
How often are valuations made available?
This tells investors if valuations are readily available and the risks.
The indicative issue and redemption prices of the fund are updated daily at www.aberdeen- asia.com, selected distributors' websites, or are obtainable from Aberdeen's toll-free line on 1800-395-2702. As units are issued on a forward pricing basis, the issue price of units is not ascertained at the time of application and will be known only the following day. There is a risk that the prices will vary from the indicative price, depending on market conditions.
How can you exit from this investment and what are the risks and costs in doing so?
This informs investors of the exit mechanism and the risks.
Fund redemption can be carried out through the distributor from whom you first bought the units.
As the price is available on a forward basis, there is a risk that it may be different from the current indicative price. It is the current policy not to impose any redemption charge. <[> Please refer to the prospectus for further details.
How do you contact us?
This tells investors how to obtain information or raise concerns
Please contact any of our appointed distributors. You can also find out more on our website at www.aberdeen-asia.com
What are some other important things you should know before you invest?
This highlights material information which investors should know
The selection of stocks in a portfolio is a skilled but subjective process. Unit values and income of fund may fall or rise. Past performance is not indicative of future performance. You should read the prospectus or seek relevant professional advice before making any investment decision.
8 THINGS TO KNOW ABOUT THE REVIEW
1 Product highlights sheet
To be prepared by product issuers, the product highlights sheet should be given to consumers before they make investment decisions.
This will supplement the product's current marketing material, such as a prospectus and fact sheets in the case of unit trusts, or benefit illustrations for investment-linked products.
Capped at four pages, it will set out key product information in a simple and concise manner.
It comprises a question and answer format with the questions set out by the regulator and answers provided by the product manufacturer.
It will not be 'fine print' but rather must be presented in a font size of at least 10-point Times New Roman.
2 Complex investments
The Monetary Authority of Singapore (MAS) is seeking feedback on a suitable definition for complex investment products. Broadly, these would be products with derivatives embedded in them.
For those classified as 'complex investments', the regulator proposed that they be sold only after advice is given.
It is proposed that representatives selling such products be required to undergo a new complex product knowledge module.
There will also be a 'health warning' slapped on all the product's marketing and advertising material.
This is to inform consumers that the product is complex and that it cannot be sold unless the investor is provided with advice including an explanation of whether the product is suitable for the given investor.
3 Risk rating
The MAS is considering introducing a system to rate the risks of investment products so that investors can assess their suitability.
Still, consumers should also consider other factors such as their liquidity needs and portfolio diversification.
4 Fair and balanced advertising materials
The aim is to ensure that these materials present a realistic and balanced perception of the product and its features and risks.
Therefore, they should not suggest that the product is comparable to a bank deposit or that there is little or no risk of the investor losing his investment.
Customers will also be cautioned that the MAS does not pre-vet such materials.
To ensure that customers are aware of this, the regulator will require marketing and advertising material to include a statement that they have not been reviewed or endorsed by the MAS.
5 Bank tellers cannot act as product introducers
This will prohibit bank tellers and those working in finance firms from referring customers to representatives flogging investment products.
By doing so, it will help consumers distinguish better the primary function of tellers to take deposits, from that of representatives selling products.
6 Sellers to exercise greater due diligence
Distributors must assess the suitability of the product by answering questions such as 'Who is the product intended for' and if the representatives have the qualifications to sell it.
Advisory firms must document in greater detail the basis of their recommendations.
They must also gather more information as to whether the invested amount is a substantial portion of the customer's assets.
7 Restrictions on product sales without advice
Advisory firms can waive the need to give advice only if the customer contacts them on his own initiative to buy a product.
This waiver must be documented. For instance, if a customer buys products online, the firm may dispense with advice to such customers.
8 Enhancing MAS' powers
The MAS wants more powers to pursue breaches under the Financial Advisers Act (FAA).
The Act will be beefed up to allow the MAS to take civil penalty action against firms or individuals who contravene the FAA provisions.
There is also a proposal to allow investors to apply to court for compensation against a wrongdoer who has been prosecuted successfully by the MAS, without having to take individual separate legal action to prove the wrongdoing.
The consultation paper can be found on the MAS website www.mas.gov.sg .
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