Clarification from Dr Lan Luh Luh

Dear Mr Tan,

With regard to my comments on "Structured Products: Let's not forget about personal responsibility" in TODAY on 2008/10/30, I would like to clarify that I was asked to express my views on our PM's statement on the two approaches the government can take after the debacle on structured products and the general duty of investors themselves. I was not asked to comment on whether there was any alleged mis-sellings or misrepresentations by the banks or their agents nor whether the banks had covered themselves adequately, which are separate issues altogether.

In addition, for the investors, I was talking about the normal investors and not our senior citizens whom I even mentioned to the reporter that the government can consider imposing a total ban or at least some form of restriction on the selling of such complex structured products to them. These senior folks will never understand the complex intricacies of these products no matter how many times you explain to them. It was also in that context that I mentioned that I never invest in things I don't understand, because many of these structured products are really, really very complex and they vary from one to another and no two products are the same (well, this part was omitted from the report:-).

As for whether I agree with PM's statement on the two approaches our government can take after this debacle, one which is essentially going for more regulation and back to the paternalistic or merit-based regime or the other which is the current disclosure-based and less regulation regime, my comment was that I do not think that a general increase in regulations is the way to go and I would advocate for the current regime to remain as this is the only way we can move forward. More regulation will only make us less competitive in comparison to HK and other developed markets.

However, there can be regulation on a need basis esp. on the protection of the older folks who may not be financial literate. That said, in order for a disclosure-based regime to be effective, the government has the duty to ensure that there are more enforceable laws on disclosure such that there is increase transparency and more information flow to the public. In addition, banks and the financial industry have the duty to educate the general public as to the products they are selling. The key points I emphasised are disclosure and education.

I also mentioned that there should be more stringent requirements as to the qualifications of these financial managers -- from the Lehman episode, it can be seen that quite a number of them did not even understand the products that they were selling (which was what I found out as well when I talked to some of them on many previous occasions).

I told the reporter that for the selling of highly sophisticated engineering or medical equipments, we general require trained engineers or qualified medical personnel to sell them. It should therefore be the same for sophisticated financial products. Bank and financial institutions should only hire business or accounting graduates or at least graduates who have the requisite financial literacy rather than fresh graduates from disciples with no prior financial education to sell these products.

Although I understand that many of these financial managers are required to go through related financial courses and tests (and that these tests are not necessary easy to clear), the fact that there can be so many alleged mis-selling incidents may indicate that some of these people themselves might not have been adequately trained.

Under these circumstances, the normal investors who are supposed to be savvy and understood the products they bought cannot complain subsequently when the products turn bad. In Lehman's case, actually many might know about the risk (i.e. they may stand to lose all if the banks collapse), but who would have heard of 6 months ago that any American bank, esp. one as strong as 158-year old Lehman, would go into liquidation? This is generally the worst risk -- almost like an unthinkable apocalypse -- and in this case, it materialized. So barring all the talks about misselling etc., people who knew the risk but just thought that it would never materialized cannot complain.

Warmest regards,

Luh Luh