Dear Mr. Tan,
I refer to the plight of a small group of investors who uses their CPF funds, namely the SRS retirement fund, to purchase Lehman Brothers minibonds.
I am sure many of these investors were literate in stocks but not sophisticated
enough to understand the instruments used in a complex structure like minibonds especially back in early 2006. In those days when subprime and CDO problems have not surfaced, only Lehman Brothers and maybe the distributors knew how good a product Minibonds are.
And i know several of these investors keeping the sadness and hatred to themselves. Maybe they were literate and they believed in the brochure and had not read further. Some i heard are government servants and they dont want to voice their feelings. I wonder why citizens in First World countries should hide their feelings.
Back in the early launch of the minibonds I and II, retirement funds were allowed to be invested. Shortly thereafter all later series of minibonds were not
allowed to be invested with retirement funds.
Most of these investors receive mailers (like that attached) from the distributors in their letter box. Some of them receive it month after month . Looking at the brochure itself you can tell the strong powerful entities are in bold. The small prints if there is, will refer you to refer somewhere else (you got to get) from the distributors where they will elaborate on the "junk" CDO. The brochure also shows the investor sitting safely on the shoulder of a strong gaint. Isnt all these misleading.
One investor told me, after looking at the quality of the reference entities of the brochure and since he has not invested in bonds before(when most of his investments are in risker stocks), he decided to use his long term old age retirement funds (SRS) to buy some safe bonds. Yes altho he did this all on his own accord but knowing SRS is allowed for minibonds , he was more confident of the product and immediately sign up to purchase the bonds. His intention and objective of using retirement funds are definitely safe and security and long term.
This is definetely not appropriate to allow retirement SRS funds to be invested in something unsafe that can have $0 value. Something totally not right to call quality bonds when they are not bonds at all . A brochure that shows you sitting on the shoulder of a safe strong gaint. That is all totally misleading.
I think a caring government ought to debate on whether this group of investors who are educated but prefered something safe with retirement funds but was misled by the brochure and have kept quiet because they are afraid the government is not happy if they were to voice their opinion. I think we should ask why retirement funds was allowed for bonds I and II and why they were removed for subsequent minibonds and who should bear this responsibility.
Miss W
Tuesday, November 4, 2008
Tunis, 5 to 8 November
I will be in Tunis from 5 to 8 November. During this time, America will elect a new President. I may not be able to access internet conveniently.
Dr Lan Luh Luh – your further clarification is required.
Posted at request of Richard Woo
Firstly, it is heartening to note that Dr Lan is cognizant, from her own experience [she “talked to some of them on many previous occasions”], that “quite a number” of the financial managers [RMs?] had no understanding of the products they were selling. A good start for you, Dr Lan.
But we do not know how many RMs she had spoken to, on those “many previous occasions”, and whether they were the same persons or different persons. “Some” here can mean two or three only and if Dr Lan had spoken to only two or three people, it would not be accurate to say “quite a number of them did not even understand…” Furthermore, an extrapolation from the past may not be an accurate reflection of the present; the ones she spoke to may not be the ones who are doing the selling today; the latter may be more knowledgeable or better educated.
Secondly, Dr Lan commented: “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.” There is no question that mis-selling has occurred, with regard to the so-called structured products linked to Lehman Brothers. Would Dr Lan agree with this statement, taking into account that several distributors have begun making restitution for having mis-sold?
Would Dr Lan also agree that when these products were being flogged to the public, the distributors made no distinction as to whom the products should be sold? In other words they were selling to every Tan, Lim and Chua, male or female, elderly or young, educated or illiterate? Would she agree that some of the sales measures, including promotion advertising material, adopted by some, if not all, distributors were clearly out of sync with the inherent risks of the products? Would she agree that these products were high-risk investments?
I refer now to the last paragraph of Dr Lan’s clarification: “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.”
The last sentence seems to be the lynchpin of the entire paragraph. So, am I right in saying that Dr Lan is not excluding the right of “normal investors” to seek restitution for mis-selling, provided they can prove that they had been mis-sold, through misleading adverts and other misrepresentations made by the RM? Would Dr Lan discount the possibility that any distributor having mis-sold to A could also have mis-sold to B, or X or Y?
Finally, Dr Lan, [1] how do you define “normal investors”? and [2] whether there is anything in law that distinguishes “normal investors” from other investors?
BTW, to all those who have mistakenly assumed Dr Lan as a male, Dr Lan is a “she”.
Richard Woo
Firstly, it is heartening to note that Dr Lan is cognizant, from her own experience [she “talked to some of them on many previous occasions”], that “quite a number” of the financial managers [RMs?] had no understanding of the products they were selling. A good start for you, Dr Lan.
But we do not know how many RMs she had spoken to, on those “many previous occasions”, and whether they were the same persons or different persons. “Some” here can mean two or three only and if Dr Lan had spoken to only two or three people, it would not be accurate to say “quite a number of them did not even understand…” Furthermore, an extrapolation from the past may not be an accurate reflection of the present; the ones she spoke to may not be the ones who are doing the selling today; the latter may be more knowledgeable or better educated.
Secondly, Dr Lan commented: “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.” There is no question that mis-selling has occurred, with regard to the so-called structured products linked to Lehman Brothers. Would Dr Lan agree with this statement, taking into account that several distributors have begun making restitution for having mis-sold?
Would Dr Lan also agree that when these products were being flogged to the public, the distributors made no distinction as to whom the products should be sold? In other words they were selling to every Tan, Lim and Chua, male or female, elderly or young, educated or illiterate? Would she agree that some of the sales measures, including promotion advertising material, adopted by some, if not all, distributors were clearly out of sync with the inherent risks of the products? Would she agree that these products were high-risk investments?
I refer now to the last paragraph of Dr Lan’s clarification: “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.”
The last sentence seems to be the lynchpin of the entire paragraph. So, am I right in saying that Dr Lan is not excluding the right of “normal investors” to seek restitution for mis-selling, provided they can prove that they had been mis-sold, through misleading adverts and other misrepresentations made by the RM? Would Dr Lan discount the possibility that any distributor having mis-sold to A could also have mis-sold to B, or X or Y?
Finally, Dr Lan, [1] how do you define “normal investors”? and [2] whether there is anything in law that distinguishes “normal investors” from other investors?
BTW, to all those who have mistakenly assumed Dr Lan as a male, Dr Lan is a “she”.
Richard Woo
SCMP: Regulators have let down investors badly
http://www.pressdisplay.com/pressdisplay/showlink.aspx?bookmarkid=6DE4R4MQKSI5&linkid=2476115f-8279-4017-a03e-d00ea406b4cd&pdaffid=8HM4kDzWViwfc7AqkYlqIQ%3d%3d
4 Nov 2008
Frank Ching is a Hong Kong-based writer and commentator. frank.ching@scmp.com
Chief Executive Donald Tsang Yamkuen talked in his policy address of Hong Kong’s position as an international financial centre and spoke of “ optimising the supervisory framework” as though it were already very good. Alas, one can tell from the protests outside banks in recent weeks by investors complaining about being lured into unsound investments that the supervisory framework is far from satisfactory. In this connection, Premier Wen Jiabao
was much closer to the mark when he called on the Hong Kong government to “seriously learn the lessons” from the financial crisis and “analyse the problems with the structure of Hong Kong’s economy and regulation of its financial system”.
More than 43,000 people have lost money from investing in Lehman minibonds. Mr Tsang said that the Monetary Authority and the Securities and Futures Commission “will examine how to further strengthen the regulatory regime and enhance investor protection”. That is shutting the stable door after the horse has bolted. If banks had been under much tighter supervision, these tragedies could have been avoided.
The SFC, like its counterparts elsewhere, has a code of conduct for banks and other licensed or registered institutions. Its first general principle states that institutions should “act honestly, fairly, and in the best interests of its clients”. Can Hong Kong’s banks say, hand on heart, that they have acted in the best interests of their customers when persuading them to buy a risky product that investors did not understand?
One of the commonest complaints is that investors did not know what they were getting into because banks did not make adequate disclosure. This is in direct violation of General Principle Five, which says an institution “should make adequate disclosure of relevant material information in its dealings with its clients”.
Paragraph 5.3 is specifically about derivative products. This says that whoever provides “services to a client in derivative products” should make sure that “the client understands the nature and risks of the products and has sufficient net worth to be able to assume the risks and bear the potential losses of trading in the products”. Would Hong Kong be in this mess if the banks had abided by this provision?
General Principle Six warns against conflicts of interest. But in a system where banks pay their relationship officers bonuses for making a sale, these employees have a clear conflict between their own interests and those of their clients. What should be done?
According to General Principle Nine, “the senior management” should “bear primary responsibility for ensuring the maintenance of appropriate standards of conduct and adherence to proper procedures”.
The minibonds issue shows that banks sell risky products to retail customers not meant for them. Under the code, sophisticated financial instruments should only be sold to “professional investors”, a term that is carefully defined. This is a problem the SFC doesn’t seem to be sufficiently aware of. Its chief executive, Martin Wheatley, has been quoted as saying that investors should have ensured they knew what they were buying. If the responsibility is on the investor, what is the point of having a regulatory body?
Under the SFC’s code, a bank needs first to satisfy itself as to whether a client’s financial situation, investment experience and investment objectives make it appropriate to recommend a particular product. Such requirements are waived in the case of a “professional investor”.
Mr Wheatley seems to assume that all bank clients are professional investors. That is not the case. It is why the SFC’s code says banks cannot treat anyone as a professional investor unless he or she agrees in writing to be treated that way, and the client can withdraw from that status at any time. It seems that no one is regulating our regulators.
4 Nov 2008
Frank Ching is a Hong Kong-based writer and commentator. frank.ching@scmp.com
Chief Executive Donald Tsang Yamkuen talked in his policy address of Hong Kong’s position as an international financial centre and spoke of “ optimising the supervisory framework” as though it were already very good. Alas, one can tell from the protests outside banks in recent weeks by investors complaining about being lured into unsound investments that the supervisory framework is far from satisfactory. In this connection, Premier Wen Jiabao
was much closer to the mark when he called on the Hong Kong government to “seriously learn the lessons” from the financial crisis and “analyse the problems with the structure of Hong Kong’s economy and regulation of its financial system”.
More than 43,000 people have lost money from investing in Lehman minibonds. Mr Tsang said that the Monetary Authority and the Securities and Futures Commission “will examine how to further strengthen the regulatory regime and enhance investor protection”. That is shutting the stable door after the horse has bolted. If banks had been under much tighter supervision, these tragedies could have been avoided.
The SFC, like its counterparts elsewhere, has a code of conduct for banks and other licensed or registered institutions. Its first general principle states that institutions should “act honestly, fairly, and in the best interests of its clients”. Can Hong Kong’s banks say, hand on heart, that they have acted in the best interests of their customers when persuading them to buy a risky product that investors did not understand?
One of the commonest complaints is that investors did not know what they were getting into because banks did not make adequate disclosure. This is in direct violation of General Principle Five, which says an institution “should make adequate disclosure of relevant material information in its dealings with its clients”.
Paragraph 5.3 is specifically about derivative products. This says that whoever provides “services to a client in derivative products” should make sure that “the client understands the nature and risks of the products and has sufficient net worth to be able to assume the risks and bear the potential losses of trading in the products”. Would Hong Kong be in this mess if the banks had abided by this provision?
General Principle Six warns against conflicts of interest. But in a system where banks pay their relationship officers bonuses for making a sale, these employees have a clear conflict between their own interests and those of their clients. What should be done?
According to General Principle Nine, “the senior management” should “bear primary responsibility for ensuring the maintenance of appropriate standards of conduct and adherence to proper procedures”.
The minibonds issue shows that banks sell risky products to retail customers not meant for them. Under the code, sophisticated financial instruments should only be sold to “professional investors”, a term that is carefully defined. This is a problem the SFC doesn’t seem to be sufficiently aware of. Its chief executive, Martin Wheatley, has been quoted as saying that investors should have ensured they knew what they were buying. If the responsibility is on the investor, what is the point of having a regulatory body?
Under the SFC’s code, a bank needs first to satisfy itself as to whether a client’s financial situation, investment experience and investment objectives make it appropriate to recommend a particular product. Such requirements are waived in the case of a “professional investor”.
Mr Wheatley seems to assume that all bank clients are professional investors. That is not the case. It is why the SFC’s code says banks cannot treat anyone as a professional investor unless he or she agrees in writing to be treated that way, and the client can withdraw from that status at any time. It seems that no one is regulating our regulators.
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