Someone told me, "If you are not insured, you stand a 5% chance of being poor. This is the chance of suffering from an uninsured event. If you are insured, you stand a 95% chance of being poor. This is the likelihood of buying an expensive product that takes away too much money from the customer and gives a good commission to the agent. "
If you buy the right insurance product, e.g. low cost term insurance, you avoid the 95% chance of being poor, and avoid the 5% chance of suffering an uninsured loss.
Thursday, July 17, 2008
MAS Guidelines on Fair Dealing
18 May 2008
MAS Guidelines on Fair Dealing
Submission by Tan Kin Lian
1. The Monetary Authority of Singapore (MAS) is seeking views on proposed Guidelines on Fair Dealing – Board and Senior Management Responsibility for Delivering Fair Dealing Outcomes to Consumers (Guidelines).
2. The Guidelines emphasise the responsibility of the Board and Senior Management of financial institutions (FIs) to deliver fair dealing outcomes when FIs provide financial advisory (FA) services to retail consumers. The fair dealing outcomes that FIs should strive to achieve are:
(a) Consumers have confidence that financial institutions put consumers’ interests first in the conduct of their business;
(b) Financial institutions offer products and services that are suitable for the consumer segments they target;
(c) Financial institutions appoint competent representatives who provide consumers with advice that meet their financial objectives and suit their personal circumstances;
(d) Consumers receive clear, relevant and timely information to make informed financial decisions; and
(e) Financial institutions handle consumer complaints promptly and in a consistent manner.
3. I agree with the goal to ensure that the consumers are given fair dealing outcomes. I believe that the board and senior management should be made responsible to achieve these outcomes. However, in my view, this requirement is not sufficient.
4. It is difficult for the board and senior management, who are responsible to achieve the “best shareholder value” for the financial institution, to be able to “put consumers’ interest first in the conduct of their business”. We must recognise and address this serious conflict of interest, in order to achieve the desired goal.
5. “Put consumers’ interest first” must be defined clearly. In my view, the financial products must be designed to give good value to the customers and a fair profit margin to the financial institution. If the product contains excessive expense charges and profit margins and are not fairly and clearly disclosed to the public, it will not pass the test of “good value”.
A good test is, “will a knowledgeable person, with no vested interest, buy the product for his own use or recommend it to a friend?”
6. As it is almost impossible for the board and senior management to exercise this responsibility adequately, we need a more effective channel to achieve the results.
In many countries, this responsibility falls on one or both of the following:
(a) Regulator
(b) Consumer advocates
7. Some financial products introduced in Singapore in recent years are complicated. It is not realistic to expect the consumer to be sufficiently well informed about the product to make the right decision, especially if they are pitted against the financial experts working for financial institutions, who have the freedom to design products aimed at maximising profits for the financial institutions.
8. There is a similar situation regarding the approval of drugs for consumption by the public. The regulator, such as the Food and Drug Administration of the USA and the Health Science Authority of Singapore, takes the responsibility to check that new drugs are suitable for consumption by the public. A drug cannot be sold without the approval of the regulator. The regulator does not expert the consumer to be sufficiently educated to make the judgement on their own.
9. It is equally important to ensure the financial health of Singaporeans. They work hard to earn an income and have to save part of the income for their future needs. If they are offered products that do not offer fair value, they are being unfairly exploited by the financial institutions.
10. Over the past ten years, Singaporeans have invested billions of dollars in complicated financial products, including structured financial products and more traditional financial products that give poor value. Most of these products have the following features:
(a) Excessive expense charges
(b) High profit margins
(c) Complex – difficult for consumers to understand
These excessive charges and high profit margins reduce the return to the consumer. Many of them get a poor return relative to the risk that they have to bear. They would have obtained a better return by investing in government bonds, for people who look for risk free returns, or leaving their savings in the Central Provident Fund.
For investors willing to take risk, they would have obtained a higher return by investing in fairly priced unit trusts.
11. Life insurance products, such as whole life, endowment and regular premium investment linked policies have high sales charges that take away more than 150% of the annual premium. These high charges reduce the return to the consumer considerably, and are not justified by the value of the product given to the consumer. The competition appears to be on the recruitment of the right type of agents who are able to “convince” customers to buy these products. There is no attempt to offer more appropriate, lower cost products to the consumers.
12. If MAS were to make a study of the innovative financial products that were sold to consumers in recent years and compare the actual return earned by the consumers against the return on “fair products” offering similar risks, the study will probably show that the investing public had been deprived of at least several hundred of millions of dollars of fair return from their investments.
13. I recommend the following approach:
(a) All complex financial products should be reviewed by two independent experts appointed by the regulator. These experts can ask relevant questions from the product issuer and study the answers to form an opinion on whether the product provides “fair dealing outcome” to the consumer. The experts can study if the charges, profit margin and penalty (to get out of a long term contract) are fair to the consumer. The experts can submit their recommendations to the regulator.
(b) Based on the recommendations of the independent experts, the regulator can disallow the product from being marketed, or be marketed with the views of the independent experts, posted in an easily accessible website.
(c) The regulator can specify the classes of simple and transparent products, such as bank accounts and products traded on the stock exchange, that are excluded from this requirement. These products may require certain guidelines to be observed, such as disclosing the effective rate of interest in a suitably prominent manner.
14. Conclusion
I support the move by MAS to make the board and senior management of financial institutions responsible to deliver fair outcomes to consumers. I recommend that this should be strengthened by an additional measure to get independent experts to review the financial products that are offered to the public.
Tan Kin Lian
MAS Guidelines on Fair Dealing
Submission by Tan Kin Lian
1. The Monetary Authority of Singapore (MAS) is seeking views on proposed Guidelines on Fair Dealing – Board and Senior Management Responsibility for Delivering Fair Dealing Outcomes to Consumers (Guidelines).
2. The Guidelines emphasise the responsibility of the Board and Senior Management of financial institutions (FIs) to deliver fair dealing outcomes when FIs provide financial advisory (FA) services to retail consumers. The fair dealing outcomes that FIs should strive to achieve are:
(a) Consumers have confidence that financial institutions put consumers’ interests first in the conduct of their business;
(b) Financial institutions offer products and services that are suitable for the consumer segments they target;
(c) Financial institutions appoint competent representatives who provide consumers with advice that meet their financial objectives and suit their personal circumstances;
(d) Consumers receive clear, relevant and timely information to make informed financial decisions; and
(e) Financial institutions handle consumer complaints promptly and in a consistent manner.
3. I agree with the goal to ensure that the consumers are given fair dealing outcomes. I believe that the board and senior management should be made responsible to achieve these outcomes. However, in my view, this requirement is not sufficient.
4. It is difficult for the board and senior management, who are responsible to achieve the “best shareholder value” for the financial institution, to be able to “put consumers’ interest first in the conduct of their business”. We must recognise and address this serious conflict of interest, in order to achieve the desired goal.
5. “Put consumers’ interest first” must be defined clearly. In my view, the financial products must be designed to give good value to the customers and a fair profit margin to the financial institution. If the product contains excessive expense charges and profit margins and are not fairly and clearly disclosed to the public, it will not pass the test of “good value”.
A good test is, “will a knowledgeable person, with no vested interest, buy the product for his own use or recommend it to a friend?”
6. As it is almost impossible for the board and senior management to exercise this responsibility adequately, we need a more effective channel to achieve the results.
In many countries, this responsibility falls on one or both of the following:
(a) Regulator
(b) Consumer advocates
7. Some financial products introduced in Singapore in recent years are complicated. It is not realistic to expect the consumer to be sufficiently well informed about the product to make the right decision, especially if they are pitted against the financial experts working for financial institutions, who have the freedom to design products aimed at maximising profits for the financial institutions.
8. There is a similar situation regarding the approval of drugs for consumption by the public. The regulator, such as the Food and Drug Administration of the USA and the Health Science Authority of Singapore, takes the responsibility to check that new drugs are suitable for consumption by the public. A drug cannot be sold without the approval of the regulator. The regulator does not expert the consumer to be sufficiently educated to make the judgement on their own.
9. It is equally important to ensure the financial health of Singaporeans. They work hard to earn an income and have to save part of the income for their future needs. If they are offered products that do not offer fair value, they are being unfairly exploited by the financial institutions.
10. Over the past ten years, Singaporeans have invested billions of dollars in complicated financial products, including structured financial products and more traditional financial products that give poor value. Most of these products have the following features:
(a) Excessive expense charges
(b) High profit margins
(c) Complex – difficult for consumers to understand
These excessive charges and high profit margins reduce the return to the consumer. Many of them get a poor return relative to the risk that they have to bear. They would have obtained a better return by investing in government bonds, for people who look for risk free returns, or leaving their savings in the Central Provident Fund.
For investors willing to take risk, they would have obtained a higher return by investing in fairly priced unit trusts.
11. Life insurance products, such as whole life, endowment and regular premium investment linked policies have high sales charges that take away more than 150% of the annual premium. These high charges reduce the return to the consumer considerably, and are not justified by the value of the product given to the consumer. The competition appears to be on the recruitment of the right type of agents who are able to “convince” customers to buy these products. There is no attempt to offer more appropriate, lower cost products to the consumers.
12. If MAS were to make a study of the innovative financial products that were sold to consumers in recent years and compare the actual return earned by the consumers against the return on “fair products” offering similar risks, the study will probably show that the investing public had been deprived of at least several hundred of millions of dollars of fair return from their investments.
13. I recommend the following approach:
(a) All complex financial products should be reviewed by two independent experts appointed by the regulator. These experts can ask relevant questions from the product issuer and study the answers to form an opinion on whether the product provides “fair dealing outcome” to the consumer. The experts can study if the charges, profit margin and penalty (to get out of a long term contract) are fair to the consumer. The experts can submit their recommendations to the regulator.
(b) Based on the recommendations of the independent experts, the regulator can disallow the product from being marketed, or be marketed with the views of the independent experts, posted in an easily accessible website.
(c) The regulator can specify the classes of simple and transparent products, such as bank accounts and products traded on the stock exchange, that are excluded from this requirement. These products may require certain guidelines to be observed, such as disclosing the effective rate of interest in a suitably prominent manner.
14. Conclusion
I support the move by MAS to make the board and senior management of financial institutions responsible to deliver fair outcomes to consumers. I recommend that this should be strengthened by an additional measure to get independent experts to review the financial products that are offered to the public.
Tan Kin Lian
Wednesday, July 16, 2008
Rejection of claim on grounds of non-disclosure
A policyholder switched from Medishield to a private Shield plan. He was not asked about his cholesterol level. He did not declare this condition as the doctor did not advice on the need to take medication.
He had to carry an angioplasty operation. The insurance company rejected the claim on the ground of non-disclosure. They even refused to pay the claim that would have been allowed under Medishield.
The policyholder wrote to the insurance company to ask for the grounds of rejection. There was no reply for one month. He intends to lodge a complaint with Fidrec.
Lesson: There is no point to pay a higher premium under a private Shield plan, if you are not sure about the practice of the insurance company in rejecting a claim on the grounds of unintended non-disclosure.
He had to carry an angioplasty operation. The insurance company rejected the claim on the ground of non-disclosure. They even refused to pay the claim that would have been allowed under Medishield.
The policyholder wrote to the insurance company to ask for the grounds of rejection. There was no reply for one month. He intends to lodge a complaint with Fidrec.
Lesson: There is no point to pay a higher premium under a private Shield plan, if you are not sure about the practice of the insurance company in rejecting a claim on the grounds of unintended non-disclosure.
ERP charges displayed on gantry
The ERP charges are now displayed on the gantry. It shows the charge for the various types of vehicles, i.e. cars, motor cycles, taxis, bus and goods vehicle. The charges change according to the time slots.
Well done to Land Transport Authority.
Well done to Land Transport Authority.
Price of a product or service
In the free market economy, the price is set by the market. The business decide on the price and sell the product or service to the market.
In my view, there is a better way to set the price. It should be based on the cost plus a reasonable margin for profit. This is a fair way to set the price, and avoids exploiting the consumers.
A cooperative operate on this model. It is an ethical model. I hope that this concept can be applied to many types of businesses.
Some companies make excessive profits by misleading the consumers. They design complicated products, and get marketing people to sell these products to consumers through misleading means.
In my view, there is a better way to set the price. It should be based on the cost plus a reasonable margin for profit. This is a fair way to set the price, and avoids exploiting the consumers.
A cooperative operate on this model. It is an ethical model. I hope that this concept can be applied to many types of businesses.
Some companies make excessive profits by misleading the consumers. They design complicated products, and get marketing people to sell these products to consumers through misleading means.
School should not be a business
The head of a junior college has the title of Principal and CEO. Why should a school be treated as a business, and to have the head carry the title of CEO?
It will be better for our soceity, if a head of a school is the principal and is not a CEO. The school should have the aim of educating students at a specified cost per student, and not be runned as a business to maximise the surplus or to reduce the cost of education (as this can be done by reducing the quality of the teaching).
It will be better for our soceity, if a head of a school is the principal and is not a CEO. The school should have the aim of educating students at a specified cost per student, and not be runned as a business to maximise the surplus or to reduce the cost of education (as this can be done by reducing the quality of the teaching).
Find out about the charges
Hi Mr. Tan,
I have bought 2 Regular Premium ILP in year 2002 and I do not know if I should continue or teminate both insurance plans.
IPL 1
Total premium paid is $9K plus and the value of investment is $7k plus. Fund purchased are GreatLink Enhancer and ASEAN Growth Fund.
IPL 2
Total Premium paid is $7500 and value of investment is only $3k. Fund purchased is Golden International Bond.
Should I still continue with both plans or terminate them and incur loses? Can you please advise me?
REPLY
You have to find out about the charges in these two policies. Generally, if the policy has been in force for more than two years, most of the upfront charges have already been spent - so you should continue the policies.
Read this FAQ:
http://www.tankinlian.com/faq/ilp.html
I have bought 2 Regular Premium ILP in year 2002 and I do not know if I should continue or teminate both insurance plans.
IPL 1
Total premium paid is $9K plus and the value of investment is $7k plus. Fund purchased are GreatLink Enhancer and ASEAN Growth Fund.
IPL 2
Total Premium paid is $7500 and value of investment is only $3k. Fund purchased is Golden International Bond.
Should I still continue with both plans or terminate them and incur loses? Can you please advise me?
REPLY
You have to find out about the charges in these two policies. Generally, if the policy has been in force for more than two years, most of the upfront charges have already been spent - so you should continue the policies.
Read this FAQ:
http://www.tankinlian.com/faq/ilp.html
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