South China Morning Post (Hong Kong) - October 7, 2008
Financial advisers can be held liable for negligent investment recommendations to clients, a local court ruling in 2003 has established.
In the Field vs Barber Asia Limited (HCA7119/2000) case, plaintiff Susan Field was awarded compensation of GBP219,890 (HK$2.84 million) plus interest and costs that she had lost as a result of changing an investment portfolio on the recommendation of the defendant.
Ms Field had asked for a conservative investment portfolio. It initially made a British sterling-dominated portfolio for her, but later advised her to gear up her portfolio with a Japanese yen loan. A subsequent appreciation of the yen forced her to provide additional cash for the loan, eventually losing the whole investment.
The Court of First Instance ruled that the financial adviser was expected to warn Ms Field of the risks. The ruling was upheld by the Court of Appeal when the defendant appealed.
Citing this case yesterday, Civic Party leader Audrey Eu Yuet-mee said minibond holders were in an even stronger position than Ms Field to claim compensation, as they had signed contracts with the distributors. She has asked the Consumer Council to refer to the case and consider using its consumer legal action fund to help holders claim compensation.
Ms Eu said individual investors might not be willing to launch costly lawsuits.
Fanny W.Y. Fung
Tuesday, October 7, 2008
Poor payout on Anticipated Endowment policy
Dear Mr Tan,
My dad has bought a 20 Year Modified Anticipated Endowment Policy in 1988 and his policy matured in August 2008.
After calculating the total amount of 5 yearly and maturity payout by the insurance company, we realize that the total payout of $11,000 is less than the total premium of $15,000 paid over 20 years.
He recalled in the 20 years, he has received payout of bonus every 5 years and the total bonus received is around $11,000 but he has already paid about $15,000 in premium for his endowment policy.
We cannot understand why he is making a loss with this endowment policy. I have writtent to the insurance company to ask for an explanation and have not heard from then yet.
As a layman, we do not understand how it works and I thought with your wealth of knowledge on insurance, you may be able to explain to us why my dad made a loss with this Anticipated Endowment policy. I sincerely hope you can also advise me on the next course of action.
REPLY
You can lodge a compliant with the CEO of the insurance company. In my view, the total payout should be more than the total premiums.
If they do not give you a satisfactory answer, you can file a complaint with FiDREC, www.fidrec.com.sg.
My dad has bought a 20 Year Modified Anticipated Endowment Policy in 1988 and his policy matured in August 2008.
After calculating the total amount of 5 yearly and maturity payout by the insurance company, we realize that the total payout of $11,000 is less than the total premium of $15,000 paid over 20 years.
He recalled in the 20 years, he has received payout of bonus every 5 years and the total bonus received is around $11,000 but he has already paid about $15,000 in premium for his endowment policy.
We cannot understand why he is making a loss with this endowment policy. I have writtent to the insurance company to ask for an explanation and have not heard from then yet.
As a layman, we do not understand how it works and I thought with your wealth of knowledge on insurance, you may be able to explain to us why my dad made a loss with this Anticipated Endowment policy. I sincerely hope you can also advise me on the next course of action.
REPLY
You can lodge a compliant with the CEO of the insurance company. In my view, the total payout should be more than the total premiums.
If they do not give you a satisfactory answer, you can file a complaint with FiDREC, www.fidrec.com.sg.
Is bond fund risky?
Hi Mr. Tan,
How about Bond Funds ? Is it safe ? Its unit price keeps dropping.
I have brought S$x of Bond Fund from Maybank at S$0.99 per unit and it was at S$0.86 now. It dropped by $0.13 dropped within 6 months time.
What shall I do now ? Cut lose or hold ? I was also told by the bank staff it was safe since it was a bond and having very little risk ...
Thanks you in advance for your advice please. I know you are very busy .. a lot of people seeking advice from you ...
REPLY
I am not familiar with this bond. It is all right to keep the investment.
It is also all right to sell the investment, as you are getting the actual value of the underlying bonds. Some of the bonds may have dropped in value due to the credit crisis.
How about Bond Funds ? Is it safe ? Its unit price keeps dropping.
I have brought S$x of Bond Fund from Maybank at S$0.99 per unit and it was at S$0.86 now. It dropped by $0.13 dropped within 6 months time.
What shall I do now ? Cut lose or hold ? I was also told by the bank staff it was safe since it was a bond and having very little risk ...
Thanks you in advance for your advice please. I know you are very busy .. a lot of people seeking advice from you ...
REPLY
I am not familiar with this bond. It is all right to keep the investment.
It is also all right to sell the investment, as you are getting the actual value of the underlying bonds. Some of the bonds may have dropped in value due to the credit crisis.
Legal fees - action against distributor
I have approached a well known lawyer. He told me that the legal fees to take a case to the High Court is likely to be $100,000 or more. If this is shared by 100 investors, the cost per investor is $1,000. If there are 200 investors, the cost is $500 per investor.
If investors wish to contemplate taking legal action, you have to be prepared to spend $500 to $1,000. As the amount invested in most cases is quite large, averaging about $50,000, it may be necessary to spend 1% or 2% to seek compensation.
I shall be putting up another "petition" to gauge the interest in taking collective action to engage the service of the lawyer. I will arrange for the investors to meet the lawyer before you take the final decision.
It may be necessary for the lawyer to take separate cases against separate distributors. This is complicated and may add to the cost. I will let the lawyer explain how to handle this matter at a future time.
What are your views? You can post your comments in this blog.
If investors wish to contemplate taking legal action, you have to be prepared to spend $500 to $1,000. As the amount invested in most cases is quite large, averaging about $50,000, it may be necessary to spend 1% or 2% to seek compensation.
I shall be putting up another "petition" to gauge the interest in taking collective action to engage the service of the lawyer. I will arrange for the investors to meet the lawyer before you take the final decision.
It may be necessary for the lawyer to take separate cases against separate distributors. This is complicated and may add to the cost. I will let the lawyer explain how to handle this matter at a future time.
What are your views? You can post your comments in this blog.
Monday, October 6, 2008
Credit default swaps - who benefits?
Someone should me a chart showing the cost of credit default swaps. Before the financial crisis, the swap rate is at average of 100 bps p.a. for well rated companies. If the structured product sells the swap to insure 6 entities, the total payout is 6% p.a. The money received from the investors were invested in CDOs and low quality bonds, which are likely to earn another 6% p.a. (this is my estimate).
It is possible that the structured product could earn up to 12% p.a. But, this is not the return given to the investors. They are given a low return of about 5% p.a. The question is, "where does the rest of the money go"? I suspect that they are taken away as charges for distribution and profit. There amounts are not disclosed to the investors.
The figures indicated by me are estimates and may not be accurate. It will be better to look at the actual figures. So far, the trustee or the arranger are not disclosing these figures. Perhaps the authority can step in and ask for these figures to be disclosed.
Even if the actual figures are lower than my estimates, there is still a question whether the charges are reasonable or excessive, and whether there is any breach of fiduciary duty.
It is possible that the structured product could earn up to 12% p.a. But, this is not the return given to the investors. They are given a low return of about 5% p.a. The question is, "where does the rest of the money go"? I suspect that they are taken away as charges for distribution and profit. There amounts are not disclosed to the investors.
The figures indicated by me are estimates and may not be accurate. It will be better to look at the actual figures. So far, the trustee or the arranger are not disclosing these figures. Perhaps the authority can step in and ask for these figures to be disclosed.
Even if the actual figures are lower than my estimates, there is still a question whether the charges are reasonable or excessive, and whether there is any breach of fiduciary duty.
Coordinated interest rate cuts
There is speculation in the financial markets that the central banks will have a coordinated interest rate cut to help the financial markets.
The chance of this happening is high. Inflation has dropped. Economies are entering into a recession, which will bring down inflationary pressures. The coordinated action means that several countries will be cutting interest rate together, at almost the same time.
Over the longer term, the global financial system needs to be revamped. It is bad to have extremely high leverage. There must be controls over the amount of debt that businesses are allowed to pile up. The control has to be stricter for financial institutions.
The chance of this happening is high. Inflation has dropped. Economies are entering into a recession, which will bring down inflationary pressures. The coordinated action means that several countries will be cutting interest rate together, at almost the same time.
Over the longer term, the global financial system needs to be revamped. It is bad to have extremely high leverage. There must be controls over the amount of debt that businesses are allowed to pile up. The control has to be stricter for financial institutions.
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