A Light Rap on the Wrist

Mas today meted out a token rap on the wrist of 10 financial institutions that made a boo-boo on selling complicated structured instruments to its customers. The fall-out came after Lehman Brothers investment bank collapsed last year.They have been banned from selling similar products by the Monetary Authority of Singapore. (MAS).

About 9,900 people lost most or all of their investments totalling about S$520 million (RM1.82 billion) in structured notes such as Lehman Minibonds, DBS High Notes 5 and Merrill Lynch Jubilee Series 3 LinkEarner Notes.

Hong Leong Finance got the harshest penalty-it cannot deal with such instruments for at least two years. Some 2,145 disgruntled customers were caught with S$86.1 million worth of such structured notes

One-year bans were handed out to brokerages CIMB-GK Securities, Kim Eng Securities, OCBC Securities and Phillip Securities.

OCBC Securities was also ordered to stop using introducers such as independent financial advisers to provide advice on new structured notes.

A six-month ban was given to DBS Bank, ABN Amro, Maybank, DMG & Partners Securities and UOB Kay Hian.

The bans took effect on July 1 and punish the institutions for their poor sales processes when flogging the complicated notes to customers.

They will not be allowed to resume selling such products until the MAS is satisfied that they have fixed all faults identified by its review and strengthened their internal processes for providing advisory services for investment products.

Each must appoint an external party, approved by the MAS, to review its action plan and report on its implementation.

The MAS investigated after affected customers complained that they had lost their savings because they had been mis-sold the Lehman-linked products.

They described being sold products that were too risky for their comfort level or were advised by sales representatives who did not know the products well.

The MAS found that the 10 financial institutions applied different internal controls and failed in a number of areas.

Among other things, they gave the products a lower risk rating than that stated in the formal prospectus and pricing statements.

They also did not do enough to ensure that their sales staff were properly trained and had accurate and complete information needed to sell the products.

Although about 62 per cent of customers whose cases have been decided on were offered some compensation, the low payouts have led many to reject the settlements and consider taking legal action.

Even though the MAS has highlighted the institutions' failings and penalised them, this does not automatically mean that they will be liable to investors.

Some market watchers felt that the MAS penalty had only a minimal effect since the sales of structured notes have dried up, but others pointed to the intangible impact of damage to reputations.

“The unprecedented move by the MAS is in itself quite a painful penalty for these institutions to be subjected to, and they certainly would not like to be on that list,” said Robson Lee, a partner at the law firm Shook Lin & Bok.

The Consumers Association of Singapore (Case) expressed disappointment at the lack of due diligence and internal controls at the institutions.

“Case feels that individuals who were found to have breached the Financial Advisers Act should be investigated and taken to task,” said Case.

The MAS confirmed that investigations against individuals are still under way and action may be taken in due course.

The chief executive of the Securities Investors Association of Singapore (Sias), David Gerald, said he was pleased that the MAS had asked institutions to rectify all the weaknesses identified and to review and strengthen all procedures.

We may yet see some individuals being hauled up and prosecuted, hopefuly, in the following months