Editor's Letter

A year has passed since our survey of mis-selling in Hong Kong was published in the February 2005 issue of Asia Risk. That survey, conducted by our editorial team, highlighted some pretty questionable practices by certain top retail distributors of structured products in the region.

This month, we delve again into the mis-selling issue. Our focus this time is on Singapore, where several collateralised debt obligations (CDOs) have been launched to retail investors in recent months. Product providers have been complaining that some retail distributors are not marketing these products properly to their customers. In particular, many do not understand the term 'principal-protected', and when the first retail CDOs emerged a few months ago, some distributors were seen to be wrongly marketing them as 'capital-guaranteed.'

So whose fault is it? Not ours, say the product providers, who have all met strict disclosure guidelines set by the regulator and clearly documented all the risks. They are quick to point the finger at the distributors and investors, who are often seen as too lazy to read the prospectuses. But one look at a CDO prospectus, and it's clear why many investors don't perservere with such documents - they are typically 100 pages thick with terminology that sounds like rocket science to most people.

In Australia, where retail CDOs have been hugely popular, sources say the Australian Securities & Investments Commission is working on recommendations for product-disclosure statements with fewer pages and in a more user-friendly format to make it easier for investors to understand the risks. That, perhaps, is also something for other regulators in the Asia-Pacific region to think about.

The mis-selling issue also made the cover story in the February 2004 issue of Asia Risk. At that time, the issue was how funds offering high minimum guaranteed returns, which were hugely popular, were being marketed to investors.

The concern was that with stock markets rallying, these funds offering low participation in the equity markets could run the risk of a retail investor backlash.

The situation is similar today for the range accrual notes and constant maturity swap spread target redemption notes linked to the US dollar Libor. They were hugely popular in 2003, drawing billions of dollars of investment across Asia. But with a flattening US yield curve, many of these structures have turned against investors. Let's keep our fingers crossed there won't be any fallout.