The road to issuance and dispute resolution for structured products in Singapore

While its private bankers have regained an appetite for structured products, Singapore's less rich retail investors have been getting used to a new regulatory and dispute resolution scheme put in place by the MAS

Plane on take off

While it continues to hold the reputation for being the second largest private banking centre in the world, behind Switzerland, the recovery in Singapore's retail investor market has been slow. A publicly listed deal from Société Générale issued at the end of last year was not widely sold as the bank struggled with the idea of advertising a structured products investment in the local media, according to local bankers. There has so far been no follow-up, as creators continue to work out the stress points of a new regulatory regime, as well as the appetite of local investors.

Singapore has adopted a perhaps less intrusive and exhaustive approach to the creation of new rules than was the case in Hong Kong, with those eager to issue or buy these investments governed by the following.

Under the new rules on marketing and sales in Singapore, investors get a Products Highlights Sheet (PHS) for structured notes, unlisted collective investment schemes and exchange-traded funds. Written in a ‘Question & Answer' format prescribed by the Monetary Authority of Singapore (MAS), the PHS describes the profile of customers the product is suitable for, what the product invests in, what the risk areas that could cause a customer to incur a loss are, etc. The PHS must be provided to investors together with the prospectus before the sale of the investment product.

"Financial advisers are required to attain additional certification in the additional Capital Markets and Financial Advisory Services examination modules so as to ensure that they have adequate and relevant knowledge of capital market products," says a spokesman for the MAS. "This, in turn, will ensure that investors receive sound advice on their investment decisions and that their trading instructions are properly executed."

Financial advisers in Singapore have always been required to have a reasonable basis for their product recommendation, considering the consumer's investment objectives, financial situation and particular needs. Since January 2012, these advisers have been required to conduct a Customer Knowledge Assessment to work out whether an investor has the knowledge or experience to understand the risks and features of more complex, unlisted investment products.

In the case of listed products that are more complex, intermediaries have to conduct a Customer Account Review to ascertain whether the customer has the relevant knowledge or experience to understand the risks and features of complex structures or derivatives, before approving the customer's account to trade such products. "Complex products generally refers to products that are or contain derivatives, or are not well established in the market," says the spokesman.

If the assessment concludes that the investor does not possess the relevant knowledge or experience, but still intends to proceed with the transaction, the intermediary must offer advice to the customer. "The MAS will not allow ‘execution only' service in such cases," says the spokesman. "Safeguards, such as a lower trading limit than what the intermediary would otherwise have imposed, have been put in place before the customer is allowed to proceed with the transaction."

Like Hong Kong, Singapore has also introduced a cooling off period, of seven days, for unlisted debentures with tenures longer than three months, allowing investors to exit the investment without incurring sales charges or commissions.

If there are disputes with financial institutions regarding the sale of a structured product, investors (as defined in SFA section 4A) can seek to resolve disputes through Financial Industry Disputes Resolution Centre (FIDReC), or seek legal recourse through the courts.

The MAS has a three-step dispute resolution process for investors' legitimate concerns with any financial institution: step 1 – lodge a complaint directly with the financial institution (FI) that sold the products; step 2 – provide full details of their case to the FI to allow it to make a fair assessment of the case; and step 3 – accept the decision of the FI or refer their complaint to FIDReC. The FIDReC is an independent and impartial organisation that specialises in the resolution of disputes between FIs and investors, and provides investors with an affordable avenue to pursue their claims, says the spokesman.

"If the matter cannot be resolved by agreement between the investor and the FI, it will be referred to adjudication, where the investor pays a S$50 fee while the FI pays $500," he says. "Among FIDReC's adjudicators are judges, senior counsel, lawyers and retired industry professionals. The adjudication outcome is binding on the FI, but not on the investor. If the investor is not satisfied with the outcome, he is free to pursue other action including seeking legal recourse."

FIDReC will consider all relevant evidence whether written or oral. Statements can be prepared by investors themselves and need not be made under oath. FIDReC normally deals with claims not exceeding S$50,000.

In July 2009, the MAS issued a report on its investigations into distributors and financial advisers who sold and marketed Lehman Brothers credit-linked structured notes to investors.


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