MAS has introduced new requirements for intermediaries to formally assess a retail customer’s investment knowledge and experience before selling certain investment products to the customer. These requirements will come into effect on 1 January 2012.
The following list of investment products are excluded from the new scheme:
- Shares
- Fully-paid depository receipts representing shares
- Subscription rights pursuant to rights issues
- Company warrants
- Units in business trusts
- Units in real estate investment trusts
- Debentures (other than asset-backed securities & structured notes)
- Life insurance policies (other than investment-linked life insurance policies)
- Contracts or arrangements for the purpose of foreign exchange trading (other than derivatives of foreign exchange contracts and leveraged foreign exchange trading)
Which means to say investment products like unit trusts, ETFs and investment-linked policies will fall under the new regulations.
The new regulations basically require investors to go through either a customer account review (for listed products) or customer knowledge assessment (for unlisted products) on a yearly basis.
Those who fail the customer knowledge assessment or deemed not to have the suitable knowledge will be required to go through learning modules to learn about the products. For those cases, the intermediary must offer to provide financial advice (although the investor can choose not to take up the offer of advice).
A main reason why these changes are implemented is because of the Minibond saga where many investors purchased the Minibonds via security firms and banks.
The security firms had maintained that they were only helping to execute the transactions without any advice. Investors, on the other hand, were led to those products from advertisements taken up from the financial institutions.
A consumer guide on the new changes can be found here:
Safeguards when purchasing specified investment products
Looks like a lot more paperwork needs to be done if someone wants to invest into certain investment products. However, the loophole still remains where transactions can be performed on a “without advice” basis.
My guess is that even if these measures were in place long ago, the mis-selling of Minibonds would still have occurred. After all, a process that required all the banks to conduct a “customer fact find” was already in place then.
The failure of the system then is not so much in the process, but a failure on the part of everyone (from the regulators to the intermediaries to the investors) to really understand products like the Minibond, Pinnacle Notes, etc. No one truly understood the toxic assets that were buried deep within the product and thus the products were deemed to be suitable for conservative investors.
All were victims of a system where bonds linked to subprime mortgages were wrongly rated as AAA. An illusion where Wall Street had everyone fooled for years.