Damning report on how Lehman-linked notes were sold; sanctions on selling structured products
By SIOW LI SEN
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(SINGAPORE) A seven-month investigation into the manner in which Lehman-linked products were mis-sold to unsuspecting, and often inexperienced, investors has concluded with some disturbing revelations - and an unprecedented step.
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The Monetary Authority of Singapore (MAS) has banned 10 financial institutions (FIs) from selling structured notes for periods ranging between six months and two years.
The 100-page report released by MAS yesterday paints a picture of occasionally untrained staff at these FIs aggressively pushing complex products at retail investors. The risk associated with these products - and sometimes even the clients' risk profile - was treated cavalierly on occasion.
There were instances of salespeople who had not even attended training. High-risk products were classified as low risk.
Hong Leong Finance, which was handed the most severe two-year sanction - used a client risk profile sheet which was basically meaningless - as no scores were assigned. It sold such notes to 428 people who had no prior investment experience.
OCBC Securities improperly used 'introducers' to sell the notes. For this, it has been slapped with a lifetime ban from using licensed financial advisers who earn referral fees for introducing clients, apart from a one-year ban from dealing in and providing financial advisory services for structured notes.
CIMB-GK Securities, Kim Eng Securities and Phillip Securities also received one-year bans. In each case, their staff were found to be improperly trained.
ABN-Amro, DBS, Maybank, DMG & Partners Securities and UOB Kay Hian face six-month bans from dealing in structured notes with effect from July 1, 2009 or until there are adequate measures in place, the MAS said.
Hong Leong Finance (HLF), which received the stiffest ban, has also paid the most in compensation - some $57.6 million in all. It was also the single biggest seller of the toxic products. Over a 19-month period, Singapore's largest finance company, which has 28 branches mainly in the heartlands, sold a total $106.2 million worth of Minibond and Pinnacle notes to 2,781 investors.
HLF has offered full or partial compensation to 2,048 investors representing 95.5 per cent of cases decided.
Maybank's risk profiling scoring system was found to be faulty. It, too, did not allocate scores to the client's investment experience and suitability for the product. For some of the Minibonds - which were not bonds - Maybank in fact informed its salespeople that they were suitable for clients who wanted to diversify their portfolio with bonds.
While the findings were pretty damning in highlighting some of the unsavoury practices which have been going on in the industry for several years, there was no magic bullet for investors unhappy with settlements offered by the FIs and thinking of taking legal action.
'The failings identified in MAS's investigations do not automatically mean that the financial institutions are liable to individual investors,' said the MAS.
'An investor would have to show that he relied on the particular recommendation or representation based on the specific facts and circumstances at the time of purchase,' it said.
'These would include the various documents that the investor signed or acknowledged receipt of as part of the transaction such as documentation containing risk warnings and disclaimers about the liability of the financial institutions distributing the notes.'
Chung Wing Kee, a Minibond Investors Action Group member, said that the action taken by MAS did not go far enough.
'Who in their right minds will buy structured products for the next two years . . . it's just a slap on the wrist,' said Mr Chung.
'MAS did not come up to say the FIs were wrong, we'll let the courts decide; if they didn't do anything wrong, why impose a two-year ban?' he said.
As at the end of May, the three banks and HLF have offered settlements to 67 per cent of investors whose cases have been decided, amounting to about $105 million.
More than 50 per cent of cases decided have been offered settlements of 50 per cent and above with 26 per cent receiving offers of full settlement. Some 85 per cent of settlement offers have been accepted, 3 per cent have been rejected and the rest have yet to decide. The stockbroking firms have offered settlements amounting to $2.7 million to 33 per cent of investors whose cases have been decided. 70 per cent of settlement offers by the stockbroking firms have been accepted, 11 per cent have been rejected and the rest have yet to decide.
The MAS said that 10,320 retail investors sank $520 million into the Lehman-linked products which became worthless following the collapse of the US investment bank Lehman Brothers last September.
With additional reporting by Brandon Chew
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