The cane whistles, but does it really hurt?

Business Times - 08 Jul 2009

COMMENTARY

MAS bans won't affect FIs much and it shouldn't gloss over deeper issues

By WONG WEI KONG

IT is a pity that what seems so tough is really just a slap on the wrist.

So 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 for mis-selling products linked to collapsed US bank Lehman Brothers.

The offending banks on the list are all established names: ABN-Amro, DBS Bank, Maybank, DMG and Partners Securities, UOB Kay Hian, CIMB, Kim Eng Securities, OCBC Securities, Phillip Securities as well as Hong Leong Finance. These were names that many investors instinctively trusted - but, as the MAS findings show, it was a trust that was grossly misplaced.

On the surface, the MAS ban, following approximately seven months of investigations, appears to be appropriate punishment. But it really rings hollow, because it isn't going to hurt the FIs very much. The fact is that the whole structured products market has vanished - the financial crisis and the structured notes fiasco have seen to that. Even without the ban, these FIs weren't selling any structured notes.

This will be cold comfort to the 10,000 or so investors who suffered from the mis-selling, some of whom will never fully recover from the blow. And it isn't satisfactory, given the serious lapses at the FIs. The list of shortcomings makes for shocking reading: risk profile questionnaires that were wrongly scored; risk profile scoring systems that did not allocate numerical scores; wrong classifications of products, and relationship managers (RMs) and representatives who refused to attend the pre-requisite training. And all the FIs get, so far at least, is a ban on doing a business that doesn't exist anymore.

If a ban really means nothing, the MAS should have imposed fines, big fines, that will hurt the FIs. If it does not want to collect fines, it should have considered pushing the FIs to compensate, more than what they have done, the investors who are seeking redress. Of course, the FIs will say they're suffering reputational damage, but that's already a fact, and that is well deserved.

Oversight and processes

There's another point worth making. Apart from investigations into FI-wide issues, the MAS is concurrently looking into specific cases 'where individuals involved in the sale and marketing of the notes may have departed from the relevant regulatory standards'. Inquiries are ongoing and any regulatory action taken against individuals will be published in due course, the central bank said.

While it remains to be seen what the MAS will do in this respect, it will be a pity if any subsequent action taken is only against the RMs and representatives actually selling the products on the ground. The nature of the lapses identified by the MAS suggests a failure in oversight and processes, which really points the finger at senior executives, and they shouldn't escape responsibility.

And what about the MAS' own role? Dare we suggest that if the sub-prime fiasco hadn't happened and Lehman hadn't collapsed, the mis-selling would have continued merrily and no one would be the wiser? How closely did the central bank supervise the banks when it came to the sale of structured products before the crisis? Liberalising the market is good, but if not implemented properly, the costs, as proven now, are enormous. The MAS itself should be deriving lessons from the whole affair.

Time to win back trust

The industry will respond to this as it usually does. Indeed, the Association of Banks in Singapore (ABS) immediately announced that its member banks are putting in place a series of measures to further protect the interests of consumers who buy investment products, with the measures covering a range of governance and assurance processes, training and compensation of sales personnel, consumer education and enhancements to the sales process. Investors will take all this with a pinch of salt. Weren't there such protestations before?

Forget expansion - winning back trust should be the biggest priority for banks and financial institutions.