MAS Releases Investigation Findings on the Sale and Marketing of Structured Notes Linked to Lehman Brothers
Singapore, 7 July 2009…The Monetary Authority of Singapore (MAS) has completed investigations into the sale and marketing of structured notes linked to Lehman Brothers (the Notes). Given the degree of public interest, MAS is releasing a report on our investigation findings (Click here to view the report).
2. MAS’ investigations found that the 10 financial institutions that distributed the Notes (see Annex 1*) had policies, procedures and controls in place for the approval, sales and marketing of the Notes. However, the extent of the due diligence and level of internal controls differed among them. As a result, there were various forms of non-compliance with MAS’ notices and guidelines on the sale and marketing of investment products. The nature and extent of these failings and their potential impact on the sales process and customers differed for each institution. Some of the specific failings included:
a) risk ratings assigned by some financial institutions to some series of the Notes that were inconsistent with risk warnings stated in the prospectus and pricing statement;
b) insufficient steps taken by some financial institutions to ensure that all their financial advisory representatives were properly trained before marketing and selling the Notes; and
c) weaknesses in how some financial institutions ensured that their financial advisory representatives were properly equipped with accurate and complete information about the Notes.
The findings for each financial institution are specific to that institution and are not general findings.
3. MAS takes a serious view of all instances of non-compliance by the financial institutions with MAS’ notices and guidelines on the sale and marketing of investment products. In deciding on the appropriate regulatory action, MAS considered the nature and impact of the failings, the steps taken by the financial institutions to rectify these, and the extent to which they accepted responsibility and resolved investors’ complaints. Taking all these into account, MAS has imposed bans on the sale of structured notes by these institutions for periods ranging from a minimum of six months to a minimum of two years. In addition, MAS has issued formal directions to the financial institutions to rectify all the weaknesses identified by the investigations and to review and strengthen all internal processes and procedures for the provision of financial advisory services across all investment products. The financial institutions are also required to appoint an external person approved by MAS to review their action plan and report on its implementation, and appoint a member of the institution’s senior management to oversee compliance with MAS’ direction. The financial institutions will not be able to distribute structured notes until MAS is satisfied with the measures they have put in place.
Settlements offered by financial institutions
4. The financial institutions have generally adopted MAS’ recommendation not to take an overly legalistic approach in resolving customer complaints. In reviewing each case under their complaints assessment framework that MAS required them to put in place, they considered whether there was a reasonable basis for recommending the product to the client, the extent to which it was properly explained to the client that the product was being sold on an advisory or execution only basis and whether proper procedures were adhered to in the advisory and sales process. In deciding the outcome of each complaint, the financial institutions weighed a range of relevant factors including the investment experience of the investor, the degree of reasonable reliance on the advice provided and the investor’s ability to understand the product and any documents signed during the sales process. The financial institutions also took into account the failings identified by MAS’ investigation. Settlements were offered by the financial institutions on a “without admission of liability” basis.
5. For the Minibond Notes, where a partial settlement is offered, the investor will retain all or a portion of his notes. He will keep any residual value arising from the notes that he retains. The residual value, if any, will depend on the ultimate value of the underlying securities.
6. As of 31 May 2009, the three banks and one finance company have offered settlements to 67% of investors whose cases have been decided at a value of about S$105 million. Over 50% of cases decided have been offered settlements of 50% and above with 26% receiving offers of full settlement (see Annex 2**, Table 1 for details). 85% of settlement offers by the three banks and one finance company have been accepted, 3% have been rejected and the rest have yet to decide. The stockbroking firms have offered settlements amounting to S$2.7 million to 33% of investors whose cases have been decided (see Annex 2**, Table 2 for details). 70% of settlement offers by the stockbroking firms have been accepted, 11% have been rejected and the rest have yet to decide.
7. The settlements offered differ across financial institutions. These differences generally reflect the varied target profiles of customers of the financial institutions and their different business models as well as the differences in the nature, extent and impact of the failings identified in the investigation for each financial institution.
8. The failings identified in MAS’ investigations do not automatically mean that the financial institutions are liable to individual investors. 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. 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.
9. MAS expects all financial institutions operating in Singapore to maintain the highest professional standards by acting fairly, in the best interests of their customers. These standards are clearly set out in MAS’ regulations, notices and guidelines. The financial institutions’ senior management should have exercised more care in carrying out their responsibilities to ensure standards were consistently implemented across the whole organisation, especially in the sales practices of their front-line staff. MAS has reiterated in our Fair Dealing guidelines issued on 3 April 2009 that the Board and senior management are responsible for ensuring their financial institution delivers fair dealing outcomes to its customers. We intend to intensify our supervisory scrutiny of how the Board and senior management of financial institutions are implementing the guidelines to deliver these fair dealing customer outcomes.
10. In March this year, MAS released a consultation paper on proposed enhanced safeguards for investors when they purchase investment products. We received a range of useful comments from various stakeholders which we are considering carefully. MAS will issue our response to the feedback shortly. Meanwhile, all financial institutions should carefully examine their current business models, including product range and remuneration structures, to ensure they are consistent with acting in the best interests of their customers.
11. Investors too have to play a role by reading product disclosures and making the effort to understand the products they purchase. This will reduce the risk of investors buying products that do not meet their needs. MAS will work with the industry to step up investor education initiatives and raise the level of financial literacy in Singapore.
12. Shane Tregillis, Deputy Managing Director, Market Conduct, MAS, said “MAS’ investigations have been thorough and objective. Based on our investigation findings for each financial institution, MAS has taken appropriate regulatory action. The industry as a whole needs to carefully reflect on these findings, take immediate steps to win back the trust and confidence of their customers and prevent similar problems from emerging in the future.”
* For Annex 1, please click here.
** For Annex 2, please click here.