MAS bans use of "Capital Protected"

MAS bans use of capital protected
The Business Times
9 Sep 2009

The Monetary Authority of Singapore has published the first set of new rules that it plans to implement to change the way financial institutions here treat customers in response to the recent scandal over mis-selling in the industry.

The 19-page document released yesterday details MAS's response to feedback it received on changes it proposed in March to regulations governing the sale of unlisted investment products. Unit trusts, life insurance policies - including investment-linked insurance plans - structured deposits, and debentures such as structured notes fall into this category.

MAS will ban firms from using 'capital protected', 'principal protected', or similar terms to describe investment products. Such adjectives have been widely used here in the past to market structured products that promised to return at maturity at least the initial sum invested.

But these promises were based on the design of a product - typically using embedded derivatives - rather than a binding guarantee by the issuer. When the financial crisis struck last year, many investors cried foul when the 'protection' crumbled, saddling them with large losses.

Yesterday, MAS said that marketing and advertising materials should not suggest that a product 'is, or is comparable to, a bank deposit', or that there is little risk of an investor losing his principal or not achieving a stated rate of return.

In addition, promotional materials should not 'give the impression that an investor can profit without risk' or bury information in footnotes 'if such presentation would cause difficulty to an investor in understanding the product', it added. Information in advertisements and footnotes must be in a font size of at least 10-point Times New Roman - slightly bigger than this text.

As widely expected, tellers at banks and finance companies will be banned from referring customers to staff selling investment products, unless customers themselves ask for information on such products.

'As a general principle, MAS strongly discourages all financial institutions from actively promoting investment products to customers who visit their premises without the intention to purchase investment products,' MAS said.

From now on, issuers of all unlisted investment products will be obliged to inform investors of any 'material changes' that may affect the risks or returns of their investment, similar to the disclosure requirements for securities listed on the Singapore Exchange.

For products lasting a year or more, issuers must also update investors with reports at least twice a year. MAS said it will publish suggestions on what these reports should contain early next year.

It will also require issuers to put up indicative prices of investment products regularly on their websites, to give investors an idea of the price at which they can sell their investments.

And firms selling unlisted debentures such as structured notes with tenures longer than three months must now give buyers a 'cooling-off' period of seven days during which investors can cancel their purchase without paying sales charges or commissions.

In future, firms will also be required to include a 'product highlights sheet' summarising the key features and risks of a product when marketing it to customers. MAS said it has formed a workgroup to develop the content and format of such summary documents.

David Gerald, president of the Securities Investors Association of Singapore, which represents retail investors here, welcomed the changes.

'It's really a positive move,' he said. 'But the responsibility is still with the financial institutions and their staff to carry out ethical practices.'

And investors 'must not invest with their eyes closed', he added. 'If they don't understand an investment, they should walk away.'

Distributors of investment products, including firms that sell products created by other firms, will be required to put in place formal policies to assess each new product and its suitability for targeted customer segments before selling it, MAS said.

Several other proposals, including those on pay structures for financial advisers selling investment products and a definition of complex investment products, need further study, MAS said. It plans to publish a detailed response to industry feedback on these proposals later this year.