Financial institutions in Singapore are expected to check a customer’s risk profile before selling investment products. But structured products – such as the Minibonds and High Notes which burnt a hole in the pockets of hundreds of Singapore investors -- can be too complex for both buyer and seller to understand.
They were once sold only to sophisticated investors, says a paper published by Securities Litigation and Consulting Group (SLCG), a financial economics consulting firm based in Virginia near Washington, DC.
It cites the National Association of Security Dealers (NASD), which merged with the New York Stock Exchange's regulation committee last year to form the Financial Industry Regulatory Authority (FINRA).
The paper says:
Structured products can be too complex and opaque for retail investors and registered representatives to understand. This complexity and opaqueness allows structured products to survive in the marketplace despite their marked inferiority to traditional portfolios of stocks and bonds. The NASD has taken notice. In the current investment environment, investors and brokers are increasingly turning to alternatives to conventional equity and fixed income investments in search of higher returns or yields. Such products, including … structured notes … are often complex or have unique features that may not be fully understood by the retail customers to whom they are frequently offered, or even by the brokers who recommend them.
Singapore’s New Paper sounded a warning as early as July last year. “Do you really understand structured products?” asked the article.
Yet these products continued to be bought and sold in Singapore for, as Singapore Finance Minister Tharman Shanmugartnam said last week, “‘I can assure you our Singapore banks are well regulated.”
It’s true that the Minibonds and High Notes were issued by Lehman Brothers.
But to quote the minister again:
“It is not possible for anyone to say all banks are safe, but what I can say is our local banks are safe, and foreign banks in Singapore are subject to tighter regulations compared to most other places.”
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