Structured products that are fair to small investors

During the past seven years, many structured financial products were launched in the financial market in Singapore. Most were exotically designed, offering capital protection and a chance of getting a big return.

They were heavily advertised. There were aggressively sold in the bank branches by marketing officers who were engaged to convince customers to switch over from the low interest bearing fixed deposits.

Many of these products were complicated.

The authority required the risks and key features in these products to be mentioned in the advertisements and the brochures. The customers were directed to read the prospectus, which incorporated supplementary documents. The customer had to sign a statement of awareness of the risks.

I am told that the prospectus and the mandatory supporting documents can come to over 200 pages. A financial expert spent many tens of hours to analyse if the product offered a good deal to the investor. The documents did not provide the relevant data to make a sound judgement. He had to ask many supplementary questions to the product issuer.

Tens of thousands of customers had invested several billions of dollars in these structured products over the past years.

To my knowledge, their experience had been overwhelming disappointing. While most of them did get back their principal, the return from the investments had been poor. Most of them had to wait for three or five years for the maturity of their investment, only to get a return of less than 1 percent per year.

The return is lower than if they had left their money in the low interest bearing fixed deposits. A better investment would have been risk-free Government bonds.

My question is, were these financial products designed to be fair to the small investors? Did they offer a fair rate of return that is commensurate with the risk? How much of the return were creamed off by the product issuer? How much was spent in the advertisement and marketing of the product?

It would be virtually impossible for the ordinary small investor to make a proper judgement.

Should these products be offered to the ordinary consumer? New products continued to be launched and advertised every week, even today.

What can be done? I suggest that these financial products should be vetted by the authority to be fair and suitable for the ordinary consumer, before they are sold in the market.

Am I asking too much? I do not think so.

Take the case of drugs. They have to be approved by the Health Science Authority before they can be sold to the consumer. The authority had to verify the claims of the manufacturer and the claims are supported by actual evidence. They also have to be satisfied that the drugs are safe to be used.

The authority does not expect the ordinary consumer to be able to make their own judgement.

Take the case of public transport. The Public Transport Council is tasked to approve requests for increase in bus or train fares. They have to deliberate many hours to consider any increase in the fare, however small. They had to be satisfied that the increase is reasonable and fair to consumers.

I hope that a similar arrangement can be made for the sale of financial products.

The authority can form a panel which can be tasked to ensure that the financial products are designed to be fair to consumers, to give a reasonable return for the risk, and that the risks are fairly disclosed. The panel can be supported by reports that can be submitted by independent and impartial financial experts.

I hope that this proposal gets considered by the authority.