[Misconduct] Misselling of Structured Notes in Singapore - Part 2 - Key Findings, Impact, Root Causes & Views

KEY FINDING
we will look at the types and number of lapses found by MAS for each FIs. Before we delve further, here is a list of internal approval obtained in the various FIs for the distribution of the Structured Notes. . There are two distinct types of approval structures in any organization being a vertical (require higher authority approval depending on predefined policy) and horizontal (sign-off from stakeholders) with vertical structures usually being the faster route. 

A list of key parties approving the Notes in the various FIs.  

Distributors	Prepared by (Department)	Internal Approval obtained from
ABN	Prepared by Investment and Specialized Products	Approved by the Heads of Operations, Information Technology, Finance, Compliance, Legal, Credit Risk, Market Risk and Operational Risk.
DBS	Prepared by  Deposits, Investment and Insurance Strategy (Consumer Banking Department)	Approved by Group Compliance, Group Risk and Legal, and approved by the Head of the Consumer Banking Group
MBB	Prepared by MBB’s Retail Financial Services	Approved by the Head of Retail Financial Services.
HLF	Prepared by Wealth Management Department	Approved by the President of HLF and HLF’s Senior Executive Vice President of Corporate & Consumer Business.
CIMB	No Info	Affected Notes were approved by Head of Retail Equities.
DMG (Execution-only)	Evaluation conducted by Directors of Business Development and Sales.	Approved by Executive Director, Business Development, Executive Director for Finance, Administration and Operations and DMG’s former Managing Director.
KESPL (Execution -only)	N/A	Approved by product specialist department, the Equity Derivatives and Structured Products Department (EDSP)
OSPL (Execution -only)	N/A	Assessed and approved by the Head of the Alternative Investment Specialist (“AIS”) Desk
PSPL (Execution -only)	Put up by PSPL’s Debt Capital Markets department	Approved by PSPL’s board.
UOBKH (Execution -only)	N/A	Approved by the Managing Director and the then Deputy Managing Director of UOBK.

A table of lapses found in the various areas by MAS in the distributors.

Distributors/ FIs	Product Due Diligence	Product Briefings	Risk Profiling and Investor Suitability	Failure to lodge notification to authorities	Corporate Disclosure	Product Write-ups
ABN	X	X	X	-	-	-
DBS	-	X	X	-	-	-
MBB	X	-	X	-	-	-
HLF	X	X	X	X	X	-
CIMB	X	X	X	-	-	-
DMG(Execution-only)	X	X	-	-	-	-
KESPL(Execution -only)	X	X	-	-	-	X
OSPL (Execution -only)	X	X	-	-	-	-
PSPL (Execution -only)	X	X	-	-	-	-
UOBKH (Execution -only)	X	X	-	-	-	-
TOTAL	9	9	5	1	1	1

LICENSED FINANCIAL ADVISERS (FLAs)
2 FIs sold the Notes though FLAs. The FLAs are prohibited from providing advice and only introduce clients to the FIs. The FIs were expected to provide financial advisory service for the referrals but the involved FIs only acted out as an “execution-only” broker.

The handling of licenced financial advisers (LFAs) by the distributor was a major lapse. The FIs involved were OSPL & PSPL.

FINANCIAL ADVICE

For FIs that were selling the Notes on an advisory basis and to ensure appropriate advice is given, clients were required to produce information for risk scoring but nevertheless all FIs had lapses in providing advice to purchase an investment product. The main root cause was clients were either not scored accurately or were misguided. A list of detailed lapses found.

1. Scorings were erroneous with higher scores given to clients with a higher risk appetite and vice versa, when it should have been the other way round

2. Notes “not suitable for inexperienced investors” were not communicated to its sales staff.

3. Investment experience was not allocated a numerical score towards computing risk profile and suitability and no guidance was given to the RMs on the relevance of the client’s investment experience.               

4. Client’s Risk profile was determined primarily from his financial objectives without any objective measure to assess other important factors.

5. No guidance on how to factor in structured notes into portfolio allocation guidance according to client risk profile. (in the form of a specified ratio of fixed income, equities and cash)

6. No differentiation in its sales documents structured notes as a distinct asset class from bonds and equities and was placed under the bond fund category.

IMPACT

As at 31 May 2009, the status of settlement for the Notes is as follow.

	ABN	DBS	MBB	HLF	CIMB	DMG	KESPL	OSPL	PSPL	UOBKH
Number of Investors	870	1083	2456	2781	217	63	208	1204	712	315
Full or partial refund (cases)	262	197	1100	2048	53	1	21	128	86	8
Settlement Offer ($) (Million)	14.1	7.6	25.3	57.6	0.49	0.02	0.31	1.22	0.61	0.09

ACTION TAKEN

A list of actions taken by MAS on the various FIs.

1. FIs are required to review or establish procedures to rectify weaknesses identified such as training on product knowledge and product due diligence.

2. Set up procedures or appoint special officers to review complaints and to offer settlements if required.

3. Cease to carry on business in dealing in and providing any financial advisory services for structured notes for certain period.

4. Appoint external person approved by authority to review the action plans.

5. Appoint senior management to have oversight over the progress of compliance measures.

6. Cease the use of LFA for financial advisory services.

DISCUSSION

The FIs had different approval processes in placed. Despite some of the FIs adopting a stricter process, lapses were still noted in the banks’ product due diligence process, this indicates an over reliance on third party information and a failure to perform proper due diligence by certain stakeholders.  

All FIs had lapses in the product briefing and training process with 2 FIs trying to mitigate the risk to LFAs and itself did not provide financial advice for referrals. This shows a low priority in the FIs to ensure accuracy in providing financial advising. Coupled with lapses during the financial advisory process, We can conclude that there were poor considerations and a lack of accountability during the product planning stage on adequate product materials and designing a proper process flow.