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By Lorna Tan, Finance Correspondent
Many of the 10,000 investors who parked their savings in failed investment products linked to the bankrupt Lehman Brothers are alleging that they had been mis-sold the products by financial institutions.
The term 'mis-selling' cropped up several times during Parliament last Monday and has made headlines in several articles. But its meaning remains hazy.
The Sunday Times asked financial experts what constitutes mis-selling and what the clear-cut cases and grey areas are. They represent the views of the experts in the financial services area, but may not be the position taken by the dispute resolution centre or the courts.
Simply put, mis-selling boils down to giving the wrong advice to potential customers. Experts also say the failure to disclose certain information, otherwise known as 'negligent omission', clearly constitutes mis-selling. This includes not advising a potential customer on the need to diversify his investments as well as the financial product's merits and risks.
Going a step further, experts agree that the agent should always demonstrate that he has a reasonable basis for his recommendations to his clients. This means ensuring that the product sold is appropriate to the customer's needs. Not doing so is mis-selling.
CLEAR-CUT EXAMPLES
Retirees who received bad advice
Mr Stanley Jeremiah, a council member of the Singapore Insurance Institute, believes that retirees who bought into the failed Lehman-linked products have a higher chance of proving mis-selling.
This is because if a retiree is encouraged to invest more than half of his investible funds in one high-risk product, it results in two wrongs, he points out.
First, there is no investment diversification and, second, there is a compounding of risks as the retiree is buying a product that is too risky for his age since he has a relatively limited timeframe to recover his investment if it incurs a loss.
Generally, the older a person is, the less risk he can take.
'Under such a scenario, it is a clear-cut case of mis-selling,' says Mr Jeremiah, who also specialises in insurance law and financial services. 'This is even so if the retiree has consented to a 'no advice' or 'product advice' fact-find, unless the adviser has at least informed him that this product is not suitable.'
A 'no advice' or 'product advice' fact-find is when the investor refuses to divulge his financial data or asks that the relationship manager advise him only about particular products. Still, the relationship manager's duty is to advise the investor on the need to diversify and spread his risks, as well as whether the products are suitable for him.
'If a patient wants sleeping pills, the doctor may not be able to stop him from buying them, but the onus is on the doctor to inform the patient that they are no good for him,' Mr Jeremiah says.
Selling a product that the client does not need
An example of this, says Mr Ben Fok, chief executive of Grandtag Financial Consultancy, is selling a whole life insurance plan to a customer who has no dependants like a spouse or children. Such a customer does not need the insurance protection on his life except for, perhaps, disability and health insurance.
Omission of information
This means not mentioning the charges and penalties involved in a unit trust or an insurance policy such as upfront sales charges, asset management charges, exit charges, surrender charges, and if there is any lock-in period, says Mr James Huan, head of legal and estate succession at financial advisory firm Providend.
Sale of an inappropriate higher risk product
An example is selling the client a higher-risk product when what he wants and needs is a fixed deposit. It is worse if the client is made to understand or has the misconception that what he is buying is a fixed deposit or something that is the same as a fixed deposit.
Not making clear who provides the guarantee
This means not making it clear that although the investment product the client is buying is a 'guaranteed' product, the guarantee is not provided by the financial institution that distributes the product, but by the financial institution that arranged the product. The client is given the impression that the distributor is also guaranteeing the product, says Mr Huan.
GREY AREAS
When customers are middle-aged
Mr Jeremiah says that if the customer is middle-aged - that is, aged 45 to 62 - there is a grey area as to how much risk he can take. The uncertainty goes up another notch if the customer is already diversified in other investments. It then becomes debatable as to whether the percentage of his exposure to a high- or higher-risk product is more than what is appropriate.
This is particularly so if the customer consents to a 'no advice' or 'product advice' sales transaction, instead of 'full advice'. In such instances, the lack of information provided by the customer makes it difficult to judge if the recommended product is suitable for his financial needs and risk level.
When customer acknowledges disclaimers
There can also be grey areas as to the extent of the risk that was actually disclosed to the customer, particularly if the sale was a no-advice sales transaction and the client - especially if he is English-educated - signed disclaimers acknowledging the risk associated with the product. 'If you have $500,000 and you are advised to put $50,000 in a higher-risk product to get a higher return, it is not necessarily bad advice,' says Mr Jeremiah.
WHAT EVIDENCE IS NEEDED TO PROVE IT?
It is one thing to claim that you were mis-sold a financial product and another to provide evidence that it took place. After all, the burden of proof is on the customer making the claim, says Mr Huan.
Mr Fok says it is difficult to prove mis-selling unless the adviser did not do a proper fact-find of a customer's financial needs.
Mis-selling can also be proved if the terms of reference of the product did not explicitly state that such an investment is high-risk, and did not include a clause that said the customer could lose his invested capital in the event of default.
As each client's circumstances are different, the requirements and evidence will vary accordingly.
Here are some broad guidelines, suggested by Mr Huan, on what customers can do to demonstrate that mis-selling took place:
- That they did not get all the documents they were supposed to be provided with, such as the prospectus, or other documents describing clearly how the structured product works.
- That the advisers had described the products as something else other than structured products. Evidence to show this could be written notes or illustrations by the advisers or even e-mail.
- Produce recordings of the sales meetings, if possible.
- That based on your personal circumstances and background such as your educational level and language ability, you would not have understood or been able to understand what you were sold.
- That your risk profile was actually very conservative - as in the case of retirees - and you should not have been sold the product to begin with, regardless of whether you understood the product or not.
HOW IS MIS-SELLING HANDLED ELSEWHERE?
In Britain, the regulator provides clear and easy to understand information on how to make a complaint, says Mr Jeremiah.
Firstly, the consumer is always asked to go back to the financial institution involved. It is mandatory for all financial institutions to have a written complaints process which has to be provided to the customer.
The process that is set out in Britain goes like this:
Firms should investigate your complaint and give you a clear and fair answer within eight weeks. They should tell you that if you are unhappy with their response, you may be able to take your complaint to the Financial Ombudsman Service. An equivalent of that in Singapore is the Financial Industry Disputes Resolution Centre (Fidrec).
The Ombudsman's role is to be impartial and investigate the dispute between the firm and the complainant. It will try to help you reach agreement by a process of mediation.
You can choose whether or not to accept an Ombudsman's decision. If you accept the decision, it is binding on both you and the firm. If you don't accept it, you can take your case to court if you want to.
In Britain, the important thing is there isn't a cap on the value of the claims that can be mediated by the Ombudsman. This is not the case in Singapore. Fidrec handles claims of up to $50,000 only.
Another difference is that in Britain, the Ombudsman's decisions are made public, which is not the case here.
Also, unlike in Singapore, a customer in Britain can use a lawyer or what is called a 'complaints handler' to assist him in a hearing before the Ombudsman. Here, the layman is at a disadvantage because he cannot use a lawyer and the financial institution will often send its in-house lawyers.
SEE ALSO:
This article was first published in The Straits Times on October 26, 2008.
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