MAS proposes stronger safeguards for retail investors

SINGAPORE — In a move to better protect retail investors, the Monetary Authority of Singapore (MAS) has proposed enhancements to its regulatory framework as more non-conventional products are being marketed as alternative investments.

“Product innovation challenges the boundaries of the product definitions. The myriad of product information being pushed out to investors as a result of more complex product features underscores the need for better means of illustrating the risk-return trade-offs associated with each product,” the MAS said in its public consultation paper released yesterday.

It wants to extend to investors in two categories of such non-conventional products the current regulatory safeguards under the Securities and Futures Act (SFA) for investors in capital markets.

The first category covers buy-back arrangements that involve precious metals, such as the troubled Genneva scheme two years ago in which customers bought gold at above-market prices in exchange for monthly payments over a period of time.

The MAS said this was “akin to collateralised debt obligations” and that precious metals such as gold, silver and platinum are comparable to financial assets due to their “interchangeability with real currency, transferability and market liquidity”. Therefore, such products should be subject to the SFA, which includes the compulsory filing of a prospectus and the licensing of intermediaries.

The other category involves products that have the elements of a regulated collective investment scheme but do not pool investor contributions. An example would be a buy-to-let scheme where investors are offered a direct interest in a property and partake in pooled rental income without having management control over the asset.

As more investment products with increasingly complex risk-return profiles are offered to retail investors, the MAS has also proposed a framework to rate these based on their complexity of structure and risk of loss of initial investment principal.

“Such products pose greater challenges to retail investors in deciding on investments that suit their level of understanding and risk appetite,” the central bank said. “Under the proposed framework … product issuers will be required to disclose these ratings in product offering documents and marketing materials, along with information on the historical price volatility or credit rating of the product.”

Mr David Gerald, president and chief executive of the Securities Investors Association (Singapore), said the rating will serve as a good guide for retail investors and may even safeguard against the occurrence of another Lehman-like crisis.

“There is an increasing number of investment products with more complex risk-return profiles that are being offered to investors today. It is only right that investors get guidance not only from (product issuers and) are being protected by this regulatory framework,” Mr Gerald said.

“Investors who worry about the difficulty of understanding the complexity and risk can be guided by the MAS ratings. This will assist retail investors to determine the risk level and make an informed decision.”

The MAS also proposes to treat all investors, besides institutional ones, as retail investors who will enjoy a full range of regulatory protection. Those who meet the necessary criteria, such as possessing net personal assets above S$2 million, can opt to be treated as “accredited investors” to access a wider range of investment products.

Currently, investors who meet the criteria are automatically considered “accredited investors”, but some are not fully aware that this category receives a lower level of regulatory protection compared with retail investors.

Said Mr Lee Boon Ngiap, the MAS’ assistant managing director of capital markets: “Taken together, the three proposals will further safeguard investors’ interests and empower them to make better informed investment decisions.”

The public consultation runs until Sept 1. The proposals are targeted to be implemented a year later.