Singapore bans use of 'capital protected'

SINGAPORE, Sept 9 — If you have ever been sold a financial product labelled 'capital protected' or 'principal protected' and did not know what the terms really meant, there is good news.

Singapore's financial regulator has decided to ban their use because too many investors do not understand them.

What is more easily understood is 'capital guaranteed' — meaning the investor's principal sum is fully protected - and this will be one of only two types of products allowed to be sold.

The other category? Everything else that is not capital guaranteed.

The Monetary Authority of Singapore (MAS) announced its decision yesterday as part of its response to feedback that it had received on a slew of changes proposed in the wake of the collapse of Lehman-linked structured products.

These proposals, first released in March, were mooted in response to controversy over the way complex investment instruments were sold to people, including elderly and lowly educated folk.

Some of the key changes include requiring financial institutions to provide customers with simple, user-friendly 'product highlights sheets' and providing 'health warnings' on complex investments in appropriately large font.

MAS had also proposed that bank tellers should not sell investments and there should be a seven-day 'cooling off' period during which an investor could change his mind and pull out of his investment.

In a 19-page document yesterday, the financial regulator outlined public responses it had received, and said that it would adopt most of the proposals.

The ban on the use of the term 'capital protected' will apply to mass-market products familiar to retail investors, including structured notes, unit trusts and investment-linked life insurance policies.

Some investors had previously raised concerns that they had difficulty understanding what those terms meant, MAS said.

A 'capital protected' product is where the principal sum is ploughed into investments like bonds which, on maturity, are expected to provide the 100 per cent capital protection.

But this is not a certainty. 'The bonds could turn sour and affect the value of the investment, and people may not get back 100 per cent,' said First Principal Financial's chief executive Mohamed Salim.

This is to be distinguished from 'capital guaranteed' products where an investor is guaranteed to get back at maturity the money that he invested on day one.

Financial advisers told The Straits Times that many retail investors, even more experienced ones, cannot differentiate between the two terms.

MAS said yesterday that one way around the problem was for the industry to develop a standard definition for capital protected products.

But it had found that all the suggested definitions tended to be too lengthy or not easily understandable by investors.

Capital protected products were popular in the years just preceding the recent financial crisis. One banker told The Straits Times that '30 to 40 per cent' of retail investment products here carried this label.

This is why consumer advocates are lauding the move.

'The term principal protected has never been understood by retail investors. Now they'll understand the terms of sales better,' said David Gerald, president of the Securities Investors Association of Singapore.

The change will make it tougher for bankers to market these investments. One banker said some product manufacturers will find it harder to sell structured products in Singapore in future because they cannot distinguish the safer products from more risky ones.

But Singapore will not lose its competitiveness as a wealth management centre, he acknowledged, since the measures as a whole will provide more transparency and confidence.

Seah Seng Choon, executive director of the Consumers Association of Singapore, lauded the full list of changes, saying that they go a long way in promoting a higher level of disclosure and safeguard investors' interest.

MAS said that it will issue further responses to more proposals in the fourth quarter. That is because some of them need further study. — The Straits Times