When asked to rank the most serious ethical issues facing global markets in the coming year, respondents to the CFA Institute 2012 Global Market Sentiment Survey gave the highest priority to mis-selling of products by financial advisers.
Regulators in the Asia-Pacific region are paying heed to this concern. They’ve drafted new rules and regulations in the aftermath of Lehman’s mini-bonds crisis to find ways to resolve disputes between investors and financial institutions. The Financial Industry Disputes Resolution Centre (FIDReC) in Singapore recently reported that it had received 2,364 complaints through 30 June involving structured products linked to the collapse of Lehman Brothers, including DBS High Notes, Lehman Minibonds, Merrill Lynch Jubilee Linkearner Notes, and Morgan Stanley’s Pinnacle Notes. FIDReC has settled 99 percent of those credit-linked note disputes.
Back in 2008, thousands of investors in Hong Kong and Singapore staged street protests to pressure the institutions to compensate them for minibond losses, particularly the Lehman mini-bond series after the firm’s collapse. Many were elderly men and women who alleged they were misled into believing that these were low-risk, fixed-income investments when in fact they actually contained high-risk credit derivatives.
However, the number of cases involving market conduct complaints in Singapore — including aggressive sales tactics or inappropriate advice — has decreased by nearly half to 497 complaints, down from 978 in the previous year, according to FIDReC.
Of course, Singapore and Hong Kong are not the only places where mis-selling occurs, and this practice is not a thing of the past, as underscored by a recent high-profile case in Japan. Just last week, Citigroup’s Japan units were again sanctioned by Japanese financial regulators — the company’s third sanction since 2004. The Financial Services Agency ordered Citigroup to temporarily suspend its Japanese mutual-fund sales and interest-rate trading businesses after the company had violated regulations through the mis-selling of investment trusts without disclosing the level of risk to clients and recommending products that were unsuitable for certain customers. In the United Kingdom, HSBC was recently fined 10.5 million pounds for selling unsuitable investment products to senior citizens with an average age of 83 years.
Accepting the status quo of mis-selling is not at all in the interest of retail investors. This naturally raises the question of what can be done in order to alleviate the problem, which is characterized by numerous ethical issues. As pointed out in a paper published by CFA Institute on the very subject of mis-selling, there are several areas which need to be addressed. Enhancing the quality of disclosures to better disclose risk factors in prospectus and promotional materials, periodic reporting of the fund’s performance, and educating investors that these products are sold under a disclosure regime are all important measures. For example, in the Lehman mini-bonds crisis, some investors mistakenly viewed the authorization by the regulator as an endorsement of the merit and safety of the product.
At the same time, these steps must be accompanied by enhanced rules of conduct and the introduction of ethical standards to emphasize treating customers fairly in every aspect of a financial firm’s operations. A change to the corporate culture that strongly emphasizes the necessity to act in the interest of the customer is an important part of this process. An excellent way for asset managers to signal to customers a commitment to high ethical standards is compliance with the CFA Institute Asset Manager Code of Professional Conduct. The Asset Manager Code outlines the ethical and professional responsibilities of firms that manage assets on behalf of clients, and the number of firms complying with it has increased to more than 600 globally in recent months. This is very encouraging, as it strongly nurtures the hope that more firms will stick to their ethical responsibilities, which may well lead to a further reduction of mis-selling cases going forward.