Happy Chinese New Year! Asia Makes Strides in Investor Protection

Have you ever thought investors should have to pass a test in order to invest? Well, it is happening here in Asia, where regulators are stepping up investor protection efforts and resorting to creative approaches to overcome weaknesses of the past, like mis-selling of products by financial advisers.

The reforms could not come at a better time. Investment professionals responding to the recent CFA Institute Global Market Sentiment Survey cited mis-selling by financial advisers as the most serious ethical issue facing the global markets in 2012. There is realistic hope, however, that at least in Asia investors will have better protections this year.

Singapore: Investors Put to the Test

The Monetary Authority of Singapore (MAS), for one, is taking an interesting approach to investor protection. Starting this year, intermediaries such as brokerage firms, banks, insurers, and financial advisers are required to assess whether a retail customer has the relevant knowledge or experience to understand the risks and features of certain types of investment products before offering them. These products, known as Specified Investment Products (SIPs), are both listed and unlisted, with terms and features not normally well known or widely understood by retail clients. They include certificates, ETFs, ETNs, futures, structured warrants, and options. Non-SIP securities, on the other hand, would include shares, company warrants, units in business trusts, and insurance policies.

Unlike a simple customer review that includes basic criteria, such as years of investment experience, the Singaporean approach goes farther in that it makes it mandatory for intermediaries to assess the knowledge a customer possesses in the case of SIPs. An intermediary cannot allow a customer to transact in an unlisted SIP unless it has confirmed that he/she has sufficient knowledge and experience. Assessment criteria would include prior investment experience and educational background, for which holding the CFA charter would be more than sufficient.

The Singapore Exchange (SGX) plays a major role by providing online tools, including tutorials and a quiz, to determine an investor’s level of understanding. Investors may continue to buy funds even if they fail the test, but only after senior management of the brokerage assesses whether the customer understands the implications and consequences of such an investment

China Establishes Investor Protection Bureau

What’s happening in Singapore, however, is only part of the story. There is another promising sign that investors will enjoy improved protection in China. Earlier this month, the Chinese Securities Regulatory Commission (CSRC) announced that it had established an investor protection bureau, with the goal to better protect the rights and interests of Chinese investors in the capital markets. It will draft and review laws and regulations that protect investors; help establish an education and service system; assist in the formation of a remedial system to make up for the violated interests of investors; monitor the management and operation of the country’s investor protection funds; and promote communication and cooperation with other investor protection organizations. According to the regulator, there are more than 72 million individual investors in China, accounting for 11 percent of the country’s urban population. They have natural disadvantages in obtaining market information and professional ability, which lead to easy infringement of their rights and interests.

Once the investor protection bureau has fully implemented its mission and is working at full steam, local and global market participants very likely will support the increased level of integrity this latest development can bring. The 2012 Chinese New Year is off to a good start!