Mis-selling: An Ethical Issue Facing Asia-Pacific Markets

Readers of our blog are likely aware that mis-selling was highlighted as one of the most serious ethical issues in the recent CFA Institute Global Market Sentiment Survey. When asked to select among six options, 25% of Asia-Pacific respondents chose mis-selling as the number one ethical issue facing their local markets in the coming year. An interesting and rather unfortunate characteristic of mis-selling is that it is not a new problem, as covered in a 2009 discussion paper from CFA Institute.

It is, therefore, no surprise that more than 150 investment professionals, including a substantial number of compliance experts, attended the recent conference “Mis-Selling of Financial Products: Investor Rights and Protection Forum” — organized by the Institutional Investor Educational Foundation and CFA Institute.

One of the high-profile speakers was Mr. Tan Kin Lian, former CEO of NTUC Income in Singapore and a former presidential candidate. Mr. Tan is a well-known fighter for the rights of investors who were infamously mis-sold the Lehman minibonds. During the conference Mr. Tan shared his experience with the audience and advocated for a sound regulatory framework that emphasizes investments that are suitable for investors with different needs.

One reason the Lehman minibond mis-selling became famous was because it particularly affected private investors in Singapore and Hong Kong. But private investors are not the only victims of mis-selling. It is not uncommon for financial firms to create extremely complicated derivatives products and sell them to corporate investors. The problem lies not so much in the degree of complexity of these products but more in the amount and type of risk disclosure. An interesting example of this occurred when the German Supreme Court held one German company liable for mis-selling, noting that it had failed to adequately advise its client of the risks associated with a financial product, a so-called CMS spread ladder swap.

Luckily, investors who feel that they have been mistreated by their investment product vendors do not have to go to the Supreme Court right away. For example, in Hong Kong the relatively new Financial Dispute Resolution Centre (FDRC) is helping protect individual investors by assisting them with mediation and arbitration. Organizations like the FDRC can be found in other markets as well. In Singapore similar help is given by the Financial Industry Dispute Resolution Centre (FIDReC).

While it is good to know that organizations such as FDRC or FIDReC exist, it would be better if they were not needed at all. Could an improved regulatory regime be one solution, since it is conceivable that it would result in added investor protection and help companies avoid similar scandals in the future? Possibly, but that is not enough. In the investment industry, it is mutual trust that is imperative in creating and cultivating sustainable relationships, and no legal or regulatory requirement can create or replace trust.

To assist in establishing trust-based relationships, CFA Institute has developed the Asset Manager Code of Professional Conduct. More than 860 firms have claimed compliance so far, and that number continues to grow.

As more firms adopt the Asset Manager Code of Professional Conduct, the resulting improved ethical culture at compliant firms is expected to lead to a market environment with relationships based on significantly higher levels of trust. In such an environment, mis-selling will hopefully become a thing of the past.

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