THE word “professional” or “accredited” usually means one has the necessary knowledge for something that requires specific skills. Yet, when it comes to whether an individual is deemed a “sophisticated” or “professional” or “accredited” investor, it is interesting that even some of the most highly regarded securities regulators in Asia-Pacific have chosen to use net worth and income as a yardstick to determine whether an individual should be allowed to buy the more complex structured investment products that usually promise higher returns but downplay risks.
That is important because Malaysia is gradually allowing more sophisticated products and derivatives to be marketed to so-called “high-net-worth individuals” here. This is essentially a variant of what Singapore calls “accredited investors”, Australia calls “sophisticated investors” and Hong Kong calls “professional investors”.
Whetever they are called — the threshold used to determine the suitability of someone being marketed complex structured investment products is still wealth and income rather than an understanding of the products and risks involved.
That wealth and income criteria cannot be right — going by the pain faced by the neither sophisticated nor really wealthy individual investors in Singapore who lost hundreds of thousands of dollars investing in bonds (debt paper) that Swiber Holdings Ltd cannot repay. They include one Elaine Tham, who says she was persuaded to take the riskier path when she only wanted to earn S$150,000 to pay her children’s university fees, Bloomberg reported in early October.
Tham qualified because Singapore allows one’s home (up to S$1 million) and car to be included in the net worth calculation. Singapore banks are allowed to sell riskier products to individuals classified as “accredited investors” if they have S$2 million worth of assets or have earned at least S$300,000 in the past 12 months.
The process to become a “sophisticated investor” is slightly harder in Australia. An individual would need to get a certificate from a qualified accountant to say he or she has A$2.5 million in net assets or earned at least A$250,000 a year in the past two years.
In Hong Kong, an individual with HK$8 million can be considered a “professional investor”, provided that he or she provides written consent to be treated as such and acknowledges that a full explanation of the risks and consequences of being one was given to him or her.
“They are not a huge number and could clearly include a lot of individuals who may not be truly professional,” an observer says. “The hunger for better-than-fixed-deposit yield and promises such as ‘the bank manager also bought the same product’ can be appealing to desperate middle-income earners with children to fund through university,” another observer adds.
“An investor’s wealth should not be the only factor to define whether he or she is a retail or professional investor. It is not always true that a measure of net assets accurately reflects his or her financial knowledge. For example, in Singapore, many inexperienced investors who own a house fall into the category of accredited investor, says CFA Institute Asia-Pacific managing director Nick Pollard.
“From the regulatory perspective, we should rethink not only the definition of investors, but also the extent to which different types of investors are protected by legislation,” says Pollard in an email reply to whether regulators need to redefine the so-called “sophisticated” investors who are being given access to a wider range of investment products.
These investors, he adds, “should be aware” that they “may not enjoy the same level of protection as retail investors do”.
Pollard also reminded financial advisers to put the investors’ interest above their own: “Financial advisers have the responsibility to assess investors’ financial knowledge and experience, and provide tailored investment advice based on their clients’ investment knowledge and experience, investment goals, financial position and risk tolerance. They should also ensure that their clients understand the risks involved and the fees and charges incurred before making an informed and reasonable investment decision. For example, if a client wishes to buy an investment product that the adviser does not believe to be appropriate, considering the client’s knowledge and risk appetite, the adviser has a duty to advise against it.”
Ironically, the Swiber losses happened eight years after the September 2008 Lehman Brothers “minibonds” scandal that rocked tens of thousands of ordinary savers in Hong Kong and Singapore, when the value of their so-called “better-than-fixed-deposit” investment in an “A-rated” bond plummeted to zero with the collapse of the investment bank.
Have the Hong Kong minibond protestors — who went on a rampage outside financial institutions and many of whom picketed during lunch hour in Central for at least two years — been forgotten?
Some 40,000 Hong Kong savers — many of whom were mom-and-pop investors and retirees promised “guaranteed returns” — reportedly laid nearly HK$16 billion of their savings into minibonds, credit default swaps and other complex Lehman-backed derivative products. Victims groups only managed to wring back a 60% to 70% settlement some 18 months later.
In Singapore, 8,927 retail investors bought S$375 million worth of Lehman minibonds through nine distributors and collectively only got back 64.5% of the amount they put in, according to data on the Monetary Authority of Singapore’s (MAS) website. More than 80% got at least 50% back while 1,790 (20%) got back less than 50% of their principal.
Malaysia escaped the 2008 minibonds fiasco, largely because regulators thought retail investors here were not ready for those products.
Today, Malaysia allows riskier products to be sold to so-called “high-net-worth individual” investors.
The Securities Commission (SC) of Malaysia’s net assets threshold for a “high-net-worth individual” investor is RM3 million, excluding the value of one’s primary residence. One can also qualify if he or she earned RM300,000 in the past year (or RM400,000 in the past year together with the spouse).
The exclusion of one’s primary residence from the net worth yardstick is a step up from regional peers. Still, there is no guarantee that a lawyer or hair stylist earning RM500,000 a year really understands the mechanics behind structured investment products.
Going by the rationale provided by the Singapore and Australian securities regulators’ websites, the wealth and income thresholds are used because investors with the means to invest should be smart enough to do their own research or buy advice.
“Accredited investors are afforded a lower level of regulatory safeguards as they are presumed to have the relevant means to seek professional advice to protect their own interests. This includes being financially capable of seeking their own legal recourse and bearing the associated costs,” MAS said in a Sept 22, 2015, statement on enhanced regulatory safeguards for investors.
According to that same statement, Singapore financial institutions were allowed to automatically treat customers who meet the prescribed wealth and income threshold as an “accredited investor” (AI) unless they “opt out” and choose to be treated as an ordinary retail investor. Only new customers after September 2015 need to “opt in” and “forgo the benefit of stronger regulatory safeguards available to retail investors, in return for the ability to more easily access a wider range of complex and risky products”. Financial institutions can continue to treat existing AI-eligible customers as accredited unless the customer chooses to “opt out”.
In Malaysia, it is understood that the SC is taking a harder stance on sales practices to clamp down on the mis-selling of structured products to investors. It has also put in place an avenue for investors who have been mis-sold products to seek recourse and compensation.
Yet, one lesson from the 2008 minibonds scandal is that getting recourse can be long and painful and is far from guaranteed — especially when the burden of proving that one had been mis-sold a product is on the investor.
Even so, the regulators are not wrong when they say that investors, too, must play their part and take responsibility for their own investment decisions. It is also true that there is a limit to which a regulator can determine the suitability of each individual class of products for a particular type of investor, who might well have different needs and risk appetites. But has enough really been done?
If regulators have decided that increasing financial literacy for consumers is the way forward, investors will have to be smarter about where they invest their hard-earned money.
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