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By Lorna Tan
This is a real case that highlights the importance of analysing your risk profile holistically.
In September 2003, Britain's Financial Services Authority (FSA) fined Lloyds Bank 1.9 million pounds (S$4.3 million) for selling clients unsuitable products.
The bank had sold 51,000 policies of the Extra Income Growth Plan, an equity-linked structured product classified as medium- to high-risk. The product was linked to 30 stocks.
But FSA investigations ruled that the product was unsuitable for customers in 22,500 cases.
Its findings showed that 16,500 customers who had no previous equity-related investment experience had put 20 per cent of their money in the product while the other 6,000 customers who had previous equity-related experience had parked 35 per cent of their savings in the plan.
Mr Stanley Jeremiah, council member of the Singapore Insurance Institute, told The Sunday Times: 'Lloyds Bank was found to have acted without due skill, care and diligence, resulting in over- concentration of customers' total financial assets in a medium- to high-risk product.'
The FSA pointed out that Lloyds failed to take account of the clients' lack of experience in investing in equity-related products and inadequate understanding of the associated risk. For instance, some customers did not understand that the product did not come with a guarantee on its maturity return and principal sum.
It said Lloyds had failed to evaluate its customers' risk capacity and risk ability.
In the same vein, Mr Jeremiah believes that many of the financial institutions that sold the failed Lehman Brothers' Minibonds product also failed to evaluate the risk capacity and ability of investors.
'If they had, they would not have allowed some retirees to put a significant portion of their retirement fund into a moderate- to high-risk product,' he said.
In the case of Lloyds Bank, the product was sold to a number of clients with a low-risk profile who were clearly unsuited for it.
This article was first published in The Straits Times.
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