By Lorna Tan

To step up efforts in treating consumers fairly, the Monetary Authority of Singapore (MAS) recently issued specific guidelines on how this can be carried out by financial firms.

The 35-page document is the result of a consultation paper issued by MAS in February last year, before the recent scandal over the alleged mis-selling of investment products linked to bankrupt United States investment bank Lehman Brothers.

The document detailed five fair dealing outcomes which provide benchmarks for MAS to assess the success of financial firms in promoting good market conduct practices.

Financial firms here are hopeful that the new guidelines, which supplement the Financial Advisers Act, will help to raise standards and restore consumer confidence in them.

They state that:

• Fair dealing is central to a financial firm's culture;
• Products and services offered are suitable for a firm's target customer segments;
• Financial firms have competent representatives providing quality advice and appropriate recommendations;
• Customers receive clear, relevant and timely information to make informed decisions; and
• Financial firms handle customer complaints in an independent, effective and prompt manner.

The MAS said it will take into account a firm's ability to observe the guidelines in assessing whether it can stay in business.

It will also conduct random checks and interview its board and senior staff on compliance.

Here are some consumer-related scenarios that fall under some of the fair-dealing outcomes.

SCENARIO 1

Mr Peter Ho was advised by his representative to switch his unit trusts within a short period of his initial investment to lock in gains.

However, he was not told that he was entitled to free switches to other unit trusts managed by the same fund house. This resulted in the representative pocketing extra commissions, at the expense of Mr Ho, for every switch transaction.

The financial firm detected the improper switches and refunded all the associated commissions and fees. It also clawed back the commissions earned by the representative and disciplined him.

The MAS says: Representatives should not recommend customers to switch from one product to another in a way that would be detrimental to their interests. The firm should ensure that it has proper controls, processes and procedures in place to monitor switching practices.

SCENARIO 2

At a roadshow, Ms Helen Lim was pressured by a representative into buying an investment. The representative stressed that it was the last day of the promotion period and that a free digital camera was on offer if she signed that day. MsLim relented but realised later that the product was unsuitable.

The MAS says: The financial firm should not unduly influence customers by offering gifts or promotions, or by applying aggressive sales tactics. The firm should give customers sufficient time to understand the information provided and consider the recommendations made by its representatives. Most investment products require long-term commitment and buying unsuitable ones can be detrimental to a person's financial well-being.

SCENARIO 3

Mr David Lee, who had cash of $200,000, sought advice on the best way to make the most of this money.

He asked if the money should be invested or used to repay his mortgage.

The representative was primarily concerned about meeting the sales target for a new investment product his financial firm was promoting. He convinced Mr Lee to buy the new product without considering whether the potential return outweighed the mortgage interest.

Mr Lee later found that the return from his investment in the product could not cover his mortgage payments.

The MAS says: Representatives should not limit their recommendations to investment options that would earn them a higher fee or commission. They should ensure that the fact-find process is thorough and consider all information provided by customers when offering advice.

SCENARIO 4

A financial firm recently launched an interest rate-linked structured deposit. The disclosure documents and marketing materials contained many tricky technical terms such as 'barrier spread'.

There was no explanation or glossary provided, so many customers could not understand the product. The representatives also failed to explain technical terms during the advisory and sales process.

The MAS says: A financial firm should not provide customers with disclosures containing information which they cannot understand. Information should be in plain language and avoid technical terms, where possible.

It should consider providing tables, diagrams, graphics or simple examples to help customers understand the key features and risk-reward characteristics of the product. Representatives should ensure that customers understand the information.

Any technical terms used should be clearly explained. If a customer is still unclear, the representative should not proceed with the transaction.

SCENARIO 5

Mrs Peggy Ang sought advice from a representative on buying an investment product with high potential returns. She said that her primary objective was preserving her capital.

She followed the representative's recommendation and bought a single-premium investment-linked insurance plan. She later realised that the representative did not explain that under certain circumstances, she could lose some or all of her entire principal amount.

The MAS says: A financial firm should not withhold relevant information from customers. When recommending investment products, the firm should ensure that its representatives highlight all key risks to customers so that they can make informed decisions.

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