By Goh Eng Yeow

IT IS time to take stock of the 'caveat emptor' regime that was put in place when our financial markets de-regulated many years ago.

Ask many people about it and you will probably draw a blank. If pressed, some might suggest that caveat emptor - or buyer beware - has got something to do with the stock market.

But caveat emptor covers far more than just listed firms. It extends to the structured financial and investment products banks and insurance firms offer their customers.

However, as a reader observed in a letter to The Straits Times Forum page recently, the term might as well mean 'look after yourself and beware of crooks'.

The horror stories that surfaced in the mainstream media and on the Internet after thousands were financially maimed by exploding Lehman Minibonds and other formerly high-flying products prove his point.

In a proper caveat emptor environment, banks are supposed to make all information - both good and bad - available in order to enable customers to make informed decisions.

But complaints have emerged of buyers being mailed the prospectuses of the structured products only after they have plonked down big sums on them.

Others have complained that most of the selling of the products took place verbally. They were shown little else besides the pricing sheet.

Sure, the buyer also has a role to play in checking out an investment before plonking his cash down.

If everything goes well and he pockets his rewards, he will not complain about the patchy information he was given on the product before he parted with his hard-earned savings.

Yet, even grabbing a prospectus is often of little help. Its original intention is to protect the rights of retail investors by giving them as much information as possible.

But prospectuses are riddled with jargon and legal disclaimers and risks are often buried in fine print.

This all raises some vital questions.

Unlike the stock market, where a string of financial analysts keep a keen eye on listed firms, where are the checks and balances on banks selling financial products?

If prospectuses on such products are so complicated that they are unreadable, for whose benefit are they issued? To protect the issue manager, or the retail investors for whom they are supposedly intended?

Surely stamping the name of a blue-blood investment bank or a reputable law firm on a prospectus is not an iron-clad proof of quality. So the move by the Monetary Authority of Singapore (MAS) last week to review the marketing and sale of financial products is not only timely but necessary.

The MAS has not been a disinterested observer, as some readers have claimed. Two years ago, it asked banks and insurers selling financial products to take remedial action on their shortcomings after it conducted an intensive four-month survey.

Using the 'mystery shopper' approach, it discovered that financial advisers needed to improve the way they 'fact find' their clients' financial needs and highlight the exclusions and disclaimers on the products being sold.

But surely, more can, and should, be done. More oversight - not more regulations - may be needed.

For a start, how about making sure prospectuses are written in plain language and not in jargon? That is surely within MAS' scope, as these documents must be registered with it before a financial product can sold.

Bankers should make their sales pitch in plain English and not hide any unsavoury information behind the technical jargon in these prospectuses.

Why go through the motion of issuing a prospectus merely to comply with legal requirements and assume that few people other than financial reporters look at them?

Too many take up the mantra, 'it has always been done this way', each time difficult issues are raised over the quality of disclosures they make and how they make them.

That attitude must change if caveat emptor is to have a chance to thrive.

Surely prospectuses should become 'must read' documents before any investor commits on a financial product.

True, any revamp will come too late for the hundreds of bereaved investors, including cleaners, taxi drivers and retirees, who have recently lost their hard-earned savings investing in products such as Lehman Minibonds.

But it will surely save many other investors from similar anguish if the result is greater transparency for all.

This article was first published in The Straits Times on October 06, 2008.