By Ignatius Low

THE current saga over investment products linked to the bankrupt Lehman Brothers gives me a sense of deja vu.

A few years ago, the fuss was over the bursting of the dot.com bubble. When technology stocks crashed, tech funds plummeted in value by as much as 70 per cent.

Even though they were considered high risk investments, tech funds were actively sold to retirees.

I remember talking to one woman in her 70s who had put her life savings into a single tech fund. When she read the news about big losses, she panicked and called the bank. But the guy who had attended to her had already left.

Next, recall the scandal that hit life insurer AIA in 2003. This involved inadequate disclosure of risks attached to policies that had the 'critical year' feature.

Some policyholders were assured by their agents that they need not pay premiums beyond a certain 'critical year'. This was untrue because the critical year could be postponed depending on how the insurer's investments performed.

In 2005, there was another furore over investment-linked insurance products (ILPs). This time, the lack of disclosure was over high mortality charges that were deducted from a policyholder's premiums. As the costs of protection against death and critical illnesses increase with age - particularly after one crosses the age of 50 - mortality charges are high.

They are deducted from premiums, so little is set aside for investment in the early years of the ILP. For elderly investors who do not have enough of an investment time horizon, this often meant cashing out of their policies at a loss.

In all cases, the pattern is the same.

Commission-driven sales staff peddle products to trusting investors that are not necessarily good for them. The investments go sour years later, but the sales staff are nowhere to be found.

Investors want some form of recourse, but financial institutions plead 'caveat emptor' ('buyer beware') and hide behind legalistic protections in documents that they say investors have signed.

If enough of a fuss is made, the issue gets debated at the national level. The Government gets involved and investors who were misled are compensated.

There is soul searching within the industry, which is asked to tighten up selling practices on the ground. Eventually, everyone agrees to do the right thing and matters are resolved.

But have they really been resolved? Here we are again this year, facing the same old issues.

You can enact any number of extra regulations on the sales process, but in the end you have to make sure that it is not just a case of adding form over substance.

Yes, prospectuses and sales materials can be written more clearly with all the appropriate warnings upfront.

But will people look at them, and understand them, when they have already been 80 per cent sold by the charming relationship manager in front of them?

You can make customers sign more forms written in plain language, certifying that they have understood the risks of the product. But how do you ensure that this is not relegated to a stack of meaningless paperwork everyone expects to do after the deal has closed?

The answer must lie in changing the conduct of sales staff themselves. They must act in the client's interest, and not out of a desire to hit some sales target.

My wish is for stronger action on the part of the authorities that will stop us from coming full circle every few years.

To really change behaviour of sales agents on the ground, you need better tools to catch errant behaviour.

I suggest that the Monetary Authority of Singapore (MAS) consider investing serious money into catching real cases of mis-selling on a day-to-day basis.

It already does 'mystery shopper' surveys to find out if banks and insurers are giving the right advice and following the right procedures. But these surveys are ad hoc, and the last one was done a couple of years ago.

Why not set up a team of 'service auditors' whose sole job is to conduct 'mystery shopper' checks all year round?

If the burden is too heavy on MAS staff, it can outsource the function to firms in the private sector. Hey, it's another way to keep our ever-growing army of elderly workers engaged. Some might even do it for free, for there is something noble in helping to prevent fellow retirees from being misled.

MAS already has full-time inspection teams that go to the hundreds of financial institutions in Singapore to look into their books and management practices, to ensure that the banks are sound, have good credit practices and do not pose a threat to the stability of the overall financial system.

Isn't it time now to put some of that rigour into the area of market conduct? Wealth managers and relationship managers deal with the life savings of ordinary Singaporeans, so ensuring the soundness of their sales practices is a national objective that is every bit as worthy.

Then, once you have the means to catch acts of mis-selling on a daily basis, a light wrap on the knuckles is not going to be enough.

You need to hit perpetrators hard in the two areas that matter most: their income, and their reputation. If a sales agent's misdeeds can lead to their customers losing money, his or her pocket should be hit as well.

It would not be unreasonable for proven acts of mis-selling, if caught by an audit team, to be punished with temporary suspension of a sales agent's financial advisors licence.

On top of this, the names of errant sales agents should also be posted publicly, along with details of the mis-selling that was caught.

Being named on a public roll-call of dishonour will leave a permanent black mark on the reputation of errant relationship managers. In time, customers will not deal with them, and banks will think twice about taking them on.

Over the longer term, the risk of getting caught may change relationship managers' incentive structures altogether. There may be less emphasis on sales commissions and we could see a shift back to better basic salaries. This is a more sober sales practice that the customer can only benefit from.

There is something wrong with banks and their relationship managers continuing to make money - risk-free, as it were - even when their actions result in people taking on high risk and losing money.

Let's not wait for the next disaster to happen before we decide to act.

This article was first published in The Straits Times on October 20, 2008.