Complicated or dangerous products

A Loke Siew Keong had written to the ST forum raising her concerns at the new requirement from MAS for remisiers and futures brokers to take and pass a Capital Markets and Financial Advisory Services Module 6A. The complexities of financial products especially derivatives and ‘other embedded terms and features’ are difficult to understand by retail investors and even financial advisers, including remisiers and future brokers. The problems do not lie in just understanding the products and derivatives but the high risk involved in wrongfully selling such products to clients who did not know what they were into. Serious consequences can result like the Lehman Bond and toxic notes incidents.

Attending and passing the module is one thing, understanding the complex products and risk is another on the part of the advisor and the buyer. Many of these high risks and complex products are simply not suitable to the ordinary retail investors and should not even be in the market.

The main issues thus is for the authority to first identify the risks of the products and their suitability for the local investors, retail or sophisticate investors. The latter can be further divided into highly intelligent or highly stupid investors but both are highly qualified to trade in such products as they are considered highly sophisticated. Goldman Sach and other big funds have plenty of such investors. And also they have highly trained and highly sophisticated advisors who specialized in such products.

It is necessary and simply being responsible to set these highly risky products aside and tagged them with warning labels like those on cigarettes, that they are not suitable for consumption by the ordinary guys. Only good for the sophisticated investors.

The second part is to allow the remisiers and future brokers to choose if they want to be in the party to advise and sell such high risk products. Many responsible remisiers and future brokers know how risky, treacherous and flawed are such products that they would not want to touch them with a thousand metre pole. They must be given the option to stay away from such dangerous products and need not try to be clever to pass an exam that would even floor CPA trained graduates. And passing a module is not going to make them any wiser.

There are many skill levels and professional training required to handle more difficult products and procedures in various profession. And those who are not up to it or who choose not to engage in dangerous games are only exercising their right and moral responsibility not to get involved or get their clients involved. They cannot be forced to take poison. It should be voluntary. Let the brave and clever take the plunge.

The best alternative is for them to go through an appreciation course if understanding of the financial market is important, without examination, unless they want to deal with such products. There are things that are good to know but not to be consumed. And the authority has to clearly redefine what is dangerous and what is not dangerous and not simply lump them together in one basket.

Many overseas products listed in foreign markets like stocks and shares are not dangerous, or at least the blue chips. As we open up our investors to the world, we are exposing them to more risks and uncertainties. The right to say no to high risks and complex products must lie not only with the investors but also the remisiers and future traders.

The whole concept of the requirement to pass Module 6A and the introduction of high risk products must be rethink through carefully. Many people do not have the appetite and the intellect to play with unknown dangers. Who is responsible to protect the ordinary investors from being exposed to poison and snake oil if they are not filtered out at the first pass? Is it a responsible thing to do to allow dangerous and high risk products into the market? Shall we sell poison by educating the buyers and sellers that it is poison and claim it is their fault if they are hurt?