Key features and risks of investment products to be on one page under MAS proposals

The key features and risks of investment products such as shares, bonds and unit trusts will be placed on one page rather than dispersed throughout their highlights document, under a proposal by the Monetary Authority of Singapore (MAS).

This is one of the changes MAS is looking to introduce as it seeks to enable investors to make informed choices on their own, even as others who need more assistance will still be able to seek financial advice before they make any investment.

The MAS is seeking feedback in two areas.

The first is on its plans to enhance the requirements for the product highlights sheets in investments such as shares, bonds and units in a collective investment scheme like a unit trust.

The second is on its suggestions to streamline the framework for complex products.

The digitalisation of financial services has enabled investors to invest and manage their own portfolios, MAS noted in its consultation paper on July 1.

Nonetheless, some investors are “less technologically or financially savvy” and they “would be better off seeking financial advice to understand the features and risks of the products they are investing in”, the regulator added.

The MAS is suggesting that the key product characteristics should be summarised on the first page under a new segment titled “What are the characteristics of this product?”.

This will put all the key product features and risks on one page, unlike the current practice where they are dispersed throughout the entire product highlights sheet.

Some features include: What is the name of the fund manager, what or where the fund invests in and its expense ratio. The expense ratio indicates how much in total fees are incurred by the fund on an annual basis.  

The revised product highlights sheet will also have segment headers in a question-and-answer format, addressing issues such as: “Who is the product suitable for?”, “What is the investment strategy of the product?”, “What are the fees payable?”, “What are the risks of this investment?” and “How do I exit the investment?”

MAS noted that this should better engage investors on the various factors they ought to consider before investing in a product.

As part of its proposals, the regulator is also calling for different colour heading bands for different investment products on the first page of the product highlights sheet. 

The yellow heading band will be the default, while products that are more complex will be clearly indicated with a red heading band, a signal to encourage investors to seek professional advice before they buy the product.

Mr David Gerald, president of Securities Investors Association (Singapore) or Sias, said the proposed changes will introduce a clearer, more reader-friendly document for investors, particularly in relation to complex investment products.

He added that by using a red label to flag complex products and by presenting key risks on the first page, investors will be able to quickly identify the nature of the product and make more informed decisions.

Investment-linked policies (ILPs) will have a red heading band under its proposals as MAS seeks views on whether they should be classified as a complex product on their own.

The regulator noted that this simplifies the current approach of classifying ILPs, which is based on the complexity of their selected sub-funds.

This means that an ILP will be classified as complex only if any of its selected sub-funds invests in complex products.

An ILP is a hybrid product that combines insurance and investment features. 

Its returns depend on the performance of its sub-funds and the ongoing insurance premium charges. MAS said such factors are generally beyond investors’ control and are not known beforehand, so it is difficult for retail investors to get a gauge of the ILP’s risk and return characteristics.

The second recommendation relates to the complex products framework that the MAS introduced in 2012 to help retail investors better understand the features and risks of a complex product before they invest in it.

The framework classifies capital market products into complex and non-complex products.

For complex products, it specifies distribution safeguards, where the financial institution is required to assess the investor’s education, work and investment experience. 

Where the investor is assessed not to have sufficient knowledge or experience, he will have to complete a learning module, or get financial advice to invest in the product.

MAS noted that over the last decade, retail investor access to investment product knowledge has improved. 

Along with the proposals to enhance the product highlights sheet, the regulator said there is room to streamline the distribution safeguards for complex products.

This, it added, will hopefully achieve a better balance between consumer protection safeguards, and consumer access to investment products.

MAS’ key recommendations include:

• Removing the requirement for mandatory financial advice since the red label for complex products will already alert investors to the risks associated with that investment. This applies to investors who do not have the qualifications, experience or knowledge to invest in the product.

• Introducing product knowledge assessment as an alternative to customer knowledge assessment, which is the current practice based on education, work and investment experience. Product knowledge assessment comprises three to five questions on the key features and risks of a complex investment product and serves as a self-assessment and awareness-building tool.

• Putting investors who require additional protection, referred to as selected clients, through a mandatory financial advisory process before they can purchase complex products. Selected clients refer to those who meet any two of the following criteria: they are 62 or older; they are not proficient in spoken or written English; or they have below GCE O- or N-level certifications, or equivalent academic qualifications.

• Requiring selected clients to have a trusted individual present during the financial advisory process. The financial adviser will have to do a follow-up call with the client to confirm the investment decision before proceeding.

Mr Gerald said that with less friction, investors who have been active in overseas markets may now turn their attention to local investment opportunities.

He added that there are benefits to trading in Singapore. This is because an investor will have the protection of Singapore’s regulations if something goes wrong or if a dispute arises with the trading platform.

The consultation period is until Sept 1. Interested parties can submit comments via the FormSG link.

Source: The Straits Times © SPH Media Limited. Permission required for reproduction.

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