Will more regulation work?

PM Lee has finally broken his silence over theLehman-linked structured note debacle, assuring the investors that the issue will be handled “fairly and properly”. Separately, the MAS has said there there is an imminent review of the structured-products industry which will address issues such as better descriptions and labelling of products, “as well as more professionally trained relationship managers.” At the same time, MAS will also review the proposed guidelines on ‘fair dealing’ which MAS invited public feedback in Feburary this year.

At a much elevated level, the laissez-faire capitalist system seems destined to the grave. Even Alan Greenspan, who championed the free market system, admitted he was wrong to assume that free markets will correct itself. A “new capitalism”, in the words of French President Nicolas Sarkozy, is set to be unleashed.

These developments points to 1 thing: more regulations.

While the control at the backend might stem the flow of creatively crafted financial products (at least for the short to mid term), those at the front-end will not eradicate unsuitable products. By unsuitable products, I mean products or portfolios that are fine for certain profiles but not for others. For example, a high risk mostly equity investment portfolio for a retiree.

For a start, any investment with the word ’structured’ would be shunned like milk from China. Retail investor would become skeptical of most, if not all investment options. However, how long will this last? 1 year? 2 years? Before the dot.com bubble burst in the year 2000, many investors piled into Technology Funds, only to see their investments going down by as much as 70%. Most have not recovered to their original levels. Many sworn off investing. What happened in the last 2 years? Retail investors, including retirees, have again piled into narrowly focused funds that invests into China or India.

Regulations might require factsheets and prospectus to illustrate warnings prominently. Product providers, eager to prevent any allegations of non-disclosure, might become overly zealous. Prominent wordings like “THIS IS NOT A LOW RISK PRODUCT. YOU MAY LOSE MONEY” might then rival the prevalence of Mas Selamat’s photo when he first escaped.

There are 2 potential issues. First of all, do investors read such information at all? Even if they were to read, this may only work in the beginning. Just like how people got used to Mas Selamat’s photo and pictures of diseased organs on cigarettes packaging, retail investors will just get used to it and treat it as if its not there. Misled investors then cannot say that they are not warned.

Investors have to their part to play. Many of them are not willing to divulge their financial status and spend the time and effort in proper planning and will rather opt for product advice or no advice in their course of financial fact find. This would surely suit the adviser or relationship manager who just wants to carry out a transactional deal (aka, become a salesman). It can be hard to understand sometimes when people are willing to spend so much time and effort in planning for a holiday but are not willing to spend a fraction of the time in financial or investment planning that requires them to place hundreds of thousands of dollars.

At the end of the day, there is no free lunch. It is really sad that “vulnerable” investors are mis-led by the financial institutions that they trusted the most.

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