Investigation report on the sale and marketing of structured notes linked to Lehman Brothers
The press release provides a good summary.
10 distributors (banks/finance companies and stockbroking firms) of structured notes linked to Lehman Brothers:
(i) ABN AMRO Bank N.V. Singapore Branch (ABN)
(ii) CIMB-GK Securities Pte Ltd (CIMB)
(iii) DBS Bank Ltd (DBS)
(iv) DMG and Partners Securities Pte Ltd (DMG)
(v) Hong Leong Finance Ltd (HLF)
(vi) Kim Eng Securities Pte Ltd (KESPL)
(vii) Malayan Banking Berhad Singapore Branch (MBB)
(viii) OCBC Securities Pte Ltd (OSPL)
(ix) Phillip Securities Pte Ltd (PSPL)
(x) UOB Kay Hian Pte Ltd (UOBKH)
Structured notes linked to Lehman Brothers concerned: (with $ amount sold to retail investors)
- Minibond series 1 to 10 (except series 4): $508 million, 7800 retail investors
- High Notes 5, arranged by DBS Bank: $104 million, 1000 retail investors
- Series 3 LinkEarner Notes/Jubilee Notes, arranged by Merrill Lynch: $18 million, 350 retail investors
- Series 9, 10 Pinnacle Notes, arranged by Morgan Stanley Asia: $25 million, 650 retail investors
Findings on individual distributors in the PDF file above are indeed eye-opening.
Highlights of some of the findings (cases from individual institutions) from the report: (I tried to classify them into categories)
1. No due diligence on products sold
- did not conduct any formal product due diligence on product
2. Wrong classification of risks of products
- failed to sufficiently distinguish the Minibond Notes from bonds and in fact informed its RMs that the Minibond Notes were suitable for clients who wanted to diversify their portfolio with bonds.
- "low to medium" risk classification for the Minibond and Pinnacle Notes was inconsistent with the prospectuses
3. Communication errors or improper communication
- mis-communicated the risk as conservative to relational manager (RM); reclassifications were solely by way of email to RM
- did not expressly communicate its internal product risk rating to its RMs;
instead relied on a general understanding among RMs, as communicated during training for other products, that non-capital protected products were to be rated "Growth".
4. Improper training system and training management system
- did not however monitor whether RMs who missed the arranger’s briefings were briefed at the branch level.
- not all RMs who sold the products attend training and take the test.
- not provide sufficient guidance to its RMs on how to factor in a structured note into client’s portfolio
5. Improper risk profiling of clients
- question in risk profile questionnaire erroneously scored.
- not allocate a numerical score to the client’s investment time horizon, experience and diversification needs towards computing that client’s risk profile and suitability to purchase an investment product, nor were alternative forms of guidance provided to the RMs on how to factor in such information.
The report’s Annex 2 shows settlement outcomes of these affected structured products.
The ban on selling structured products will eventually be lifted when the ban period is over. As investors, we should always bear in mind the lessons learnt in this whole saga. Buyer beware ! Be extra careful when dealing with financial institutions, particularly before you are signing on the dotted line. We have seen how ridiculous the financial institutions can be in doing due diligence, classifying risk of products, communicating within the institutions, training staffs and doing risk profiling of clients. Just wonder how to justify the high remuneration/bonus paid to the financial institutions’ top management and board of directors.