Product Intervention for Retail Structured Investment Products: A Comparison of Rules in Singapore, Hong Kong and Taiwan
My article 'Product Intervention for Retail Structured Investment Products: A Comparison of Rules in Singapore, Hong Kong and Taiwan' examines and compares how financial consumers can be protected by way of product intervention at the early stages of the development of a structured financial product in Singapore, Hong Kong, and Taiwan. Product intervention is not a foreign idea for many non-financial products, such as medicine or motor vehicles, that require some form of prior regulatory approval, minimum standards and/or testing before hitting the market. The question then is whether and how we should apply the same approach to retail financial products.
Facing mounting consumer complaints after the global financial crisis, several regulators have naturally attempted to improve financial protection regimes. Regulators commonly strive to improve product disclosure and risk warnings, in order to let consumers make informed decisions, as well as to strengthen suitability assessments (by placing the burden on a selling bank or a financial adviser to filter a customer’s background in order to reduce the chance of a person acquiring an unsuitable product). All these efforts take place at the point of sale, ie when a customer faces a banker or adviser to consider whether or not to make an investment. On this basis, one may question further whether we should protect financial consumers before the point of sale, ie by preventing a ‘toxic’ financial product from entering into the market in the first place, much like regulators seek to prevent poisonous food or drugs from reaching consumers. This raises the idea of ‘product intervention’.
We see two main problems with product intervention in financial products. First, it can be doubted whether product intervention is indeed a goal worth pursuing for retail financial instruments. One may suggest that the best way to prevent retail investors from suffering loss is to stop them from having access to a particular product at all. However, as shown by examples in Singapore, Hong Kong and Taiwan, it is difficult to review the merit of a financial product due to the nature of the risk, investment and finance (eg, should such review be based on riskiness, profitability, or other factors?). Regulators should also be cautious of giving the market an impression of ‘safe’ financial products after product intervention. Over-intervention may also stifle financial innovation and might simply push investors to make offshore investments, away from the protection of local regulators. As a high level argument, it may be better to rely on disclosure and suitability assessments as the main weapons to protect investors from unsuitable products rather than intervention at an earlier stage.
Second, even if product intervention is necessary, the practical question is how to conduct product intervention. This article examines the regimes regarding complex financial products in Singapore, Hong Kong and Taiwan after the global financial crisis. We find a variety of approaches. Singapore’s approach is to improve firms’ internal safeguards. By requiring board level approval for a product, it is expected that the chance of toxic financial products entering the market will be reduced. While regulators don’t have to get their hands dirty by reviewing the merit of a product, Singapore’s regime hinges upon directors’ liability, and it is hard to measure how effective the liability rule may be in such a context.
In Hong Kong, the approach is to require prior authorisation for new unlisted structured investment products from the securities regulator pursuant to some minimum standards. However, other than minimum requirements for issuers, collateral and reference entities, it is unclear when the regulator would reject a structured product. Unlike Hong Kong or Singapore, Taiwan’s approach is to have a self-regulatory body (SRO) reviewing a product beforehand. This also allow regulators to keep their hands clean. However, although a SRO’s review panel should mostly be comprised of professionals or experts, the regime does not offer sufficient incentive to properly review a product, especially when the committee is formed by a trade association. It is also unclear what should be the standards when reviewing a product. Thus, Taiwan’s product intervention rules may be more like an illusion.
In sum, we have seen different methods of product intervention in Asian countries as a result of the retail structured notes fiasco after the global financial crisis. How effective product intervention regimes in Singapore, Hong Kong and Taiwan will be may remains to be seen. However, we suggest that to make the regime workable in the financial market, there must be clear regulatory objectives and guidelines (for reviewing a product ex ante) and decent incentives must be provided to those who will perform the gatekeeper role without giving retail investors an inaccurate expectation that a structured financial product must be safe.
Christopher Chen Chao-hung is Assistant Professor of Law at the Singapore Management University.