All they wanted was to grow their savings but three non-savvy Singapore investors ended losing most of their hard-earned money after they were misled into buying financial products that they did not understand.
The irony is two of them bought private and non-guaranteed insurance products when they could have just topped up their CPF Retirement Account to receive better returns from CPF LIFE, the national lifelong scheme which will pay decent monthly sums for life.
There are important lessons to be learnt by just looking at what they did so that you can avoid making the same mistakes.
If you are going to the bank to place or renew fixed deposits, you should just stick to your plan and not be swayed into putting the money elsewhere just to earn a bit more interest.
Alarm bells should ring even louder if you are asked to sign up for a loan because you stand to lose even more when you borrow to invest in something that you do not understand.
This was what happened to a 63-year-old man when his bank’s relationship manager called him about his fixed deposit of $100,000 which was about to mature. The man, who is not proficient in English as he had only primary school education, told the manager that he wanted a stable and consistent income for his retirement and would renew his fixed deposit as usual.
But the manager recommended him to buy a $180,000 insurance policy by using his fixed deposit and a bank loan of $80,000. The retiree agreed because he was told that this would allow him to enjoy continuous income in old age.
A year later, he realised that he had bought an unsuitable product when his loan repayments increased significantly and he was not earning any income as promised. He kicked up a fuss at the bank and when his complaint got nowhere, he surrendered his policy and stopped paying interest on the loan.
The bank maintained the retiree signed all the documents, suggesting that he knew that he was taking a loan to finance the product he bought. But the retiree said the forms stated that he had secondary school education, a decent income and experience in investment-linked policies.
Fortunately, the man knew how to take his case to the Financial Industry Disputes Resolution Centre (FIDReC) which helps bank customers like him to resolve disputes for nominal fees.
During the adjudication, the bank’s manager did not show up and the bank merely produced a statement that contained “general answers that lacked specificity and context”.
The adjudicator found questionable aspects about the sales process and said the customer should have been told about the risks of borrowing money to buy the product. The adjudicator then ruled that the bank should refund the customer the amount he lost and the loan interest he paid.
This customer was lucky that he got back what belonged to him in the first place. But the next customer was not so lucky.
A 67-year-old Singaporean thought he had chanced upon a good investment plan that could pay for his monthly expenses because his bank’s manager told him he could borrow to pay for 70 per cent of the single-premium policy.
The retiree was at the bank then to renew his fixed deposits and was told there were no higher promotional interest rates at that time.
The manager then suggested the retiree take up a single-premium whole life insurance policy that would be funded by a bank loan. He assured the customer that the loan’s interest would be fixed for the first two years, which was not true.
So he paid $300,000 and was given a loan of over $700,000 to pay for the million-dollar plan. The retiree was convinced the product would generate so much profit that he would get his monthly payout and be able to pay off his loan too.
A year after buying the policy, the retiree found that the monthly interest repayments had increased sharply. He called the manager, who reassured him that the interest would decrease over time, which again was a false statement.
Two years later, he picked up a second million-dollar policy using the same loan arrangement, which meant he borrowed another $700,000.
He did this even though there were niggling signs that the first plan did not pan out as promised because he had to bear the rising interest costs. About two years later, the total loan of over $1.4 million caused him to be in dire straits because the payout from two policies could not offset the interest costs, let alone pay for his retirement.
As he could not pay the continually rising interest, he had to give up both policies and ended up losing a huge chunk of his initial savings.
Like the other customer, he took his case to FIDReC.
Its hearing revealed that the man did not understand the policies; he thought his monthly interest payment was also being used to pay down the loan. He said he would not have bought the policies if he had known the loans would be paid only when he gave up the policies or when he died.
It was not disclosed how much the man lost, but the maximum claim limit for adjudication at FIDReC is $150,000 now.
In the past, FIDReC had ordered full awards to customers who ended up buying unsuitable products after being misled by the vendors.
In this case, the adjudicator found that the retiree had to bear some responsibility for contributing to his own losses because he bought the same product, which he did not understand, twice. So the retiree got only a partial award, which is half of his claim.
A Singapore woman wanted to earn a bit more interest but ended up losing all her $200,000 savings after she was swayed into buying a complicated financial product.
The 58-year-old customer service employee earning $3,000 a month, wanted to put the inheritance from her late husband into a fixed deposit but was convinced by a bank sales representative to consider “other products that could give a better interest rate”. The customer had secondary-level education, and could read and understand Chinese, as she was from the Chinese language stream.
She was given documents in Chinese to read and sign but she did not check them and chose to believe everything the bank employee told her. It was not disclosed what returns she would get, but she invested the entire $200,000 without understanding what she was buying.
To make matters worse, she did not even read bank statements sent to her over the next five or so years. She had the shock of her life when she tried to withdraw her money – the account was empty as losses had erased all her savings.
She would not have fallen into a high-risk investment trap if she had just stuck to her original plan of opening a fixed-deposit account instead of risking $200,000 just to possibly earn a few thousand dollars more.
Fortunately FIDReC helped her claw back some of her money.
While some structured notes have components that can guarantee part of the invested sums, she was apparently sold one that tied all her money to the fate of four stocks. To make matters worse, she was served the raw deal of losing all her money just because the worst-per forming stock fell below the final valuation price.
Shocked that all her money was gone, she asked the bank for compensation but her request was denied as she was made to sign a document that stated she understood the product and its high risks.
A translator helped her to present her case during an adjudication session at FIDReC as she was not fluent in English. The adjudicator noted that the evidence showed that she had bought an unsuitable product.
But she had to bear some blame because she still chose to invest despite not understanding what she was buying. Moreover, she did not read any of the bank documents that were in Chinese during the purchase process and she also threw away all bank statements that were sent to her without even reading them.
But FIDReC found that the bank was also at fault for peddling a product that was clearly not suitable for customers like her. After all, no one would want to purchase such high-risk products when they do not draw equally high incomes.
As a result, the bank was told to bear 40 per cent of the losses, or about $80,000. The case could have had a better outcome if she had sought help earlier, after noticing the discrepancy in her savings as soon as she read bank statements that were sent to her.
The lesson from these three cases is simply this – if you are keen to plan for a decent retirement income but don’t know how to, head to the CPF Board first and ask how you enjoy the state-guaranteed benefits of receiving a decent monthly payout for life.
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This article is part of ST InvestMe — The Straits Times’ premium investment series by Invest Editor Tan Ooi Boon and the Invest Team.
