SINGAPORE – The Monetary Authority of Singapore’s (MAS) decision to remove the mandatory financial advice requirement for most investors – while retaining safeguards for vulnerable customers and strengthening disclosure obligations – marks an important shift in philosophy because it reflects a recognition that Singapore’s capital markets have evolved considerably since the traumatic collapse of Lehman Brothers in 2008, and that this means the regulatory framework must evolve as well.
The move, announced earlier in May, might have raised some eyebrows, especially among those used to the existing, more prescriptive approach born out of one of the darkest chapters in Singapore’s retail investment history – the Lehman Minibonds crisis of 2008.
When Lehman Brothers collapsed during the US subprime crisis 18 years ago, thousands of investors who had bought Lehman-linked “Minibonds”, which were essentially credit-linked derivatives, suffered substantial losses.
Many investors later claimed they did not fully understand the products they had purchased, and not surprisingly, public outrage followed.
Regulators responded by tightening the sale of structured products and requiring financial advice and customer knowledge assessments before certain complex products could be sold to retail investors.
Those measures were understandable at the time because confidence in the financial system had been badly shaken, and there was genuine concern that ordinary investors were being exposed to products beyond their comprehension. As a result, the pendulum quite naturally swung heavily towards protection.
But markets do not stand still, and almost two decades later, Singapore’s investing landscape looks very different.
Retail investors today are more informed, more technologically savvy and far more exposed to global financial products than investors were in 2008.
Through online platforms, foreign brokerages and mobile trading applications, younger investors are already buying products ranging from US stocks to leveraged exchange-traded funds, options, cryptocurrencies, structured notes and contracts for differences.
Furthermore, many are doing so without speaking to a financial adviser at all, and mainly from the comfort of their homes.
This reality raises an obvious question: if retail investors can already access sophisticated products online with a few taps on a smartphone, why should Singapore’s own financial institutions remain constrained by a framework designed for a very different era?
The danger of maintaining overly restrictive rules is that some investors may invest and take risks anyway through overseas financial institutions, which, unlike local institutions, are not subject to domestic regulations.
In other words, strict domestic regulations may end up protecting neither the investor nor the competitiveness of Singapore’s financial sector.
The latest MAS move, therefore, reflects a practical and balanced recognition of how investing behaviour has changed. By removing mandatory advice for most retail investors while preserving safeguards for vulnerable customers, the regulator is effectively acknowledging that informed adults should have greater freedom to make their own investment decisions.
Importantly, the move is also fully consistent with the principles of a disclosure-based regulatory regime, as Singapore’s capital market has long operated on the philosophy that investors should be provided with clear, accurate and timely information so they can make informed decisions for themselves.
Under a disclosure-based regime, the role of the regulator is not to decide which investments are suitable for every individual. Rather, it is to ensure transparency, fairness and proper disclosure so that investors understand what they are buying and the risks involved.
That philosophy has underpinned Singapore’s approach to equities, bonds and listed securities for years. After all, investors are free to buy speculative growth or penny stocks, distressed companies or highly volatile securities as long as the relevant disclosures are made. Extending the same principle to complex products is therefore a logical progression.
The approach now is not to impose restrictions on what products can be sold but instead to empower investors with information while making it abundantly clear that investment decisions ultimately come with consequences.
This is why MAS’ emphasis on enhanced disclosures is critical.
If mandatory advice requirements are relaxed, disclosure standards must rise correspondingly. Product issuers and distributors should explain risks in plain language, avoid jargon and make key downside scenarios immediately obvious. Investors should understand not only the potential returns but also how and why they could lose money.
Complex products often fail the “clarity test” because documentation can be dense, technical and filled with legal terminology. Note in this regard that simplifying disclosures does not mean dumbing them down or diluting their substance; instead, it means presenting risks in a way that ordinary investors can realistically understand.
This brings the discussion to perhaps the most important point of all: investor education.
A disclosure-based regime can only function effectively if investors possess a reasonable level of financial literacy, which means that the liberalisation of complex product rules therefore places even greater importance on sustained investor education efforts.
This responsibility should not fall solely on regulators. Financial institutions, industry bodies, schools and investor advocacy groups all have roles to play.
Investors, too, have to protect themselves by having the requisite knowledge before buying into sophisticated products.
They can do so by tapping free learning resources such as those offered by the Securities Investors Association (Singapore) and MoneySense, and by familiarising themselves with basic and advanced investing concepts.
Meanwhile, the retention of protections for vulnerable customers is particularly important because not every investor has the same level of sophistication or financial resilience or is able to go online to study investing.
At the same time, allowing broader access to complex products for those who are better equipped should deepen Singapore’s capital markets by expanding the range of investment solutions available to retail investors.
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The writer is president and chief executive of the Securities Investors Association (Singapore).
