PM Lee on a practical and fair way to deal with the issue

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This is an edited transcript of the interview Prime Minister Lee Hsien Loong gave journalists on Oct 26 on structured products

Q: Could you comment on MAS’ approach to the issue of structured products linked to Lehman Brothers?

A: This is a most unfortunate event. When you invest in financial instruments, whether it is stocks, bonds, unit trusts, or in this case, structured products, there is always a risk. There is an upside and a downside. You hope for the upside, and also hope that the downside does not happen to you. If you know the downside can happen, and go in with your eyes open, that is alright. The problem comes when you did not know what you were going into and it catches you unawares, and you have taken out your life savings for retirement and put it into Lehman Minibond Notes or like products. Then you are in trouble because if something goes wrong, this is money that you cannot afford to lose.

We have to look at the circumstances of the people who have lost money, whether on Lehman Minibond Notes or DBS High Notes or ML Jubilee Notes. Where there has been mis-selling, it has to be put right. Where there has been less than professional behaviour by the relationship managers, or it does not measure up to the standards expected by MAS when they promote financial products or advise someone what to buy, then the banks have to do the right thing. Where there have been breaches of the law, MAS will take action.

MAS has worked with the banks to set up the mechanism to deal with these cases expeditiously. If you went to court one by one, it would cost you a lot of money and take a long time. The banks have appointed three very experienced, fair- minded and well-respected persons who will oversee the process – Gerard Ee, Law Song Keng and Hwang Soo Jin. They will help to resolve this problem, without the people affected having to pay a lot of money to hire a lawyer and go through a complicated process.

I hope that those affected will go through the process and try and sort it out this way. If it still cannot be resolved, there is still the Fidrec, (Financial Industry Disputes Resolution Centre), which MAS set up back in 2005.

Beyond Fidrec, if you still do not feel that the matter has been adequately settled, then you still have your legal rights, which are not compromised.

This is a practical and fair way to deal with the problem. The banks know it is in their interest to deal with the customers fairly, because there is ‘reputational risk’. In other words, if the banks do the right thing, their customers will remember them for a long time. If they do the wrong thing, customers and potential customers will also remember them for a long time. The banks know this and have every interest in sorting this out expeditiously and fairly.

Q. Why could the Government not take more responsibility for vetting products?

A: I think this is a very difficult and unsatisfactory approach in the long run. First of all, Government should not be making decisions for individuals; individuals should have the right to decide for themselves according to their circumstances, their preferences, their needs.

Secondly, the Government is not in a position to guarantee what is safe and what is not safe, because there is nothing which is 100 per cent safe. It is impossible. The higher the return, inevitably the higher the risk, because there is no free lunch in this world.

What is the safest? Singapore Government Securities – that means Government debt, followed by the deposits guaranteed by the Government, like CPF deposits. These are 100 per cent safe as long as the Singapore Government is safe. Make sure that there is a good Singapore Government, then the dollar is stable, and one Singapore dollar is really worth one dollar, and your money is safe.

Other than that, nobody can say. If you had put money into Lehman Brothers three years ago, which had a credit rating of ‘A’ then, it may have looked alright, but now it is a totally different situation. Even safe products have the possibility of going wrong and if something does go wrong, it is not possible for Government to say: I guaranteed that this would not happen, so I am taking responsibility.

Q. Surely with consumers deciding for themselves, the Government must set up safeguards?

A: Yes. The Government’s job is to make sure things progress fairly and properly, not to guarantee that you make money, but to ensure that investors know what they are doing. So if a bank wants to sell you something, first there must be a prospectus explaining what it is, and in as simple language as possible. In this case, the Lehman Minibond Notes or DBS High Notes or ML Jubilee Notes were clearly not low-risk products. I think the prospectus says ‘you could lose all or a substantial part of your investment in the Notes’ in bold print, on page 1 or 2.

Secondly, there must be a fact-finding process about you, unless you opt out. The bank must find out about your circumstances – what you need, what your risk tolerance is, whether you are a young man planning for 30 years of investment, or you are a middle-aged person with family responsibilities, or you are a retiree needing a steady stream of pension. Each person’s needs are different. What risk people can tolerate will be different. You may own a house and be looking to invest $10,000 of spare cash, or this may be your life savings taken out from CPF which you can ill afford to take risk with.

Then there must be advice from the financial advisers. Their duty is to look at it from your point of view, and not from the bank’s point of view or from the adviser’s own point of view hoping to earn a commission, to advise you what is the prudent way. If you do this, these are the risks. These are the options and the trade-offs, you make up your own mind.

So there is a proper process which if followed properly, should help people to make better financial decisions for themselves.

Then we have to educate the people. They may know how to follow rumours to buy and sell in stock market, and find it very exciting to see the prices of their shares going up and down. But they may not understand more complicated financial products, or the risks, or the consequences.

Financial education is important for you to have a sense of what the risk is and what your own limits should be; so that you can appreciate the advice you are given. So we have all sorts of programmes – Moneywise, Dollars and Sense, etc. The Community Clubs and Residents’ Committees organise financial education talks. The Sunday Times has lots of pages advising people how to manage their money. These are very basic, but at least people can begin to understand. Even if they do not know everything, they know what they do not know. And that is the most important, because when you think you know everything which you do not, you can get into trouble.

Even then, from time to time, things will go wrong and investors will feel aggrieved. Hence we need a process to deal with this when it happens. The process can investigate this properly, and not cause every aggrieved investor to go through a full court trial. It must be a fair and quick resolution. It cannot be that if I invested and it turned out well, then I am happy, but if I invested and it turned out badly, then I am entitled to compensation.

So these are all the pieces we have to put in, in order to have a system with more flexibility, to let people make their own choices.

Q. Can we somehow make sure that people do not lose their last dollar on risky investments?

A: We try to do this through HDB home ownership, and the CPF system. For example, last year we tightened up the CPFIS rules, so that the first $20,000 from your CPF Ordinary Account cannot be used for CPFIS investments. I know that some Singaporeans, particularly some better-educated younger people, felt unhappy at this restriction. They said: ‘I am a responsible adult, I know what I am doing, let me manage my savings myself.’ I know that some Singaporeans will be more than capable of looking after themselves, but as a national savings scheme, I think it is wiser that we keep this basic amount safe. If you have more savings beyond that, you can make freer choices, but do not take any chances with this base level.

But ultimately, each person has to take responsibility for his or her own financial decisions. If you do not understand a product, do not invest in it. If it looks too good to be true, it probably is. You may not be able to become an expert, but you still have to look after your own money.

Q: Would the two different approaches you mentioned earlier explain the difference in the way the Hong Kong and Singapore authorities handled the situation?

A: I would not like to comment on what other jurisdictions do. We do what is necessary in our circumstances. In Singapore, while dealing with specific complaints of individuals who feel that they were mis-sold the Lehman Minibonds Notes, High Notes or ML Jubilee Notes, we must also have in mind the right overall policy on the sale of financial products to retail investors.

We are a major financial centre. In regulating and supervising financial institutions and activities, we must be fair, consistent and transparent. Set the right rules, and work by those rules. We should not act arbitrarily. If a bank breaches the rules, we will not hesitate to take action against it. But if a bank has acted properly within the right rules, the Government cannot, just because it is under political pressure, lean hard on it to do something convenient and get ourselves out of a jam.

We have to stand back and ask: What is the right way to resolve this? What are the right rules, the right policies? Then everybody will know that these are the rules of the game. Not just in this situation, but all the time. And that gives people the reassurance and confidence that the Singapore Government will do the right thing when problems arise again in future.

If people lose confidence in what we are doing, the damage to Singapore will be considerable. You may get out of the immediate jam but then what happens further down the road? The next time somebody sells a product, he will say: ‘Don’t worry. If this goes wrong, the Government will look after you.’ And then more problems will come. Because the good outcome is mine, the bad outcome somebody else will take care of. That is what ‘moral hazard’ means.