Investors in Singapore must possess certain knowledge and qualifications if they want to purchase a mutual fund or similar products
Moneylife Digital Team
In what could be a first of its kind, in Singapore, if anyone wants to buy a mutual fund (or any “Specified Investment Product”) directly, the person must be ‘qualified’ to do so. In other words, he/she must pass a test. And, no, they aren’t referring to financial intermediaries but ordinary investors, like you, who want to invest in the market.
The Monetary Authority of Singapore’s website clearly states that:
“...from 1 January 2012 onwards, financial institutions that act as intermediaries for these products will be required to assess whether a retail customer has the relevant knowledge or experience to understand the risks and features of a Specified Investment Product before offering the product to them. Intermediaries include financial institutions such as broking firms, banks, insurers and financial advisers.”
In other words, before taking a potential customer as a client, the financial intermediary must ‘assess’ the customer’s knowledge to check whether the same person is ‘fit’ enough to purchase the product.
Additionally:
“If the intermediary assesses that you do not have the relevant knowledge or experience to purchase the unlisted Specified Investment Product or to open an account to trade listed Specified Investment Products, they may suggest that you undergo learning modules to learn more about Specified Investment Products.”
“The intermediary will consider whether you have the relevant educational qualifications, work experience or investment experience in that product or similar products. They will also take into account whether you have demonstrated sufficient understanding of the product.”
This means that if the customer is not ‘qualified’ or ‘educated’, then he/she must undergo learning modules as specified by MAS. Whether the investor is ‘qualified” or ‘educated’ is highly subjective to the financial intermediary’s observation. The assessment of the same level of ‘knowledge’ may differ from one intermediary to another.
This move certainly safeguards investors, and perhaps, forcing them to educate themselves the nuances of finance and thereby increasing financial literacy levels. However, it is also a double-edged sword and there could be a negative ramification of this move.
Firstly, it increases the costs, both explicit and implicit, on both the investor and the financial intermediary. For instance, it would take up lot of time and expenses to just merely assess the ‘quality’ of a customer. Not only would the monetary cost of acquiring a specified product, such as mutual funds, increase, but also the hassle of obtaining one which would push the large populace away from investing in general.
Secondly, a lot of investors might just dabble in products that aren’t mentioned in the “Specified Investment Product” list. For instance equities, which is inherently riskier than mutual funds, is not mentioned in the “Specified Investment Product” list. This might make the system inherently more volatile rather than the other way round. If investors want to diversify their holdings, there ought to be easy to do it.
It is widely known that Singapore takes its investor protection and safety seriously—even though the regulators were behind the curve in assessing the safety of Lehman-linked bonds in 2008. In India, the Securities and Exchange Board of India (SEBI) has taken a supposedly pro-investor stance since August 2009 by banning upfront commissions for selling mutual funds and is now insisting that fund companies monitor their distributors so that they choose be either a simple distributor of financial products (sell whatever customers want) or advisors (sell what customers really need). And now, shortly regulations covering advisors would be issued. In India at least, investors have been let alone but who can say if India will import the bright idea from Singapore of putting investors through a test and killing the mutual fund market completely?