MAS proposes stronger safeguards for investors

Exotic investments could come under MAS rules
Products like land-banking, gold buy-back schemes may be regulated
By Yasmine Yahya, The Straits Times, 22 Jul 2014

PEDDLERS of esoteric financial products such as forestry investment and gold buy-back schemes have for many years avoided being regulated.

But new proposals by the Monetary Authority of Singapore (MAS) unveiled yesterday aim to change that.

The operators of such schemes have stayed unregulated by deliberately structuring their investment products so that they do not fall under the ambit of the Securities and Futures Act.

This could soon change, as the MAS hopes to extend the scope of its powers to cover two more types of investment structures.

The first: buy-back arrangements involving gold, silver and platinum. Under such schemes, an investor buys an amount of precious metal with the agreement that he can sell it back at a higher, agreed-upon price, regardless of market prices. An example of such a scheme is one operated by Genneva Gold, which in 2012 went bust and left more than 10,000 investors stranded.

The second investment structure the MAS is targeting is the collectively managed investment scheme, such as that operated by Profitable Plots, accused in 2012 of cheating investors of more than $3 million.

These schemes allow groups of investors to buy direct stakes in an asset, but their funds are pooled and the asset is managed by the scheme operator, who splits any income or profits among the group.

If the MAS' proposals come to pass, operators of such schemes would have to be licensed, publish proper disclosures and comply with relevant codes under the law before they can market their products to retail investors.

This could mean that retail investors might soon be unable to invest in land-banking schemes, as the existing code on collective investment schemes does not allow investing in vacant land that does not generate income.

"These proposals are somewhat overdue but it's better late than never," said Securities Investors Association ( Singapore) president David Gerald.

"If such operators were to be regulated, they would think twice before marketing in Singapore and this would raise the overall quality of investment products in Singapore, ensuring that only ethical operators come here."

Investor Ang Eng Choo, who was recently stung by an unregulated investment scheme, agreed. "As an end user, it's good to have the Government safeguarding our interests, as long as it doesn't dampen the marketplace for investment products."

The MAS, which is seeking public feedback on its proposals, is also suggesting a new ratings system for investment products.

Under the system, financial product sellers will have to state in their brochures the level of risk and complexity of the product, according to a set of guidelines issued by the MAS.

This will help standardise ratings, making it easier for investors to differentiate between simpler and more complex products and gauge riskiness, MAS said.

WHO'S AFFECTED BY PROPOSED RULES

- Operators which want to launch a precious metal buyback scheme would have to undergo the same processes and comply with the same rules as bond issuers.

- Collectively managed investment schemes, similar to those offered by EcoHouse and Profitable Plots, would come under the existing code on collective investment schemes under the new MAS proposals.

Beefed-up rules on exotic investments 'welcome'
But if not done carefully, they could hurt investors, weaker firms: Experts
By Yasmine Yahya, The Straits Times, 23 Jul 2014

TOUGHENING up the rules surrounding more unconventional investment schemes will help protect consumers but if the regulation is not done carefully, it risks hurting even more investors, said financial experts.

The beefed-up rules, while welcome, could place a heavy financial burden on companies as they try to comply, and may even force some to go out of business, they said yesterday.

This, in turn, might spell trouble for investors who placed money with these firms.The rules being flagged by the Monetary Authority of Singapore (MAS) come after hundreds of people here have been burned by two types of exotic products - precious metal buybacks and collectively managed investment schemes.

These are very similar to investment products that already come under MAS regulation but are deliberately structured in such a way that they do not fall under the ambit of the Securities and Futures Act, the MAS said.

Under the first, investors can buy gold, silver or platinum with the guarantee that they can sell it back to the operator at a higher, fixed price, regardless of the metal's market price.

There have been scandals over the past year involving such investment products peddled by firms such as Genneva Gold and Virgin Gold Mining Company. Both firms have been accused of financial impropriety.

The MAS said in a paper released on Monday that it plans to regulate these investments as debentures, or a type of bond. This would mean that an operator who wants to launch a precious metal buyback scheme would have to undergo the same processes and comply with the same rules as bond issuers.

Collectively managed investment schemes allow investors to buy a direct stake in an asset, say a unit in an apartment block, and then pool the funds from all the investments in the entire block.

The block is then managed and rented out by the scheme operator. Investors make returns from an income pool that is divided among the whole group rather than from the rents collected at their own unit. EcoHouse and Profitable Plots are among operators of similar schemes. Investors have filed complaints with the Commercial Affairs Department against both firms after they failed to meet payout promises.

Under the new MAS proposals, such schemes would come under the existing code on collective investment schemes.

Investor Haden Hee, who sank $50,000 into Profitable Plots, said it was time the Government stepped in. "When I was making the investment, I was told that even wealthy investors, lawyers and doctors were doing it too. I think they were all deceived," he said.

Fellow Profitable Plots investor Ivan Teo said many consumers likely assumed that such schemes were already regulated. He said: "Many of us thought that since Singapore has very strong property investment rules and this was a British firm, we could be confident investing in it."

Eternal Financial Advisory chief executive Viviena Chin said she has advised several clients over the years to avoid such products. MAS' move would at least get consumers thinking twice before putting their money into such unconventional schemes, she added.

She said: "I know friends and clients who have put their savings into unregulated investments such as wine and lost their money. I think it's high time MAS clamps down on all unregulated investments and makes it difficult for them to market (their products) in Singapore."

Bringing operators of such products under the ambit of the law will likely have a financial impact on them, said financial advisers.

If they are regulated, they would have to obtain a licence from MAS and their sales staff would have to undergo exams to become licensed financial advisers, both of which are lengthy processes. They may also have to maintain a minimum base capital of up to $1 million.

This could put many such firms, most of which are small operators, out of business, said Promiseland financial planner Wildred Ling. "That could be good because fly-by-night operators will have to leave and we'll have only legitimate players left," he said.

One land investment firm with about 20,000 clients here agreed. "Our company is unregulated but we have our own strict internal compliance standards. Being regulated would put us in good stead and it would weed out the undesirable companies," said a spokesman.

However, MAS has to take into consideration the impact regulation might have on people who have already invested in such schemes, he added.

In some cases, the new rules, if passed, would mean some companies may be unable to sell their products to retail investors.

Take land banking firms, which allow investors to collectively buy plots of undeveloped land with the promise that it can be sold to a developer for a profit. Under the law now, property investment firms cannot take retail investors' funds for investments in vacant land that does not generate income.

"Perhaps MAS could allow these firms to service existing customers but not take on new retail clients," Mr Ling said.

And there are many collectively managed investment schemes that have popped up in Singapore in recent years that may realise that their business does not comply with the law.

The existing code on collective investment schemes require them to invest in liquid assets - those that can be bought and sold easily - and many do not.

There are, for example, agricultural schemes where investors can buy trees, cassava or wine grapes, which the operator will cultivate and harvest on their behalf.

There are even farming schemes, where investors pay the operator a fixed amount of money to buy farm animals or birds such as emus. The scheme operator is then responsible for harvesting and selling to distributors. The investors receive payouts from revenues of these activities.

The gloss and the dross
Experts give tips on what to look out for should you take a shine to gold buyback and other schemes
By Rachael Boon, The Sunday Times, 3 Aug 2014

Ask about exit options and hidden costs

Investments offering exceptionally high rates of returns can look very tempting.

Faced with the prospect of quick gains, it is very easy to forget that golden rule - "caveat emptor", or "buyer beware".

But remembering this rule is never more important than when dealing with unregulated financial products promising an easy path to riches.

Singaporeans have been offered a number of these sorts of schemes lately, such as precious metal buyback arrangements involving gold, silver and platinum, and collectively managed investment schemes in overseas land.

Many have been burnt.

Now, the Monetary Authority of Singapore (MAS) is proposing that operators of such schemes will have to be licensed, publish proper disclosures and comply with relevant codes under the law before they can market their products to retail investors.

The proposals were unveiled last week, and the MAS is seeking public feedback on them by Sept 1.

In the meantime, The Sunday Times explores what consumers should look out for when faced with such products or schemes.

Research, research, research

Mr Seah Seng Choon, executive director of the Consumers Association of Singapore (Case), says investors should first be realistic about how much they can afford to invest, understand the product and consider whether it meets their needs and budget.

Weigh the risks involved, especially for investments in unregulated financial products, he adds.

"Currently, such products are not required to comply with the collectively managed investment schemes code as stipulated by the MAS, and investors may find it very difficult to pursue compensation if the investment falls through in the future."

For instance, the existing code does not allow investing in vacant land that does not generate income.

If you plough cash into such an investment, it would be difficult to seek help when things go wrong.

Never take such a product at face value, always do plenty of research and seek financial advice if you have doubts.

And consider whether the product or company is regulated by the MAS.

Identify common unregulated schemes

The online portal of MoneySense, the national financial literacy programme, has a page devoted to consumer alerts, with tips on identifying common unregulated schemes, not just investment schemes.

These include virtual currencies, overseas property and crop schemes that offer investing in trees, crop plots or plantations, foreign exchange trading seminars which may come with huge course fees and payment for computer software or coaching sessions, gold buyback schemes and land-banking schemes.

Useful links

You can do some of your homework online, which will give you an idea of what is out there and whom you can trust.

Head to the "financial institutions directory" at the MAS website, which lists regulated financial institutions and the activities they are authorised to provide.

Also, visit the MAS "register of representatives" on the regulator's homepage, where you can check if the person you are dealing with is an authorised person from a financial institution, and, if so, what regulated activities he is allowed to conduct.

The "investor alert list" is another important resource that lists unregulated companies that may wrongly be seen as being licensed or authorised by the MAS.

But don't forget: This list is not exhaustive, and is updated regularly.

Deputy Prime Minister and Minister for Finance Tharman Shanmugaratnam previously noted that being on the list does not necessarily mean that the company has breached any of MAS' regulations, and does not mean that the regulator has the power to monitor its activities or to investigate its operations.

"Where there is evidence of fraud or any other breaches of law, action will be taken by the appropriate enforcement agency," he added.

This is why the regulator "strongly encourages consumers seeking financial services to deal only with persons regulated by MAS so that they will be protected under our regulations".

What information do you need from the company?

Besides checking the various MAS lists and directories, you need to ask the company for as much information and details as possible before you even consider the product.

Mr Seah's advice: "Investors should ask for a copy of the terms and conditions, and read the agreement carefully. They should also get the financial consultant to commit in writing that there will be no hidden costs involved."

Mr Tan Lye Poh, director at IPP Financial Advisers, says that investors uncomfortable with the risk involved should immediately examine the different exit strategies available that would allow them to redeem their investment.

"They should contact the product provider or the sales personnel that they had purchased the investment from, for redemption or exit options available to them," he adds.

If you are stuck with such investments, what can you do?

Mr Tan recounts how his firm helped clients who invested in "profitable" gold schemes.

He explains how a typical gold scheme works: Investors get to purchase physical gold - at a premium to the current gold price - which comes with a sales and purchase agreement and a certificate of ownership. The investor is given a choice to take possession of the gold or leave it in the custody of the company, and told that the investment yields are a monthly "dividend" of 1 per cent to 3 per cent per month.

Mr Tan warns: "This works out to an annualised return in excess of 12 per cent. This is definitely a potential return that seems too good to be true in this low interest rate environment."

If you had paid a 20 per cent premium for the gold, for instance, Mr Tan notes that this 20 per cent is enough to cover about a year of "promised" interest.

The company promises to buy back your gold at the initial purchase price, which sounds like it is an almost "capital guaranteed" investment.

However, he adds: "As global gold prices retracted from the high of US$1,800 per ounce... companies offering such gold investment scheme ran into liquidity problems fulfilling their 'promises', resulting in clients losing some or a substantial part of their investments."

In this instance, Mr Tan advised clients against the gold scheme. Those who insisted were advised to take possession of the physical gold.

"In the event that the company goes bust, at least part of the initial investment is secure in the form of physical gold," he notes, adding that this applies only if the gold bar is genuine and legitimate.

Case's Mr Seah says there have been several complaints from people investing in gold or wine who were unable to cash in on their investment some time later.

Investors should take precautions early on, and get out immediately and ask for their money back should they find a scheme questionable.

"Unfortunately, when these investors came to us, most of their investments had already gone under and they had great difficulty in recovering their capital, much less their returns.

"We usually feed back these complaints to MAS or advise the complainant to go to a lawyer," says Mr Seah.

There are community legal clinics in Singapore which offer free basic legal advice, and investors can check with the Subordinate Courts for a list of legal clinics, he adds.

Mr Tan says: "History has shown that some unregulated products are unsound investments while others are outright scams.

"While there are some unregulated investments products that may work out well, one must understand that there is no free lunch."

He adds that those who are not savvy with investments should work with a trusted adviser "to make sense of the myriad options available in the investment marketplace".

As the old saying goes: If it seems too good to be true, then it probably is.

Staying nimble, closing loopholes
MAS' move to regulate alternative investments is a welcome start, but it needs to respond more quickly to the evolving world of innovative financial products
By Yasmine Yahya, The Straits Times, 19 Aug 2014

WHEN the Monetary Authority of Singapore (MAS) said last month it would start regulating two types of alternative investments, the move was praised by pundits and investors alike.

But in the same breath, some wondered why it had taken the regulator so long to embark on the initiative.

It has been years since thousands of Singaporeans lost money through these two categories of investments: collectively managed investment schemes and precious metal buyback schemes.

To those who have already been burnt, the current efforts of MAS are cold comfort. But for the sake of all other investors, these expanded regulatory powers are increasingly necessary.

Past experience has shown that no matter how many Singaporeans lose money through dubious deals, there are always more willing to bet their life savings on the next "sure thing".

It is also clear that the MAS will need to be more on the ball to keep up with the rapidly changing world of innovative investments, so it can ensure that consumers remain well-protected.

Closing the loopholes

THE new MAS rules will sew up some loopholes that have been exploited by investment brokers peddling everything from emus to gold.

One such loophole involves collectively managed investment schemes, including land banking. These will now be regulated like traditional collective investment schemes, such as hedge funds and mutual funds.

Traditional collective investment schemes involve investors pooling their funds to invest in an asset or a group of assets, while unregulated collectively managed investment schemes require each investor to buy his or her own direct stake in the asset, such as a small plot in a large tract of land.

These unregulated schemes will now be brought into the regulatory fold.

Among other things, operators of such schemes will have to invest in liquid assets - assets that can be easily bought and sold - if they want to attract money from retail investors.

This means operators of schemes peddling illiquid assets such as land banks or agricultural products would no longer be able to market their products to retail investors.

One worry is what will happen to investors who are already committed to such schemes. They might not be able to exit their investments easily, especially as the pool of potential investors will now shrink considerably.

But in the long term, more regulation is good as investors seem to be constantly taken in by such stratagems. Land banking scandals began surfacing here as early as 2009, yet this investment continued to grow in popularity.

In 2012, thousands of investors in Singapore were affected when land banking firm Profitable Plots' directors came under investigation for not delivering on promised payments.

Over the years, operators have become more canny. Now there are farming schemes, where investors pay to buy farm animals or birds such as emus and swiftlets. There are also agricultural schemes which allow investors to buy individual trees or other agri-products such as agarwood, timber or wine grapes.

The MAS' proposals would bring operators of these and similar schemes under the Securities and Futures Act, limiting their activities to institutional and savvier investors.

Curbing metal buybacks

ANOTHER loophole closed by the new MAS proposals involves metal buyback schemes.

These are essentially debt financing arrangements: Individual investors lend their money to these operators and accept gold as collateral. The investors thus take on a credit risk - the risk that the operator would not be able to pay up when the time comes.

While these are similar to other debt-financing arrangements using stocks or bonds as collateral, these schemes have escaped regulation because they use metals rather than capital market products.

Operators such as the now-defunct Genneva Gold sold investors gold at a discount to the market price with the promise to buy it back 30 or 90 days later.

The Gold Guarantee - now also bust - offered a scheme where investors bought gold at a premium and received monthly payouts, depending on the amount invested.

Under the new MAS proposals, metal buyback schemes will be regulated under the same rules as debt-financing arrangements involving stocks and bonds.

Again, it's about time.

More than 10,000 investors in Singapore lost their money in 2012 thanks to Genneva alone. As for The Gold Guarantee, company founder Lee Song Teck disappeared early last year after taking tens of thousands of dollars from investors.

Although the MAS plans to expand its oversight of buyback schemes only to those with precious metals for now, the move sends a strong signal that it will not always be so easy in future to exploit a loophole in the law.

Growing complexity

THESE signals, that the MAS will not turn a blind eye to investment scheme operators taking advantage of loopholes in the law, are crucial given that the MAS is likely to grapple with ever-more exotic investment products in time to come.

As memories of the 2008 financial crisis fade and interest rates remain low, more and more Singaporeans are looking beyond well-understood products such as stocks and unit trusts in search of higher investment returns.

In response, the MAS is looking into giving retail investors more options by making it easier for them to buy fixed income products directly.

But other institutions are responding to the demand for yield as well. Banks have started rolling out structured products onto the market again in recent months.

Lest anyone has forgotten, some structured products - such as Lehman minibonds and Morgan Stanley's Pinnacle Notes - went bust during the 2008 financial crisis, leaving thousands of Singaporean investors with losses.

Six years on, banks are reintroducing products such as structured deposits and structured notes, some advertising interest rate returns of over 10 per cent.

Financial advisers say they see many of their clients being tempted, especially those who were not burnt by such products before, or who are too young to remember the fallout from the crisis.

To be fair, the banks - some of whom had been accused of mis-selling structured products leading up to the crisis - say this time they are making sure to target only savvy investors when promoting these new products.

But unregulated players peddling their own exotic instruments to a market filled with investors hungry for returns might not have such compunction.

Even when the new rules are in place, it is likely that some investment scheme operators will be able to find a way around them. As it is, the MAS proposals already leave new loopholes open.

Take, for example, wine, jewellery or art investments. The MAS has said that since these are not capital market products, investment schemes involving them would still not come under the expanded regulations.

More unregulated schemes, using even more exotic underlying assets, are likely to pop up on the market soon.

One possibility is bitcoins. The MAS has said that it intends to regulate virtual currency intermediaries for money laundering and terrorist financing risks, but has repeatedly said it will not recognise virtual currencies as legal tender or as securities.

Singapore already has several bitcoin machines and exchanges. It is not too much of a stretch to imagine a day when bitcoin or some other virtual currency is used as an underlying asset for an investment scheme that would fall outside MAS regulations.

As Singaporeans become more affluent and seek better returns for their money, one hopes they will be more aware of the risks involved, especially with newer investments.

But the MAS should also be equally nimble, to keep up with an innovative and rapidly changing investment landscape.