Tighter regulations set for sale of special investment products

Intermediaries are now required to check whether a customer has sufficient investment knowledge before a sale gets a greenlight.

Retail customers should also be warned explicitly of the risks before purchasing from foreign-listed investment products beginning October 2012, which is when the new regulations will be enforced, according to the Monetary Authority of Singapore.

What other protections does the new regime afford Singaporean investors?

Here's more from MAS:

The Monetary Authority of Singapore (MAS) announced that it will refine the prescribed list of Excluded Investment Products (EIPs) to include EIP equivalent investment products listed on foreign exchanges, certain Collective Investment Schemes (CIS) and sub-funds of investment-linked life insurance policies (ILP sub-funds). This reclassification follows additional consultations with the industry and will take effect in October 2012. 

Intermediaries are required to assess a customer’s investment knowledge and experience before selling a Specified Investment Product (SIP) to the customer. Investment products that contain derivatives or have complex terms and features are classified as SIPs.

An investment product listed on a foreign exchange can be simple orcomplex. However, under the current regime, all foreign-listed investment products are classified as SIPs because intermediaries in Singapore had provided feedback to MAS that they could not determine the complexity of products listed overseas.

The industry has since informed MAS that it expects to resolve this difficulty by implementing a system for foreign-listed investment products. Intermediaries will identify and tag foreign-listed investment products as EIPs or SIPs and will be responsible for ensuring accuracy of the tagging. The industry expects to implement the system by October 2012.

Accordingly, from October 2012, intermediaries that can identify EIP-equivalent investment products listed on foreign exchanges will be allowed to treat these products as EIPs. An intermediary that is unable to determine whether a foreign-listed investment product is an EIP will be required to treat the product as an SIP. It will then have to comply with the relevant requirements for a retail customer wishing to transact in the product by conducting the Customer Account Review (CAR).

MAS notes that foreign-listed investment products, including EIPs, may carry a different set of risks and different levels of protection for investors from those offered locally. MAS will therefore require intermediaries to warn retail customers of the possible risks prior to the customer’s first purchase of a foreign-listed investment product from October 2012 and to obtain the customer’s acknowledgement on the risk warning disclosure. This will apply to all foreign-listed investment products, regardless of whether the customer has transacted in such products prior to October 2012, and whether the customer is assessed to have the relevant knowledge or experience to transact in SIPs. MAS will provide guidance on the content of the risk warning disclosure statement. 

All CIS, including those with a mandate to invest in EIPs, are currently classified as SIPs since they may undertake activities such as securities lending or investing in derivatives to achieve their mandate. However, fund managers have provided feedback that there could be a need to develop simple CIS products that do not engage in securities lending or derivatives.

With effect from October 2012, MAS will classify a CIS as an EIP if its investment mandate permits investments only in EIPs, and prohibits it from engaging in securities lending or repurchase transactions. The manager of such a CIS will be required to seek unitholders’ approval and ensure that the relevant SIP requirements have been complied with for each retail unitholder, before making any change in the investment mandate of the CIS that could cause it to become an SIP. MAS will also classify an ILP sub-fund as an EIP if it satisfies the same requirements. A customer is not required to undergo the Customer Knowledge Assessment if he wishes only to invest in such ILP sub-funds.

Amendments will be made to the Notice on the Sale of Investment Products [Notice No. SFA 04-N12] and the Notice on Recommendations on Investment Products [Notice No. FAA-N16] to reflect the above changes