Singapore's private banks are coming under scrutiny for earning bonuses by selling risky debt as the nation sees an unprecedented wave of defaults. The central bank says an industry group is reviewing the practice.
Bond issuers offer banks rebates of as much as 1 per cent as incentive to sell unrated securities, according to a Bloomberg News analysis of figures from bond-sale arrangers and compiled by analysts.
The payments, which often are not explained to the banks' clients, have stoked concerns of a conflict of interest, and Fidelity International has called for the practice to be abolished. At least half the $875 million of bonds that have failed since November were sold by private banks earning rebates.
The defaults have further shaken confidence in Singapore's financial markets. A penny stock crash, close ties between the local unit of a Swiss bank and a disgraced Malaysian state investment firm and raids on brokerages in a market manipulation probe have kept the authorities busy.
Undeclared bonuses for selling poor-quality debt raise another spectre. The Monetary Authority of Singapore (MAS) said yesterday there is scope for disclosure on rebates to be clarified.
"Ultimately, safeguards on disclosures complement the broader obligation of private banks to act in the best interests of their clients, taking into account their investment objectives and risk tolerance," the central bank said in response to queries.
"At the same time, this cannot replace the need for investors to take responsibility for their investments."
Private banks are expected to uphold "rigorous standards" in dealing with their clients, and that includes disclosing key terms of transactions, fees and conflicts of interest, the regulator said.
Associate Professor Mak Yuen Teen, co-director of the Corporate Governance and Financial Reporting Centre at the National University of Singapore, said, speaking of the rebates: "Private bankers are supposed to look after their clients' interests but this may cause them to put the issuers' interest and their own interest first."
Private banks took up 49 to 92 per cent of the unrated notes issued by PT Trikomsel Oke, Pacific Andes Resources Development and Swiber Holdings in their sales from April 2013 to October 2014, the Bloomberg News analysis shows.These three firms have defaulted on their bond obligations since November.
"The practice of sales concessions is not unique to Singapore but is also practised in other global financial centres," Ms Tan Su Shan, co-chair of MAS' Private Banking Industry Group said in a separate statement yesterday.
"There is no explicit requirement currently for distributors to declare the amount of sales concessions received. Some distributors do and others do not."
There is scope to enhance disclosure to clients, said Ms Tan. The industry group is reviewing the code to require private banks to disclose fees and charges on investment products and services, including bond sales concessions, she said.
The rebates helped fuel a boom in the local debt market as local investors hunted for higher yields in a low-interest world. Sales of non- bank corporate debt in the five years through 2015 rose by almost half over the previous five years.
But paying bankers for selling unrated securities suggests that issuers had to try hard to find buyers for their debt.
"A rebate is given on poor-quality credit as a general rule," said Mr Bryan Collins, a portfolio manager at Fidelity International.