MAS proposes changes to classification of investment products to better protect retail investors

The Monetary Authority of Singapore is seeking feedback on classifying certain investment products as complex. PHOTO: ST FILE

SINGAPORE - The Monetary Authority of Singapore has proposed changes to the classification of certain investment products, whereby those categorised as complex will come with enhanced safeguards to protect retail investors.

In a consultation paper issued on Wednesday (Nov 3), MAS sought feedback on its latest review of its complex products regime set up in 2012 following the global financial crisis.

"Financial innovation has since led to an increasing number of investment products with more complex risk-return profiles being manufactured and marketed to retail investors," noted MAS.

In developing the proposals, MAS sought to balance between allowing retail investors' access to a range of investment products, while helping them better understand the features and risks of products considered more complex.

Under the existing regime, products which are well-established in the market and have terms and conditions generally understandable are termed Excluded Investment Products (EIPs).

Products that do not fall within the prescribed list of EIPs are regarded as more complex Specified Investment Products (SIPs), which must be sold only with enhanced safeguards, including requiring intermediaries to assess a customer's investment knowledge and experience before investing.

In its consultation paper, the regulator proposes to classify all collective investment schemes (CIS), such as investment funds, that are authorised or recognised by MAS as simple investment products or EIPs, except for a small group of more complex funds.

Currently, only CIS that invest in simple products such as shares or gold and use derivatives solely for the purpose of hedging or efficient portfolio management are classified as EIPs.

MAS also proposes classifying debentures with varying interest payments or convertible features as complex investment products or SIPs.

When it comes to perpetual securities (perps) and preference shares, MAS seeks views on whether to classify them as EIPs or SIPs.

Perps are a type of debentures with no specified maturity date. The issuer has the discretion whether or not to redeem the security or to defer interest payments. Preference shares have similar characteristics as perps.

MAS observed that not all investors may fully understand the features and risks of perps and preference shares - particularly that redemption is optional.

It asks whether there is a need to enhance the marketing and disclosure requirements on perps to ensure that key features and risks are adequately highlighted to investors.

The enhancements could include disallowing perps to be marketed or described as bonds and requiring cautionary statements in advertising material that highlight their key features and risks.

It also asked for other suggestions on safeguards for the sale of perps and preference shares.

MAS is also seeking views on removing the requirement for financial institutions to conduct separate assessments on the investment knowledge and experience of customers when advising customers on products.

"With these proposals, we strive to maintain the balance between providing retail investors convenient access to a range of investment products, while ensuring that sufficient safeguards are in place to enable them to make informed investment decisions," said Mr Lim Tuang Lee, MAS assistant managing director (capital markets).

Interested parties can submit their comments on the MAS proposals here by Dec 15.

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