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Pre-empting caveat emptor

The UK regulatory regime can learn from Singapore’s indoctrination of the ’buyer beware’ principle

The events of the past three years, caused by the global recession and related problems, have led to an increased regulatory focus on how financial services companies are supervised and controlled in different countries.

I was in Hong Kong and Singapore recently and one of the topics that seemed to fascinate many people I met was the UK’s impending retail distribution review and how it is likely to affect the market.

The most widely discussed change relates to the commission ban and the RDR has led to much speculation as to how widespread this development will become across a wider group of regions.

In Singapore, as in many parts of Asia, there are a large number of individuals who use dealing/execution-only platforms to self-direct their own short-term tactical bets on market developments.

Whether it is individual company shares, mutual funds or other collective investments, many financial services providers have built sizeable businesses in facilitating these individuals in their trading.

The nature of self-directed investing is about to change in Singapore. Worried about the speculative nature of much of this type of investing, the regulator plans to impose a new requirement on all financial services providers.

Before any individual can be a self-directed investor, the financial services platform will need to complete a detailed ’know your client’ document to evaluate whether the individual has sufficient knowledge, skill, risk-awareness and resources to be a self-directed investor and thus be accepted to transact the business on self-directed terms.

If the individual is not deemed competent, the financial services provider will either reject the business or offer the client an advisory service to help them make informed decisions.

Using the UK as a reference point, this development is fascinating for several reasons:

  • It moves the Singapore market in a different direction to that of the UK. We have seen a number of new execution-only business models and providers emerging in the UK. At a recent Schroders conference, 76 per cent of the 200 advisers polled said more execution-only platforms will exist after the RDR. The impact of UK legislation seems to lead to reduced adviser numbers and to encourage the use of execution-only services.
  • Investor protection in the UK requires investors to be protected from bad advisers, providers and products. In Singapore, investors have to be protected from themselves and the risks of going it alone in their decision-making. Advice is seen as inherently important for all but the sophisticated few who qualify to self-invest.
  • The mass market in the UK is likely to have less access to advice, while the high net-worth sections of the market will be swamped with those advisers specialising in servicing those with sufficient resources to pay for advice. In Singapore, advice will be more important for the unsophisticated and those who want/need help in their decision-making.

There are some valuable perspectives to be drawn from this as the Singapore regime seems to build on and enshrine the ’buyer beware’ principle, which may well be lacking in much of the upcoming RDR regime.

Robert Noach is head of global financial institutions at Schroders

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