Need for financial products to be approved

Some people argue that it is not possible for the regulator or the government to check every investment and make sure that they are suitable for ordinary people to invest.

This argument is wrong.

Approval of drugs

There are more drugs available on the market, compared to financial products, and these drugs are tested and regulated.

It is illegal to sell a drug that has not been approved. The manufacturers submit the drugs for testing and approval. Only approved drugs can be sold.

Approval of financial products

This approach can be done for financial products. It should be easier to test and approve a financial product, compared to a drug.

What are the test for suitability of a financial product? 1. It is properly described 2. The charges are reasonable

Properly described

It is all right to approve a risky or betting product, provided that it is property described and the charges are fair. For example, you can bet on the outcome of a football match and be ready to win or lose the entire amount of the bet. You have the choice to choose either side to bet.

It is even fair for the betting house to offer a spread, of say 5% to cover their expenses. If the spread is too large, it would be unfair and would not be allowed.

Casino products

This approach is adopted in a casino. The betting odds are regulated to be fair to the betting public and to the betting house.

Fair charge

Some of the bad financial products have charges that are excessive. For example, in a regular premium life insurance product or investment linked product, the charges could amount to 1 or 2 years of the premium. This is far too high.

A fair charge is 30% to 50% of the annual premium for a long term saving contract. If it is capped at this level, the investing public has a change of getting an acceptable return.

Unfair betting terms

I have seen some structured product that gives a return of 5% per annum, when the market moves in a favorable direction and the risk of losing 30% when it moves in the other direction. This type of structure is unfair and should not be allowed. Most members of the public may not be aware of this kind of structure. They are likely to be sold to them as being "safe".

Conclusion

There is a high risk that the ordinary public can be placed at a serious disadvantage when they are being financial products that are designed to make a lot of profit for the issuing house, at the expense of the unwary investors. These products can be misrepresented to the investing public.

This problem can be solved by an active approach taken by the regulator to approve financial products that are sold to the public.

Tan Kin Lian