MAS' move to regulate alternative investments is a welcome start, but it needs to respond more quickly to the evolving world of innovative financial products
By Yasmine Yahya, Assistant Money Editor
WHEN the Monetary Authority of Singapore (MAS) said last month it would start regulating two types of alternative investments, the move was praised by pundits and investors alike.
But in the same breath, some wondered why it had taken the regulator so long to embark on the initiative.
It has been years since thousands of Singaporeans lost money through these two categories of investments: collectively managed investment schemes and precious metal buyback schemes.
To those who have already been burnt, the current efforts of MAS are cold comfort. But for the sake of all other investors, these expanded regulatory powers are increasingly necessary.
Past experience has shown that no matter how many Singaporeans lose money through dubious deals, there are always more willing to bet their life savings on the next "sure thing".
It is also clear that the MAS will need to be more on the ball to keep up with the rapidly changing world of innovative investments, so it can ensure that consumers remain well-protected.
[You're barking up the wrong tree. MAS should stop people from investing in stupid schemes. Wait. That came out wrong. MAS should stop STUPID people from investing in STUPID schemes. Yes. That's much better.]
Closing the loopholes
THE new MAS rules will sew up some loopholes that have been exploited by investment brokers peddling everything from emus to gold.
One such loophole involves collectively managed investment schemes, including land banking. These will now be regulated like traditional collective investment schemes, such as hedge funds and mutual funds.
Traditional collective investment schemes involve investors pooling their funds to invest in an asset or a group of assets, while unregulated collectively managed investment schemes require each investor to buy his or her own direct stake in the asset, such as a small plot in a large tract of land.
These unregulated schemes will now be brought into the regulatory fold.
Among other things, operators of such schemes will have to invest in liquid assets - assets that can be easily bought and sold - if they want to attract money from retail investors.
This means operators of schemes peddling illiquid assets such as land banks or agricultural products would no longer be able to market their products to retail investors.
One worry is what will happen to investors who are already committed to such schemes. They might not be able to exit their investments easily, especially as the pool of potential investors will now shrink considerably.
But in the long term, more regulation is good as investors seem to be constantly taken in by such stratagems. Land banking scandals began surfacing here as early as 2009, yet this investment continued to grow in popularity.
In 2012, thousands of investors in Singapore were affected when land banking firm Profitable Plots' directors came under investigation for not delivering on promised payments.
Over the years, operators have become more canny. Now there are farming schemes, where investors pay to buy farm animals or birds such as emus and swiftlets. There are also agricultural schemes which allow investors to buy individual trees or other agri-products such as agarwood, timber or wine grapes.
The MAS' proposals would bring operators of these and similar schemes under the Securities and Futures Act, limiting their activities to institutional and savvier investors.
Curbing metal buybacks
ANOTHER loophole closed by the new MAS proposals involves metal buyback schemes.
These are essentially debt financing arrangements: Individual investors lend their money to these operators and accept gold as collateral. The investors thus take on a credit risk - the risk that the operator would not be able to pay up when the time comes.
While these are similar to other debt-financing arrangements using stocks or bonds as collateral, these schemes have escaped regulation because they use metals rather than capital market products.
Operators such as the now-defunct Genneva Gold sold investors gold at a discount to the market price with the promise to buy it back 30 or 90 days later.
The Gold Guarantee - now also bust - offered a scheme where investors bought gold at a premium and received monthly payouts, depending on the amount invested.
Under the new MAS proposals, metal buyback schemes will be regulated under the same rules as debt-financing arrangements involving stocks and bonds.
Again, it's about time.
More than 10,000 investors in Singapore lost their money in 2012 thanks to Genneva alone. As for The Gold Guarantee, company founder Lee Song Teck disappeared early last year after taking tens of thousands of dollars from investors.
Although the MAS plans to expand its oversight of buyback schemes only to those with precious metals for now, the move sends a strong signal that it will not always be so easy in future to exploit a loophole in the law.
Growing complexity
THESE signals, that the MAS will not turn a blind eye to investment scheme operators taking advantage of loopholes in the law, are crucial given that the MAS is likely to grapple with ever-more exotic investment products in time to come.
As memories of the 2008 financial crisis fade and interest rates remain low, more and more Singaporeans are looking beyond well-understood products such as stocks and unit trusts in search of higher investment returns.
In response, the MAS is looking into giving retail investors more options by making it easier for them to buy fixed income products directly.
But other institutions are responding to the demand for yield as well. Banks have started rolling out structured products onto the market again in recent months.
Lest anyone has forgotten, some structured products - such as Lehman minibonds and Morgan Stanley's Pinnacle Notes - went bust during the 2008 financial crisis, leaving thousands of Singaporean investors with losses.
Six years on, banks are reintroducing products such as structured deposits and structured notes, some advertising interest rate returns of over 10 per cent.
Financial advisers say they see many of their clients being tempted, especially those who were not burnt by such products before, or who are too young to remember the fallout from the crisis.
To be fair, the banks - some of whom had been accused of mis-selling structured products leading up to the crisis - say this time they are making sure to target only savvy investors when promoting these new products.
But unregulated players peddling their own exotic instruments to a market filled with investors hungry for returns might not have such compunction.
Even when the new rules are in place, it is likely that some investment scheme operators will be able to find a way around them. As it is, the MAS proposals already leave new loopholes open.
Take, for example, wine, jewellery or art investments. The MAS has said that since these are not capital market products, investment schemes involving them would still not come under the expanded regulations.
More unregulated schemes, using even more exotic underlying assets, are likely to pop up on the market soon.
Closing the loopholes
THE new MAS rules will sew up some loopholes that have been exploited by investment brokers peddling everything from emus to gold.
One such loophole involves collectively managed investment schemes, including land banking. These will now be regulated like traditional collective investment schemes, such as hedge funds and mutual funds.
Traditional collective investment schemes involve investors pooling their funds to invest in an asset or a group of assets, while unregulated collectively managed investment schemes require each investor to buy his or her own direct stake in the asset, such as a small plot in a large tract of land.
These unregulated schemes will now be brought into the regulatory fold.
Among other things, operators of such schemes will have to invest in liquid assets - assets that can be easily bought and sold - if they want to attract money from retail investors.
This means operators of schemes peddling illiquid assets such as land banks or agricultural products would no longer be able to market their products to retail investors.
One worry is what will happen to investors who are already committed to such schemes. They might not be able to exit their investments easily, especially as the pool of potential investors will now shrink considerably.
But in the long term, more regulation is good as investors seem to be constantly taken in by such stratagems. Land banking scandals began surfacing here as early as 2009, yet this investment continued to grow in popularity.
In 2012, thousands of investors in Singapore were affected when land banking firm Profitable Plots' directors came under investigation for not delivering on promised payments.
Over the years, operators have become more canny. Now there are farming schemes, where investors pay to buy farm animals or birds such as emus and swiftlets. There are also agricultural schemes which allow investors to buy individual trees or other agri-products such as agarwood, timber or wine grapes.
The MAS' proposals would bring operators of these and similar schemes under the Securities and Futures Act, limiting their activities to institutional and savvier investors.
Curbing metal buybacks
ANOTHER loophole closed by the new MAS proposals involves metal buyback schemes.
These are essentially debt financing arrangements: Individual investors lend their money to these operators and accept gold as collateral. The investors thus take on a credit risk - the risk that the operator would not be able to pay up when the time comes.
While these are similar to other debt-financing arrangements using stocks or bonds as collateral, these schemes have escaped regulation because they use metals rather than capital market products.
Operators such as the now-defunct Genneva Gold sold investors gold at a discount to the market price with the promise to buy it back 30 or 90 days later.
The Gold Guarantee - now also bust - offered a scheme where investors bought gold at a premium and received monthly payouts, depending on the amount invested.
Under the new MAS proposals, metal buyback schemes will be regulated under the same rules as debt-financing arrangements involving stocks and bonds.
Again, it's about time.
More than 10,000 investors in Singapore lost their money in 2012 thanks to Genneva alone. As for The Gold Guarantee, company founder Lee Song Teck disappeared early last year after taking tens of thousands of dollars from investors.
Although the MAS plans to expand its oversight of buyback schemes only to those with precious metals for now, the move sends a strong signal that it will not always be so easy in future to exploit a loophole in the law.
Growing complexity
THESE signals, that the MAS will not turn a blind eye to investment scheme operators taking advantage of loopholes in the law, are crucial given that the MAS is likely to grapple with ever-more exotic investment products in time to come.
As memories of the 2008 financial crisis fade and interest rates remain low, more and more Singaporeans are looking beyond well-understood products such as stocks and unit trusts in search of higher investment returns.
In response, the MAS is looking into giving retail investors more options by making it easier for them to buy fixed income products directly.
But other institutions are responding to the demand for yield as well. Banks have started rolling out structured products onto the market again in recent months.
Lest anyone has forgotten, some structured products - such as Lehman minibonds and Morgan Stanley's Pinnacle Notes - went bust during the 2008 financial crisis, leaving thousands of Singaporean investors with losses.
Six years on, banks are reintroducing products such as structured deposits and structured notes, some advertising interest rate returns of over 10 per cent.
Financial advisers say they see many of their clients being tempted, especially those who were not burnt by such products before, or who are too young to remember the fallout from the crisis.
To be fair, the banks - some of whom had been accused of mis-selling structured products leading up to the crisis - say this time they are making sure to target only savvy investors when promoting these new products.
But unregulated players peddling their own exotic instruments to a market filled with investors hungry for returns might not have such compunction.
Even when the new rules are in place, it is likely that some investment scheme operators will be able to find a way around them. As it is, the MAS proposals already leave new loopholes open.
Take, for example, wine, jewellery or art investments. The MAS has said that since these are not capital market products, investment schemes involving them would still not come under the expanded regulations.
More unregulated schemes, using even more exotic underlying assets, are likely to pop up on the market soon.
[Comics! Invest in Comics!]
One possibility is bitcoins. The MAS has said that it intends to regulate virtual currency intermediaries for money laundering and terrorist financing risks, but has repeatedly said it will not recognise virtual currencies as legal tender or as securities.
Singapore already has several bitcoin machines and exchanges. It is not too much of a stretch to imagine a day when bitcoin or some other virtual currency is used as an underlying asset for an investment scheme that would fall outside MAS regulations.
As Singaporeans become more affluent and seek better returns for their money, one hopes they will be more aware of the risks involved, especially with newer investments.
But the MAS should also be equally nimble, to keep up with an innovative and rapidly changing investment landscape.
One possibility is bitcoins. The MAS has said that it intends to regulate virtual currency intermediaries for money laundering and terrorist financing risks, but has repeatedly said it will not recognise virtual currencies as legal tender or as securities.
Singapore already has several bitcoin machines and exchanges. It is not too much of a stretch to imagine a day when bitcoin or some other virtual currency is used as an underlying asset for an investment scheme that would fall outside MAS regulations.
As Singaporeans become more affluent and seek better returns for their money, one hopes they will be more aware of the risks involved, especially with newer investments.
But the MAS should also be equally nimble, to keep up with an innovative and rapidly changing investment landscape.
[Easy. Go NUTS. "No U-turn Sign". All products must be pre-approved by MAS before sale. Only approved products may be sold. No approval, cannot sell. ]
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