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Rebates on bond sales should be disclosed: MAS

But a ban on incentive practices in private banking would be a "draconian step"
Wednesday, September 7, 2016 - 05:50

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The recent wave of attention was sparked in part by problems at oil-and-gas company Swiber Holdings, which buckled under the stress of debt and defaulted on its high-yield bond, as oil prices collapsed. The company entered into judicial management after it was prompted by its major bank DBS to rescind its winding-up petition.

Singapore

SOME form of disclosure on rebates for bond sales by private banks is important, but a ban on incentive practices such as this would be a draconian step, said managing director of the Monetary Authority of Singapore (MAS) Ravi Menon, on Tuesday.

The practice of private bankers earning a rebate from selling bonds to clients has come under scrutiny, amid worries that several high-yield bonds held by private-banking clients are now under pressure.

"Minimally, I think some kind of disclosure would be important, so that the buyer knows as a result of his purchase, how the financial adviser is being rewarded," said Mr Menon, who was speaking at a Foreign Correspondents Association (Singapore) event. "I think that is a legitimate thing to expect."

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The recent wave of attention was sparked in part by problems at oil-and-gas company Swiber Holdings, which buckled under the stress of debt and defaulted on its high-yield bond, as oil prices collapsed. The company entered into judicial management after it was prompted by its major bank DBS to rescind its winding-up petition.

A Bloomberg report showed at least half of some S$875 million worth of bonds that have defaulted since November were sold to private clients, including issuers such as Swiber, PT Trikomsel Oki and Pacific Andes Resources Development.

It also reported bond issuers offer undisclosed rebates of up to one per cent to private banks to sell their bonds. MAS said in late August that a private banking industry group is now reviewing the practice.

Mr Menon stressed that incentive structures should not get in the way of financial advisers putting first the interests of their customers.

"Banning practices is a rather draconian step because you're not sure of the unintended consequences, whether this leads to a weakening of distribution channels and so on," he said. "But the larger point is that financial institutions must deal with their customers fairly."

The industry review on rebates is expected to be done fairly, Mr Menon said, responding to a question on the perception of a conflict of interest.

The group is co-chaired by well-known banker Tan Su Shan, who is also group head of consumer banking and wealth management at DBS Group Holdings. DBS is Singapore's largest bond house, with a market share of about 45 per cent.

"The industry group includes members from all the major private banks in Singapore. The MAS is also present at those discussions. I can't see how the chair, on its own, can make a huge impact on the outcome of these discussions. It has to be seen as fair," said Mr Menon.

Asked about the broad rise in anti-bank rhetoric and sentiment, Mr Menon noted that it is something that he has a lot of concern about.

He said he fears that in many advanced economies, trust in banks has been lost, though by and large, there is trust in banks in Singapore. He urged senior managers at financial institutions here to keep risk and compliance staff close to them.

"That's why we keep emphasising the importance of banks managing public trust. It is not just the licence to operate that matters. There is a social and moral licence to operate. And that's not given by the regulators, it's given by the public," he said.

"We take it very seriously when there are complaints. Naturally, with any transaction between two parties, there will be grounds for misunderstanding and for complaints. But they need to be attended to fairly, expeditiously, and resolved as best as possible."

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