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Bond losses show vulnerability of Singapore's not-really-rich
[SINGAPORE] When Elaine Tham signed an "accredited investor" form with her bank in Singapore two years ago, she took a fateful step toward losing all the money she had set aside for her children's education.
Based on her financial profile and investment priorities - her need for S$150,000 to pay university fees - a local branch of HSBC Holdings Plc had initially categorised her as a "medium risk" investor. But because the value of her property and car entitled her to "accredited" status, a category reserved for wealthy investors, Ms Tham says she was persuaded to take a riskier path.
She agreed to invest S$250,000 in the bonds of a small Singapore energy-services company, Swiber Holdings Ltd, which said in August that it won't be able to repay its bondholders.
Ms Tham is one of many Singaporeans who lost money by investing in Swiber, which sold an unusually high proportion of its bonds to the wealthy clients of banks in Singapore. Amid signs last week that more local energy-services companies are being dragged down by the prolonged slump in global oil prices, some are urging quick action to plug loopholes in Singapore's investor-protection rules.
"It's time for Singapore's regulators to rethink how they define the accredited-investor regime," said Christopher Chen, an assistant law professor at Singapore Management University. "Here, if someone happens to own a landed property, likely that person will become an accredited investor. If investors are really rich, it's not a problem. But some people are semi-rich, or look rich on paper."
A Singapore-based spokesman for HSBC declined to comment on Ms Tham's case, referring inquiries about the sales practices of the bank's relationship managers to its 2013 annual report. In that report, HSBC said it stopped linking wealth-management relationship managers' incentives to sales volumes for the UK and France that year, and would make that effective in most markets by 2014.
Singapore law allows banks to automatically classify individual investors as "accredited" if they have at least S$2 million of assets or earned at least S$300,000 in the previous 12 months. By entering the category, the wealthy are given a greater range of investment choices but lose some of the key protections offered to ordinary investors - such as restrictions on selling them certain riskier products.
Swiber bonds were only available to accredited investors or those investing a minimum of S$250,000, according to Robson Lee, a Singapore-based partner at the US law firm Gibson, Dunn & Crutcher LLP.
As property prices surged over the past decade, many middle-class Singaporeans entered the accredited investor category due to the high value of their homes. A mass-market 1,000 square-foot suburban apartment was worth S$1.26 million on average in the second quarter, Savills Plc data show, while a same-sized luxury apartment in the centre of town would be worth S$2.34 million. About 20 per cent of Singaporean households live in private housing, government data show.
"They are wealthy by technical definition, but in reality they may not have enough disposable assets to withstand such losses," said Mr Lee at Gibson, Dunn & Crutcher. "There are many Swiber bond investors who are left high and dry as they were persuaded by their bankers to buy such high-yield products with money they can ill afford to lose."
More than 80 per cent of some Swiber bond issues were sold to clients of Singapore private banks, which cater for the wealthiest investors. Swiber is currently under interim judicial management and missed a payment on a bond coupon in August, which triggered cross defaults on all its issues.
Asked about the implications of the Swiber default for investor protection, the Monetary Authority of Singapore said it's proposing revisions to the law which will prevent banks from assigning accredited investor status to those whose wealth is mostly in property, as well as allowing individuals to opt out of accredited status and retain the protections afforded to ordinary investors.
The MAS plans to introduce the revisions to Parliament by the fourth quarter, it said Sept 2 in an e-mailed response to questions from Bloomberg News.
Allowing wealthy investors to opt out of the accredited investor regime will bring Singapore up to the investor protection standards of Hong Kong and the European Union, the MAS said in its proposed amendments to the law.
Hong Kong introduced safeguards earlier this year for wealthier people in the "individual professional investor" category, requiring banks to ensure that products they sell are appropriate for a client's risk profile and financial situation.
Regulators in both Singapore and Hong Kong have sought to boost investor protection after mis-selling scandals at the time of the 2008 global financial crisis caused investors millions of dollars of losses.
The most notorious was the sale of structured products linked to Lehman Brothers Holdings Inc - investments that soured rapidly following the US bank's collapse in Sept 2008. Sixteen Hong Kong banks were forced to repay about US$800 million to investors, while 10 financial services institutions in Singapore were banned temporarily from selling structured products.
Regulators had been "too relaxed" about the selling process back in 2008, said David Webb, a Hong Kong-based shareholder activist and deputy chairman of the city's takeovers panel.
"Just because someone is wealthy it doesn't mean that they are also sophisticated as investors. Regulators need to adopt an approach which can handle both ends of the spectrum of sophistication."
The growing signs of stress in Singapore's domestic bond market suggest wealthy investors may face further losses. Last week, Rickmers Maritime and Marco Polo Marine Ltd said they are having difficulty with bond repayments, as their operations have been hurt by weaker oil prices.
The wealthy are especially vulnerable because of their large exposure to the local bond market. Private-bank clients bought about 44 per cent of Singapore-dollar bonds issued in 2014, the most of any investor group, MAS figures show.
By comparison, private banks and retail investors accounted for just 11 per cent of purchases of US dollar-denominated Asian credit in the same year, according to a Deutsche Asset Management presentation.
The revisions to the law proposed by the MAS might have helped another Singaporean bondholder, Sandeep Kapoor, who says he is facing losses after buying S$250,000 of Swiber bonds in 2014. The 50-year-old engineer said he only found out he was an accredited investor last month, some two years after the purchase, via his relationship manager at DBS Group Holdings Ltd.
Under the proposed revisions, he would have been given the chance to opt out of accredited investor status, rather than being automatically assigned to the category because of his wealth.
In an e-mailed reply to questions, DBS said: "Our relationship managers are focused on investor suitability and go through a robust process to ensure that our clients fully understand the product before making their investments."
The bank's accredited investor clients "are kept informed of their AI status at various stages, including at the time of account opening, account review, and after every trade conducted," DBS added.
Mr Kapoor said he would choose to opt out of his accredited investor status, given the chance.
"Who would understand the full consequence of being an accredited investor? It can be a grey area."