Private banks must disclose all 'conflicted remuneration'

THE recent wave of defaults in high-risk unrated bonds in Singapore has raised fresh scrutiny on how the bonds were sold.

Based on analyses by Bloomberg, bond issuers have taken to offering rebates of up to one per cent to private banks to sell their bonds, a form of remuneration that was apparently not disclosed to clients. It is estimated that 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 Holdings, PT Trikomsel Oki and Pacific Andes Resources Development. To be sure, in a "lower-for-longer" rate environment, bonds have been a relatively easy sell to clients hungry for yield. Unrated bonds, in particular, offer an attractive coupon well in excess of 5 per cent. This appetite has helped to drive bond issuance to new highs. In the past five years, the average annual issuance of Singapore dollar bonds rose to US$23.8 billion, compared with US$16 billion in the preceeding five years.

Banks earn a spread from the sale of fixed income securities, typically well under one per cent. The offer of a rebate, however, is likely to come on top of the spread and exacerbates conflicts of interest issues. These conflicts are further magnified should a bank's investment banking division also serve as the arranger and/or underwriter for the bond. There is currently no explicit requirement for distributors to disclose the "sales concessions" received, although the practice is said to be under review. Under the code of conduct for private banks, institutions are to broadly "manage any actual, perceived or potential conflict of interest, including appropriate disclosures to the client under certain circumstances, to minimise any potential adverse impact to the client". Banks are also to ensure that advisers have a "reasonable basis" to recommend a product. The code also already provides for disclosure on fees, charges and conflicts of interest.