Why banks should not push older fixed-deposit customers to invest
https://www.straitstimes.com/business/invest/why-banks-should-not-push-older-fixed-deposit-customers-to-invest
2024-07-21
Tan Ooi Boon
Invest Editor
The Straits Times
The days when vulnerable customers were at the mercy of bank employees pushing unsuitable products are hopefully behind us in the light of clearer guidelines for the sector.
These forbid bank staff from promoting investment products after inviting older and less sophisticated bank customers, many with a poor command of English, to visit the bank to renew fixed deposits.
Such a practice goes against the enhanced fair dealing guidelines for financial institutions here that are aimed at uplifting customer confidence and safeguarding their interests.
Unless customers specifically ask for investment options, the Monetary Authority of Singapore (MAS) expects banks to not actively promote other products to customers visiting a branch to renew fixed deposits.
Bank employees should think twice about offering loans tied to investment products to retirees, freelancers and gig workers because such customers may not be able to meet repayments if proceeds from the product are less than expected.
“Where the investment product or loan is subsequently found to be unsuitable, the financial institution should take appropriate rectification steps, which may include reversing the transaction and refunding the customer,” said an MAS spokesperson.
Even if they are willing to sign up for the loans, they should be told about the worst-case scenarios that could result in losses, as well as ways to cash out of the investment.
It is timely for the MAS to promote its newly enhanced fair dealing guidelines by using examples of common transactions because they mirror some of the actual complaints lodged at the Financial Industry Disputes Resolution Centre (Fidrec) in recent years.
There have been 77 cases over the past two years involving older customers complaining about investment products they bought. While most of the cases were either resolved amicably or dismissed, five customers got their money back because they were sold unsuitable products.
One involved a 63-year-old man who went to a bank to renew his $100,000 fixed deposit but was duped into buying a $180,000 insurance product that required him to take up an $80,000 loan even though he had no way of paying it off.
The bank employee claimed that the product would provide stable income and that the man did not have to worry about the loan as the investment’s returns would offset it. It took a year for the man to realise that he had been taken for a ride: He had not received any income and had to fork out a significant sum in interest on the loan.
Fortunately, he knew how to take his case to Fidrec, which ruled in his favour and ordered the bank to compensate him for the mis-selling.
Here are seven other common practices and what financial institutions should do to deal with their customers fairly.
Products that are capital-guaranteed
A customer told a sales representative that she was keen to buy a low-risk investment product that would preserve her capital. The employee recommended an investment-linked policy that was payable with a lump-sum premium.
The customer learnt later that the product was not in line with her intent to preserve capital – the representative did not tell her that she could lose a portion of or the entire investment sum.
What MAS expects: Financial institutions and their representatives should recommend only suitable products to customers. Vendors must highlight all relevant features and key risks to customers so that they can make informed decisions to buy or back out.
Investment changes
A representative advised a customer to switch his investment funds within a short period to lock in a gain. Although the customer was entitled to a free switch to another fund by the same provider, the representative told him to switch to another product from a different fund house.
This would allow the representative to earn extra commission at the expense of the customer.
What MAS expects: To curb improper switching, a financial institution should have proper procedures to monitor such practices. If an improper switch is detected, the company should take action against the errant representative and compensate the customer.
‘High commission’ products
A customer wanted to grow his cash savings but the bank representative was only keen to meet his target of selling a new investment product that was being promoted by his financial institution. So he convinced the customer to buy this product, which had a higher sales commission, and did not offer other similar products for consideration.
What MAS expects: Representatives should not skew their recommendations to investment products that would earn a higher fee or commission.
Advertisements for products
A financial institution advertised a structured deposit that highlighted the “maximum potential percentage return” in its headline. But other important information, such as the annual interest percentage payout and tenure, was placed only at the bottom of the ad and in much smaller text.
The highlighted yield for the product turned out to be the cumulation of annual interest over the total multi-year tenure, while the headline could have given the wrong impression that customers would get such returns annually.
What MAS expects: Financial institutions should not present information in a manner that may mislead or confuse customers. They should present potential returns in a form that is commonly understood and accompanied by disclosure of the potential risks that come with such investments.
‘Zero’ commission
A financial institution claimed to charge zero commission when advertising a product or service but did not prominently disclose the existence of other fees and charges. This gave customers the wrong impression that there were no levies for the product or service.
What MAS expects: Financial institutions must ensure that all advertisements for products and services should be clear, fair, balanced and not misleading. Ads should not give customers the impression that a service is completely free when there are other fees and charges involved.
All immediate and subsequent charges should be clearly disclosed and such messages should also be approved by senior management.
Products with bonus interest
A customer was sold a product that had a long premium payment term after he was told that this would enable the savings in a special bank account to earn much higher interest. But the representative did not inform him that the higher bonus interest on his savings account would last for only 12 months.
As a result, the customer felt he was sold an unsuitable product, as it meant that he would have to pay premiums for a longer duration than the period of bonus interest.
What MAS expects: When making recommendations on products, a financial institution should ensure that its representatives highlight all key and relevant features.
Health insurance
While signing the agreement for a plan to cover hospitalisation costs, the representative did not ask about the customer’s existing medical conditions or go through the health declaration questions.
A few months later, the customer suffered a stroke. His claims for the associated medical expenses were rejected because he did not disclose that he had hypertension at the point of application.
What MAS expects: The principle of utmost good faith applies to insurance contracts, and the onus is on customers to disclose all material facts at the point of application. Failure to do so could result in claims being rejected or policies being voided.
Due to such serious repercussions, insurers and their representatives have to remind customers to disclose material facts and highlight the consequences of not making a full disclosure.
While the fair dealing guidelines would go a long way towards shielding you from bad practices, nothing beats taking your own precautions and ensuring that you buy only products suitable for your needs. You should not be tempted by high returns as this merely means that the products come with equally high risks too.
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