Monetary Auth of Singapore Investing on leverage
GLOBAL FINANCIAL CRISIS
Sometimes during 2009, a retired couple approached me. They had invested $200,000 with a local bank and had lost $100,000 during the Global Financial Crisis.

I learned that they were long time customers of that bank and had been advised by the bank's relationship management to invest in dual currency investment.

The bank offered them a loan of 4 times of their invested sum. They were able to invest in dual currency investment for $1 million.  This comprised their capital of $200,000 plus $800,000 in borrowed money.

Due to the crisis, the reference currency (which could be Australian dollars) dropped by 10% within a few days. Their relationship manager telephoned them to top up their accounts. As they had no money to top up, the bank had to close the positions. They suffered a loss of $100,000 (10% on $1 million).

This was the first time that I learned that a bank was encouraging the customer to borrow money to invest. They were targeting retirees with money to invest. These retirees were not aware of the risk that they were taking.

BORROW TO INVEST
In subsequent years, I have been approached by consumers who were offered similar loans from banks for investments. The consumers were told that the interest rate was low and they could make money on the difference in yield, i.e. earn a higher yield on their investment and after paying off the interest on their loan, they could make a net gain.

They could be advised to buy in many kinds of investments, and not only in dual currency investments.

These investors were not aware that the interest rate on the loan could increase sharply during a crisis and they would be asked to top up their accounts at a time when their investments had dropped sharply in value.

RECENT CASE
In a recent case (see here) a retiree carried a big placard to protest that his wife had been advised by a local bank (the same bank that was involved with the retirees in 2009) to invest $250,000 and she had only $11,200 left. She had lost 95% of her investment.

The case looks similar to the 2009 case. I guessed that she must have invested with leverage. She had probably invested in dual currency deposits or in a "safe bond" that had dropped sharply in value.

MAS
I suggest that MAS should look into the current practice.

a) MAS requires banks to get customers to sign certain statements that they are aware of the risk of the financial transactions that they are making
b) Often, these statements are signed by customers who are not aware of what they are signing.
c) In some cases, the bank officers asked the customer to sign the blank forms and the details are filled up later.

I suggest that MAS should require the customer to be advised by an independent financial adviser, who is not the same person who is involved in making the sale. Preferably, the independent adviser should come from a panel that is managed by MAS.

Tan Kin Lian


 

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