The Monetary Authority of Singapore (MAS), apparently sick of complaint e-mails, has taken drastic steps. In traditional Singaporean manner, there is now a test for newbie investors. Because, you know, we didn’t get enough of those in school. The new assessments determine if you’ve got the financial smarts to handle certain investments. They’re graded, we assume, by the Secondary school teachers you hated most. MoneySmart takes a look at the impact on n00b investors:
What are the New Assessments?
The new MAS Assessments come in two forms:
- A Customer Account Review (CAR)
- A Customer Knowledge Assessment (CKA)
Customer Account Review
The CAR qualifies you to open a trading account. And yes, you can’t buy and sell on the stock market without doing this test. If you already have a trading account (e.g. SGX), contact your broker. Or more than likely, his panicked voice is already on your phone.
Once you register, your qualifications will be considered. Meet the criteria and you get your account. Otherwise, you get taken to an e-learning portal. This is followed by a 20 question exam, of which the passing grade is 18 / 20. Topics covered are:
- Warrants and Options
- Exchange Traded Funds
- Exchange Traded Notes
- Callable Bull / Bear Contracts
In my experience, most new investors will need help. There’s a lot of financial jargon in there, so have a lexicon handy. It’s supposed to take an hour (yeah, right).
Customer Knowledge Assesment
A licensed intermediary will determine if you know enough to buy Specified Investment Products (SIPs). These products are new or “non-standard” investments, with more conditions than a geriatric in the ICU. “Old school” investments, such as simple share trading, are excluded. Ultimately, you’ll be informed by the seller whether or not your product falls under the SIP category.
It’s easy to check whether the intermediary is licensed; most financial advisors and existing stock brokers are.
Note that the CAR and CKA are conducted on a yearly basis, so try to keep up, eh?
The Impact on You
As an investor, the new assessments have important implications. These are:
- Removing excuses for bad investments
- Better preliminary security
- A lower range of investment options
- Lower trading limits (for the disqualified)
1. Removing Excuses for Bad Investments
During the Lehman Brothers Minibonds Saga, some 10,000 local investors lost all or most of their money.
Most of the affected people were the elderly, or the financially uneducated. They made their investment decisions based on advertising copy, which is about as clever as hating Canadians because you watch South Park. Still, the authorities shrugged and agreed that “okay, maybe you have a point. Those brochures do look awesome.”
With the new CAR and CKA, this excuse is deader than MC Hammer’s music career. If you pass the tests, make a lousy investment, and still want to sue…well your lawyer had better have mind control powers. You’ll have a hard time convincing the judge that, even after all those gruelling tests, you didn’t know better.
2. Better Preliminary Security
The operative word is “preliminary”. To be honest, the CAR and CKA are badly needed; I’ve met finance majors who still make imprudent decisions with SIPs.
Descriptions of financial products are heavily biased, and the phrases used are often misleading. Where caveats are included, these have been scrawled in Legalese, tucked to one side of a pamphlet. Most first time investors have no questions, because they don’t know what to ask anyway. But the tests promise to load them with the right queries; at the very least, it forces their financial advisor to break things down in detail.
3. A Lower Range of Investment Options
The general consensus is that, with the CKA in place, financial institutions will be inclined to offer simpler products. After all, if something doesn’t fall under the SIP, it’s easier to qualify and sell to the buyer.
This translates to a smaller range of investment options. Potentially bad for experienced investors, but of little significance if you’re
fresh meat new. Also, do remember: a wider range of investments doesn’t mean a wider range of good investments.
I suspect this might change after the first court case. If someone’s claims of being misled are discarded, then financial institutions will be twice as eager to sell SIPs. After all, they’d no longer be responsible for their customer’s bad choices.
4. Lower Trading Limits (For the Disqualified)
Under some circumstances, customers disqualified by the CKA may insist on going ahead. Since chronic idiocy isn’t actually a crime, they’re free to do so…with some securities in place.
Amongst stock traders, for example, it’s likely that the disqualified will face lower trading limits. Investors in other policies might be restricted in how much they can commit, based on the nature of the policy.
Overall, I’d say the new tests are well executed. The upside for investors is obvious, but financial institutions get a boost as well. The e-learning portal is a great introduction, which may attract new customers for them. In addition, they can breathe easier selling SIPs.
Have you taken the CAR or CKA? Comment and tell us what you think!