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Redefining Capital/Principal Protected

>> Wednesday, September 9, 2009

THE term "capital or principal protected" will be banned in marketing materials and disclosure documents for unlisted investment products sold to retail investors.

Unlisted investment products include debentures and unit trusts which are not traded on an approved exchange, and life insurance policies.

In future there will be only two categories. One, which is more easily understood is 'capital guaranteed' - meaning the investor's principal sum is fully protected. Two, everything else is not capital guaranteed.

The Monetary Authority of Singapore (MAS) announced its decision as part of its response to feedback that it had received on a slew of changes proposed in the wake of the collapse of Lehman-linked structured products.

Some of the key changes include:

  • Requiring financial institutions to provide customers with simple, user-friendly 'product highlights sheets' and providing 'health warnings' on complex investments in appropriately large font.
  • Bank tellers should not sell investments.
  • There should be a seven-day 'cooling off' period during which an investor could change his mind and pull out of his investment.
  • Advertisements are required to give "a fair and balanced view" of the product, i.e. they must be easily understood by the audience, highlighting both the upsides and downsides of the investment and stating the risks prominently.
  • Distributors are to put in place formal policies and procedures to assess the nature of each new investment product and its suitability for targeted customer segments before distributing the product.

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