5. Management of the Wealth Management Business
5.3 Analysis and Recommendations
國
立 政 治 大 學
‧
N a tio na
l C h engchi U ni ve rs it y
they will pretend to be customers and drop by at different banks that conduct wealth management business. Through the inspection they will justify if Sales has truly understands those investment product that they are promoting. If FSC identified any unqualified sales, FSC may issue “correction order” to the bank to criticize the internal control of the bank and the worst scenario of the administration punishment will be bank may not be granted new business license or for set up of new branch or license to open offshore branch.
5.3 Analysis and Recommendations
(1) Through the understanding of the nine dispute model classified by the BA on Leman Brothers and three civil court judgments and the investigations carried out by the Singapore Monetary Authority Supervisions on the two financial institutions regarding sales of Minibond and HN5 in Chapter 4, we are able to classify common structured note investment disputes by investors and at the same time we may identified that most of the cause of investment disputes may be attributable to Bank‟s failure to comply or perform its obligations in accordance to regulatory requirements when engaging or managing the related business activities.
As the trend to compete in wealth management Business market is still the priority choice to most of the Banks in Taiwan, I would considered that Bank may need to consider its business strategy by applying the SWOT analysis concepts. In brief, bank may by identifying its Strength, Weakness, Opportunities and Tread in its business activities to strengthen and boost up its wealth management business.
‧ 國
立 政 治 大 學
‧
N a tio na
l C h engchi U ni ve rs it y
From the experience of T Bank and C Bank in Chapter5, section 5.1.1 and 5.1.2, we may easily find that both Banks had coincidentally work on its weakness parts( e.g.
internal control parts) and make use of its strengths ( e.g. to make use of system available ) to improve the investment sales process.
The common weakness, deficiency on the investment sales process identified from the above case studies in Chapter 4 could be generally classified as below:
(i) KYC process was not carried out properly, sales failed to perform customer and product suitability check or errors found in the process, causing mis-selling as a result.
(ii) Sales had failed to explain the product, its governing terms and conditions and did not fully disclosure the risks associated with investment products.
(iii) Sales are not competent or did not possess sufficient professional knowledge, or are not properly trained to carry out business or to depend on the rewards to perform their sales duties.
(iv) Sales misconduct to carry out investment without customer‟s authorization.
(vi) Customer‟s did not understand products and look at the possible benefits only on such investment without understanding where risks may be.
‧ 國
立 政 治 大 學
‧
N a tio na
l C h engchi U ni ve rs it y
(vii) Customer may be illiterate or low education, high age, or have no investment experience and rely entirely on Bank sales to take care of their investment.
(vii) Customers misunderstand structured product investment similar to term deposit products.
(viii) Bank failed to control sales professional, training requirements.
(ix) Bank lack of internal control and monitoring mechanism on investment products due diligence check or in sales process (including untrue or unclear information in DM, sales marketing material or sales documentations etc.)
(x) Bank did not consider or is able to focus on customer protection issues.
(xi) Bank did not develop a reasonable rewards scheme on sales performance.
(xii) Bank did not set up proper or adequate after sales process monitoring, information providing scheme (e.g. no update of investment performance during the period of investment).
(2) One of the identified threats of wealth management business activities are no doubts on the structured note disputes issues. Some banks had suffered from the accusation of non-compliance to local regulations by the authorities and ban by the local authorities to conduct related Bank‟s business e.g. stoppage of trust business
‧ 國
立 政 治 大 學
‧
N a tio na
l C h engchi U ni ve rs it y
activities for a period of six month. Bank therefore should be alert of the authorities‟
possible sanction if customer disputes are not handled properly. Moreover, the effect on the weakness in the afore-said structured product transaction activities may result also in litigation risks, reputations risks and eventually on monetary loss of the Bank.
Apart of the above, the possible threats as we have indentified from the review of local regulations on governing sales of structured products are on the stringent restrictions on the types of structured product and tedious approval process imposed by local governmental bodies as compared to other countries.
Another threats concern may be lost of customer confidence to the Bank. As we saw from the Structured Note disputes in BA or court, many customers claimed that they relied on what RM had suggested. Hence, when loss occurred, these customers had all considered that RM had deceived them.
All of which as above-mentioned, if not resolved may be hindrance to the Bank in conducting its wealth management business.
(3) Based upon each identified weakness, we may work out possible solutions to improve, enhance or established possible mechanism to overcome these weaknesses.
By referencing the experience of T Bank and C Banks business strategies, we may sought out the strengths of a Bank by working on the following areas, i.e. the following may be recommended to bank that provide structured product investment to their customer under their wealth management business and trust business license scope:
(i) Enhancement and Implementation of Internal Monitoring and Control
‧ 國
立 政 治 大 學
‧
N a tio na
l C h engchi U ni ve rs it y
a) Product Suitability
Per local regulatory requirements, Bank is required to set up product review team to determine the risk level of the product, this is normally known as product due diligence check and Bank is required to at least classify its investment product to at least three categories. We would have queried here how we could standardize product that is of the same risk level to the same risk category by all Banks?
We suggest that the standardized basis may be set upon basing on the issuer, guarantor, tenor, complexity of structure, percentage of principal protection, place of issuance, secondary market and nature etc. factors of the structured product. Professionals, product manager of the structured product team from different Banks may gathered together to work out the standard for common types of structured products. Or such kind of categorization could be done by an independently third party (with professional knowledge). By doing so, I trust Bank could base on the product risk level to make recommendation or to introduce Structured Product, and customer could make their investment decision more easily and be better protected.
b) Customer Suitability
It is important to base on customer risks appetite to classify customer at different segment and therefore it would be important that the KYC is done in thorough and appropriately. In the case studies we have identified, KYC may not be done properly by the sales or even it is done how it could be done without error and
‧ 國
立 政 治 大 學
‧
N a tio na
l C h engchi U ni ve rs it y
customer is classified appropriately? We found that in the case studies, KYC was somehow not done by customer themselves or there was error in classifying customer risk tolerance level by the bank.
To overcome these deficiencies, I think clear and standard guidelines on the design of KYC questionnaire should be worked out in the first place. It is required by local regulations that Bank should take into consideration customer‟s age, income (financial status), investment experience, educational level, professional knowledge etc. criteria to work out their KYC Questionnaire, however there is no standard guidance on the ratios of these evaluation items and therefore the outcome of customer classifications may be variant in different Banks.( e.g. A customer may be classified as lowest tolerance level in B Bank and may be ranked as middle tolerance customer in C Bank). To adjust the possible gaps on the customer risk ranking justification, I think it is recommended also that standardized ratios on different evaluation items to be established, this could be also done by the authorities or independent third party of professionals from the BA. If customer‟s risks level could be unified, it will help also to reduce mis-selling cases.
In additional to the above, to prevent any manipulate of KYC questionnaire by the sales, customer should be requested to done the KYC by themselves and after completion of the KYC questionnaire, customer should be required to provide a written testimony that KYC was done in true all by themselves without any error and such testimony should be kept file for audit track. We may
‧ 國
立 政 治 大 學
‧
N a tio na
l C h engchi U ni ve rs it y
also request Bank to obtain evidence to support the KYC questionnaire in a reasonable basis.
To effectively control related sales process, Bank should equipped with system that link the customer KYC result to actual investment products transactions for their customers. In simple, by application of system control, Bank is able to ensure that product risks and customer risks shall be matched for any customer‟s investment transactions. System shall automatically reject any investment that customer risks tolerance do not match with product risks level.
c) Sales Qualification Control
It is relatively common that Bank may recruit staff with no sales experience.
These un-experience staff was then required by the Bank to pass the test and trainings within a short period of time. In many circumstance these staff had no actual sales experience or sufficient financial knowledge to provide customer‟s appropriate financial advice. To develop staff sales competency and experience, other than sufficient financial trainings, I would consider another possible way of helping junior sales in the Bank to play its roles in the wealth management business. This could be done by grouping a senior and junior staff to serve customer at the same time for a period of at least two years time before permitting these junior staff to perform financial advisory to the Bank‟s wealth management customer independently. These junior staff should undergo and passed the graduation examination test also before she or he could be qualified to play the role of Relationship Manager of the Bank.
‧ 國
立 政 治 大 學
‧
N a tio na
l C h engchi U ni ve rs it y
Apart from the above, based upon the case studies, e.g. from the investigation report done by MAS on some of the Banks, we may appreciate that RM of the Banks have been required to take trainings and examinations whenever new product is to be launched by the Bank in prior to sales of the specific product to customers, and from the accusation by customer to local court, we may found that there are sometimes mis-selling activities occurred and investment transaction may be done without actual authorization by the customer, we may realize from here that other than there is a need to actual control and monitor sales to fulfill the product training and test requirements, which I will suggest to make use of system controls( e.g. if sales did not pass specific product test, he or she may not be able to sell specific product as system may automatically reject sales inputs of such specific product transaction into the system), there is still a need to enhance staff moral attitudes at work.
Bank should consider providing educational program that emphasis also on moral, compliance to law and regulations etc. fields. Bank should highlight in their training program on the consequential result of willful misconduct or non-compliance, e.g. any sales activities that violate Civil Act or criminal offense may not only result on bank‟s internal punishment, but may be also sentenced to jail in the worst scenario case depending on the seriousness of the offense. By balancing the education program provided by Bank and emphasize the importance to comply with the Bank‟s code of conduct to its wealth management sales, I think it will help in a certain level of extent to assist their
‧ 國
立 政 治 大 學
‧
N a tio na
l C h engchi U ni ve rs it y
sales to have the right mindset on sale‟s role and at the same time, bank may also mitigate possible mis-selling or fraudulent sales activities in the future.
d) Sales Process Control Procedures
From time to times, as revealed in the case studies, customers complaint to BA or to the Court, arguments on clearness of the DM, explanation of product terms and conditions, lack of important or risks disclosures in transaction documentation, it is thus important how Bank could enhance and improve the relative sales process. With reference to the recent change of laws and regulations which we have elaborated in Chapter 5, Section 5.2, our governmental bodies have indeed imposed strict regulated sales process that required Bank to comply, these include also the format, required content in relative documentation which should be provided to the customer and terms and conditions, risks content that should be explained clause by clause or declared to the customer. And to evidence that Bank had act in accordance to regulatory requirements, tape recording for certain type of investment transaction would be necessary. Failure to comply may result in regulatory sanction, e.g. FSC may ban Bank wealth management business or reject the application of branch opening etc.
We would expect from the above that Bank if follow the regulatory requirements strictly would have adequate control in the sales process. Nevertheless, I would point out the possible issues after a deeper review of these processes, it would be how well Bank could implement these control process with quality? Most of the
‧ 國
立 政 治 大 學
‧
N a tio na
l C h engchi U ni ve rs it y
time, we see that the quality and professional control was focus on front end staff, i.e. the sales representative that face client, but we seldom have query if the supporting unit staff from risk control unit, operation unit or legal and compliance function that support the business, if their skills, professional knowledge or experience are adequate to support the business? Bear in mind that relative DM (marketing material), customer communications material, operational control step and transaction documentation may be prepared, reviewed and approved by the support unit staff, as such I would think that Bank should also conduct a review to justify if these supporting staff have been provided with same and adequate product knowledge and professional trainings opportunities.
Bank should have in place a control mechanism to ensure all related staff are provided with same training opportunities and qualification test control prior to carry out their operating or control tasks in the wealth management business.
These related control mechanism and implementation result must be reviewed and approved by highest management team of the Bank as appropriate and shall be checked by independent party in the Bank such as audit department or Supervisors of the Board.
I would consider that if the functions of relative control units (e.g. legal and compliance) that support the wealth management business could perform its functionality in its fullest extent, it will then be a quality assurance to the business and can mitigate possible customer criticism on relevant transaction
‧
document or information released to the customer.
(ii) Developed a customer centric (protection) culture
It may be important that Bank should developed the mindset of protecting customer‟s rights and benefits besides making profit from the wealth management business. After the financial crisis broke out in US, many countries have made an effort to work out new protection scheme to general investors. For instant in US, under Fed‟s planning, “Financial Consumer Protection Bureau”
was established in July 2009, and UK had also announced in June 2009 that they are planning to set up an independent “Customer Protection and Market Supervision Bureau”32 and in Singapore, MAS Fair Dealing Guideline was issued in April 2009 to all the financial institutions33. Singapore Government required financial institution to embed the fair dealing concept in their business activities. In specific they have encouraged financial institutes to include the fair dealing outcome as the key performance indicator for staff so as senior management and tie the fair dealing outcome with their remuneration scheme on staff and management to raise staff and management awareness and attention on the importance of Fair dealing outcome. And in Taiwan, the legislative Yuan of R.O.C. had passed the “Financial Consumer Protection Law” on 3 June 201134. According to the Law, FSC is required to set up a “Financial Consumer Dispute Handling Institutes” by end of this year, and details of the dispute settlement
32金融研究發展基金管理委員會 「金融海嘯後如何加強銀行銷售金融商品投資人與金融服務消費者保
護」座談會 前言 民國九十九年九月二十八日
33 MAS Monetary Authority of Singapore, February 2008 Consultation Paper, Proposed Guideline on Fair Dealing-Board and Senior Management For Delivering Fair Dealing Outcome To Consumer
34 行政院監督管理委員會銀行局 新聞稿 立法院三讀通過金融消費者保護法民國 100 年 6 月 3 日
‧ 國
立 政 治 大 學
‧
N a tio na
l C h engchi U ni ve rs it y
scheme shall be further work out and announced by the authorities to financial institutions.
From the above-mentioned, and from the Court Judgment on the Investment dispute cases, where Judge in the Court criticize Bank‟s failure to perform its obligation to act as a prudent trustee, we may appreciate the trend of customer protection eras has come to the focus of peoples mind. Subsequently, it will be then an important topic as how Bank could consider placing customer in their first priority and provides customer a secure and fair trading investment environment. As we noted also from the dispute models in the case studies, sales tend to mis-sell non suitable product to customers during their course of servicing their client, the reason behind such behaviour may be attributable to unreasonable Bank‟s reward scheme and policies in sales management. I would thus consider that Banks in Taiwan may reference what was done by Singapore, i.e. to incorporate the “Fair dealing” concepts into Bank‟s management in wealth management business.
Bank may first review their existing wealth management policies on staff management and based upon the concept, to set out appropriate and reasonable performance rating and remuneration scheme to the staff and also senior management. If “Fair Dealing” value could be accepted by Top management of the Bank and that “Fair Dealing” is accepted by the management to be the core of the business value and promoted by the management to their staff in a proactive manner (e.g. via mandatory training or to set the accomplished of fair
‧ 國
立 政 治 大 學
‧
N a tio na
l C h engchi U ni ve rs it y
dealing outcome as an key indicator of staff performance etc.), this would assist in the reduction of staff mis-selling cases. In additionally, Bank may need to work out also monitoring and control mechanism to review the result of the implementation of “fair dealing” performance.
(iii) Developed Product Structuring abilities
To take into consideration of the strengths of Bank conducting wealth management business, other than reputation (brand name), stable financial status
To take into consideration of the strengths of Bank conducting wealth management business, other than reputation (brand name), stable financial status