Bent Towards Malpractice
Whether you subscribe to the basic Christian belief that all humans are sinners and have the sin nature which predisposes them to sin, or not, it is easy to see that malpractices are more prevalent than best practices.
The most common cause of malpractice is self-interest over the interest of others i.e. selfishness.
It was said of Timothy, one of the Christians named in the Bible, that he took a “genuine interest” in the welfare of others. This was contrasted with the common behaviour of others who “look out for their own interests”. (Philippians 2:20-21)
There are other causes of malpractice and greed ranks high on the list. But well-intentioned people can also slip due to laziness and complacency Afterall, it takes time and effort and money to look after other people’s interest.
After discussing the bright side of best practices, it is necessary to now look at the dark side of malpractices.
There are many malpractices even in our fairly regulated environment.
My knowledge of what have gone on and may still be going on is gathered from advisers who are in the know and from feedback gathered from others. This is for clients to be wary of the motives and methods of the crooks in the industry.
That there have been malpractices and will continue to be, is to be expected as there will be some people who will fall into temptation. “The love of money is a root of all evil” and many who are driven by greed or the need to provide for their families or repay loans, will be tempted to make money by all and any means.
Some people take short cuts and cut corners to do business faster, which may compromise standards.
I will highlight only the more prevalent and serious malpractices.
On top of the list, CPF Investment Scheme churning.
Clients are induced by Representatives to use their CPF funds to invest in unit trusts and are given cash rebates. Client’s money are churned frequently and they get the cash rebates but often suffer a rapid depletion of their CPF funds because of the fees paid out and often losses in investment.
Clients may or may not be aware that under CPF rules, any cash received is to be returned to CPF.
This practice is also in breach of the FAA because cash rebates are not permissible if they are an inducement for the client to make the purchase. Often, in the desire to get more money from this malpractice, Representatives resort to getting the clients to sign blank redemption and purchase forms so that they can “trade” using the client’s money.
This has led to “syndicates” headed by people outside the industry with many runners to look for clients and these transaction forms are then channeled to Representatives of companies either set up to do churning, or infiltrated and infested by churners.
Churning of a client’s money can be easily detected if it is done by the same Representative in a firm, or even between a few Representatives in the same firm.
To avoid detection, the syndicates resort to moving their deals from firm to firm so that each firm has only one buy trade and sell trade for a particular client. This way, the practice gets under the radar of each firm.
The number of Representatives involved in taking this form of business from the syndicates is also reportedly large and they can be commissioned Representatives or employees of the firms.
When these Representatives sign on the Know Your Client forms without knowing who the clients are, they are breaching the FAA.
Some Representatives or the syndicate and their runners may resort to forging the signatures of clients on the forms to authorize sale and purchase of the investment.
Clients with financial problems and who need cash urgently will be tempted to get cash from their CPF through the churning route. Reportedly, some loan sharks have also joined the bandwagon to lend money and forcing the borrowers to pay back using the churning route.
The change of CPF ruling to tie up the first $20,000 in both the Ordinary Account and the Special Account will go some way to protect the CPF money of those who may otherwise be tempted to siphon out their CPF money. But there will be CPF account holders with bigger sums who may still be tempted to do trades on their money to siphon out their CPF money.
Representatives who are tempted to join the bandwagon should remember that they are liable for giving reasonable advice for each trade. Even if the investor does not complain, if the malpractice surfaces through MAS inspection, the Representative and the firm can be fined for missselling and wrong advice, besides other disciplinary action and even cancellation of license.
Firms who have benefitted financially from the churning trade must remember that the money has come from people who have little funds and would have a bleak future especially when their CPF retirement funds are depleted.
When syndicate groups are involved, these firms must realize that they are party to a crime of unauthorized and unlicensed people carrying on business. If unauthorized loan companies are involved, these firms are wittingly or unwittingly encouraging their business.
There is also the loss of reputation.
The name of the firms allowing or actively involved in churning are known to many and good reputations have been tarnished.
There is a saying that “evil will out” and it is a matter of time that the law will catch up with the lawbreakers.
Closing of a business may be a big financial blow, but it is the loss of reputation and self-respect which will be far greater.