Beating The System

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“Forbidden fruit tastes sweetest”.

Many years ago when I heard this quote from St. Augustinein his “Confessions” (if my memory serves me right), I was reminded of the mangoes which we boys “picked” from the estate of a rich family. We did this at some risk because of the dogs which guarded the estate. How delicious those stolen mangoes tasted, and how assuaged our hunger was, but not the pangs of conscience!

We had to time how long the dogs would take from discovering us to the time they pounce on us. And we had to practice our shuttle run. At times, we had to place decoys or distracted the dogs in some ways. But there was always a way to beat the system.

If this cheeky streak remains kids’ play only, no harm done. But beating the system is becoming an adult preoccupation.

The daily papers throw up many stories of how people beat the system and how the law caught up with them. Some companies had resorted to having bogus employees on their payroll, in order to employ additional cheaper foreign workers, to beat the quota set by MOM.

Some employers pay their S Pass foreign employees less than $1,800 per month by requiring them to return a portion of their pay each month.

The grapevine abounds with stories of how certain Financial Advisers and financial adviser Representatives give incentives and cash rebates to induce prospects to purchase certain products. Since inducements are not permitted by the authorities, these cash rebates are given as “introducer fees” or “coffee money”. Where CPF investments are concerned, the cash rebates are actually certain percentages of the fees which are charged and should be returned to the CPF accounts, but since it is in cash form, it is easy to beat the system.

There is a thin line between the legitimate offering of rebates because of business reasons (for large sums, loyal customers, etc.) and using rebates as an inducement.

What is inducement anyway they ask? Who decides whether it is inducement? The fact is that if it is up to the prospect / client, then there will unlikely be anyone reporting it because it benefits him also.

But there are risks. In the case of inducements for investments, the risk is that insufficient attention is paid to the investment per se, and the prospect can end up losing more than what he gains in cash rebates.

In the case of insurance, where medical underwriting is required, offering inducements up front is often accompanied by the Representative filling in the medical questionnaire with answers that are favourable. The problem of misrepresentation or non-disclosure would only surface at the time of a claim. So when you encounter Representatives offering cash rebates at road-shows, be careful that you do not end up later with disallowed claims.

The question which will surely come to mind is what can be done to stop individuals and companies from beating the system?

The first thing to note is that given the financial “rewards” that forbidden fruit can bring, there will be many who will be tempted.

It has been observed that there are insurance broking companies which have been attracted to do Financial Advisory business, particularly investments, not by the legitimate way of distributing unit trusts, but by the money which can be brought in by “churning” of CPF investments using cash rebates as an inducement. The fact that there are “syndicates” willing to supply these firms with a steady stream of business makes it easy for them to be sucked in.

That there are licensed FA firms or groups within the firms which have succumbed to the temptation, is also circulating in the grapevine and presumably known to the authorities as well.

The second thing to note is that all these offenders presumably expect to be found out sooner or later. So why are they still continuing the offence? The answer is that they are prepared to terminate the “culprits” and if so be it, to stop their FA business. That was what happened to three companies in 2008, and the possible thinking of firms which have been doing the same thing but not found out yet, is that it is worth it.

It has been calculated that a firm which goes into heavy churning business can make millions in a few years before the law catches up with them. Anyway, if the shareholders and directors are of retirement age, they can go into a cash rich retirement.

The obvious deterrent to these firms or individuals beating the system is to be found out before they can make a pile, or for a heavy punitive punishment. There have been several suggestions of more effective deterrents:

  1. If the firm is responsible or accountable (e.g. because the malpractice is rampant and obvious), the license to do even general insurance should be cancelled. This is because ceasing the FA business is not a penalty at all.
  2. Fines under the Financial Advisers Act could be imposed on both the offending firms and the Representatives. This can be hefty.
  3. Quicker action could be taken so that other firms would not be tempted to join the bandwagon. In addition, it is important that the public be educated on the disadvantages of churning.

Beating the system must not be allowed to go on unchecked. It is good thatSt.   Augustinereached the place of repentance and confession for “beating the system” in his childhood.

While the temptation is always there to take advantage of other peoples’ follies and gullibility, it is important to keep to the straight and narrow road, and keep a clear conscience.

Forbidden fruit may taste sweetest, but it often leaves a bad stomach ache.