TODAY:Don't bet on FIs To follow GE's lead

5 August 2009

THE decision by Great Eastern Life to return the entire premium paid, less annual payouts, to those who bought its GreatLink Choice policies was nothing short of a public relations coup. The “goodwill gesture” has brought relief to some 18,000 people who bought these investment-linked insurance products. This virtually no-strings-attached gesture could cost GE Life in the ball park of $250 million. Money well spent, I say.

I’m sure that many among the nearly 10,000 investors here, who bought $665 million worth of toxic structured products including the Lehman Brothers Minibonds and the DBS High Notes 5, are hoping the 10 financial institutions (FIs) here involved in selling — or should I say, mis-selling — these products, might take a leaf out of the GE Life public relations manual and do the same — compensate all of them fully.

Don’t bet on it. I would be glad to be proven wrong, but the writing on the wall warns of more disappointment — for three reasons.

Let me remind you what the Trade and Industry Minister Lim Hng Kiang told Parliament a fortnight ago about the investigation by the Monetary Authority of Singapore (MAS). He said the “investigation findings do not support an across-the-board general settlement for all investors, irrespective of their individual circumstances”. For those familiar with Monopoly, that is virtually a “get-out-of-jail card” for the FIs.

Mr Lim noted “the nature and extent of failings identified and their potential impact on the sales process and customers differed for each institution and for each customer”. And while not all would accept the case-by-case approach, he said “this way we serve the interests of all parties, and also serve the wider public interest of growing Singapore’s reputation as a credible and reliable international financial centre”.

There is little pressure on FIs to settle in full. After all, an investigation by their regulator does not support an across-the-board settlement. As of May 31, the FIs have paid out $107.7 million in full or partial settlements to some 3,900 of the nearly 10,000 structured product investors.

The second reason offered: It’s an “apples and oranges” type of comparison. Well, that’s what the FIs will tell you. The product sold by GE Life was an “investment-linked insurance product”, whereas the now toxic structured product was an “investment product”. The GreatLink Choice policies were investment-linked products with underlying investments in CDO (collateralised debt obligations) instruments. The products were designed with built-in loss protection levels and wide diversification across various industries and geographical regions.

For the general investing public, and particularly for those who have lost money, the “apples and oranges” comparison is not so much about the type of products they were sold but about how the institutions that sold them the products have responded. Both products were adversely hit by the financial meltdown. GE Life has opted to bite the bullet and pay up. The FIs appear to be doing their best to ante up as little as they can.

The third reason that has been suggested: The FIs and GE Life are “very different entities” and their governance is different.

Being an insurer, actuaries at GE Life must have done a cost-benefit analysis and decided that in the long run the benefits of the repayment exercise would extend well beyond their policyholders, to the average man in the street, and also go a long way in restoring trust and confidence in the company, one of the largest local insurers. And I must agree. It is not easy to put a dollar value to public trust and confidence.

So what sort of cost-benefit analysis did the FIs do? With claims lodged, and lawsuits looming, they are going to see management time wasted, legal dollars spent and reputational cost incurred. I guess this must all add up to less than the $500 million the 10 FIs have not refunded.