SINGAPORE – An investor keen to earn a bit more interest ended up losing all her $200,000 savings after she was swayed into buying a complicated financial product she did not understand.

The woman, a 58-year-old customer service employee earning $3,000 a month, wanted to put the inheritance from her late husband into a fixed deposit but was convinced by a bank sales representative to consider “other products that could give a better interest rate”.

The customer – we will call her Madam Goh – had secondary-level education, and could read and understand Chinese, as she was from the Chinese language stream. She was given documents in Chinese to read and sign but she did not check them and chose to believe everything the bank employee told her.

It was not disclosed what returns she would get, but she invested the entire $200,000 without understanding what she was buying. To make matters worse, she did not even read bank statements sent to her over the next five or so years.

She had the shock of her life when she tried to withdraw her money – the account was empty as losses had erased all her savings.

Cases involving bank customers who are sold unsuitable products are not rare, but such cautionary tales seem to escape many people who continue to invest without checking the terms and conditions.

It is hard to cry foul if you choose not to read before you sign, or worse, simply throw away important bank statements without even reading them.

While the Monetary Authority of Singapore has mandated that financial institutions follow fair dealing guidelines, such as not promoting unsolicited investment options to fixed-deposit customers, it is still up to everyone to check and understand what product is being sold.

Madam Goh would not have fallen into a high-risk investment trap if she had just stuck to her original plan of opening a fixed-deposit account and not put the entire $200,000 at risk just to possibly earn a few thousand dollars more.

Fortunately, she made the right move in bringing her case to the Financial Industry Disputes Resolution Centre (Fidrec), which helped her claw back some of her money.

Total loss in high-risk structured note​s

Such financial products are normally sold to companies and savvy investors who want to maximise their returns by betting on a combination of bonds and high-risk equities.

While some structured notes have components that can guarantee part of the invested sums, Madam Goh was apparently sold one that tied all her money to the fate of four stocks.

To make matters worse, she did not understand the complex workings of the product, and was served the raw deal of losing all her money just because the worst-performing stock fell below the final valuation price.

Shocked that all her money was gone, she asked the bank for compensation but her request was denied because she had signed all the documents, including one stating that she understood the product and acknowledged the risks involved.

A translator helped her to present her case during an adjudication session at Fidrec as she was not fluent in English.

The adjudicator noted that the evidence showed that Madam Goh had bought an unsuitable product. But she had to bear the bulk of the blame because she still chose to invest despite not understanding what she was buying.

Moreover, she did not read any of the bank documents that were in Chinese during the purchase process and threw away all statements unread that had been sent to her.

But Fidrec found that the bank was also at fault for peddling a product that was clearly not suitable for customers like her. After all, no one would want to purchase such high-risk products when they do not draw equally high incomes.

It was also clear that Madam Goh did not understand the risk that came with structured notes. This led the adjudicator to warn bank employees that the process of form filling and signing should not be “a check-box exercise”. As a result, the bank was told to bear 40 per cent of the losses, or about $80,000.

The case could have had a better outcome for Madam Goh if she had sought help earlier, after noticing the discrepancy in her savings as soon as she read the statements sent to her. In some previous cases, Fidrec had ordered full refunds for similar customers who filed complaints early, as this helped to minimise their products’ losses.

Projected profits are not real profits​

Many investors are likely to be turned off if they are shown the estimated amount of losses they would suffer in a downturn, so most vendors prefer to show the projected profits instead. But you should always take such numbers with a huge pinch of salt.

In another case, a customer bought a 15-year endowment policy through a bank as part of his retirement planning. The policy required him to pay an annual premium of $5,000 for five years.

During the purchase, he was shown a “benefit illustration” outlining that he would receive a guaranteed maturity amount of $20,000 plus a non-guaranteed portion.

It was stated that this variable component could be $10,000 if the investment return was 3.5 per cent, or $20,000 if it was 5 per cent.

But when the policy matured, the customer received only $28,000 – just $3,000 more than he had invested – over a 15-year period.

He kicked up a fuss because the amount was less than even the lower projection of $30,000. The insurer told him that while the fund achieved an average return of 3.55 per cent, higher claims had affected its performance.

The customer did not buy this explanation and took his case to Fidrec, basing his claim on the benefit illustration even though the numbers were merely projections.

His case was dismissed because the adjudicator found that the benefit illustration stated clearly that the document was meant to show examples of projected returns only. The customer also acknowledged this when he signed on it.

As the customer bought the policy from the bank and not the insurer directly, the adjudicator noted that he should have claimed against the bank if there was an allegation of sales misconduct.

The lesson from these two cases is that there is no such thing as a lucrative and risk-free investment, so it is essential to study the terms and conditions carefully before signing anything.

For instance, most insurance products come with policy illustrations that are meant to show the benefits and costs, but such numbers are not part of the actual contract, so any projected profit is not part of the deal, no matter how lucrative it seems.

What you should check in the contract are the guaranteed values, because all non-guaranteed ones may not be paid, as these are subject to the insurer’s discretion.

If you suffer losses, you can seek compensation only if you can show wrongdoing, such as the sales representative providing false information to mislead you into buying something that was not what you wanted.

Finally, always think twice before changing decisions when it comes to money. Just like you are unlikely to buy a car suddenly when you go shopping, you should not be adventurous with investments if you are going to the bank to place fixed deposits.

https://www.straitstimes.com/business/invest/how-a-woman-lost-200k-after-investing-in-complex-financial-product