INVESTMENT

Why bother with consultation papers?


Answering counseling can be tedious.

In Singapore, general consultations for the views of financial sector stakeholders are issued by the Central Bank of Singapore, the Monetary Authority of Singapore (MAS), or the Singapore Exchange Regulation (SGX Rego).

And organizations and individuals respond to them to further their own interests. Which is understandable. But our first engagement as an investment professional is often ignored when we are asked to share our input with policy makers.

Of course, I was guilty of it myself. Nevertheless, I answered a few of these papers and it prompted me to wonder: Why would anyone comment and respond to this long-easily-understood document? Aren’t we tied up? Wouldn’t our time and resources be put to good use elsewhere? Wouldn’t we rather go bouldering or trail walking, catching up in our sleep, or just do nothing?

The short and sharp answer, in my opinion, is a lift pitch of policy advocacy inspired by the CFA Institute.

By giving our opinion, we can stand up and speak for the three main advocacy principles:

  1. “Policies and regulations that protect investors from commercial interests”
  2. “Research and commentary that seeks transparent corporate reporting and financial market fairness for all investors.”
  3. “Supporting and adopting best practices, laws and regulatory standards that enhance and expand the professionalism of the investment industry.”

My thoughts on the above are as follows:

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“InsideWester protection on commercial interests “

Investors fundraising is something we forget. These funds are mostly generated through hard-earned savings. If there are no funds to manage or consolidate development projects or loans, a central component of the financial sector will stop working and the connection between the fund provider and the end users will be effectively severed. And that means investors can’t achieve goals like retiring. This is an important and crucial point for us in Singapore where by 2030 one in four or five people will be over the age of 65.

Moreover, at the macro level, if the capital market is not prosperous, economic growth will slow down. It affects our quality of life and our efforts to lift people out of poverty, especially in developing countries. It also hinders our efforts to transform into a low-carbon economy and prevent environmental catastrophe.

Therefore, all investors need to be protected, especially the weakest – less experienced retail investors. When these retail investors face well-funded companies run by professionals, a typical David and Goliath situation develops. Goliath Adam Smith Company Profits: Commercial Interest Foremost. And often those commercial interests come at the expense of investors.

In this case, the protection of investors should come before commercial interests because investors play a central role in the channel of funds for productive investments. In the long run, investor protection ensures the long-term development of the capital market and our profession.

An example: The Global Stock Exchange wants to attract and host the next big tech unicorn that could one day join the ranks of Bat-Badu, Alibaba and Tencent-and Fang Stock. They hang big carrots? Dual class shares. These give an iron grip on the company through unequal voting rights even though their shareholders do not have a majority shareholder. There are good reasons for such a structure. But there are also problems.

SGX201 sought feedback through a consultation in early 2017. Our community carefully looked at the pros and cons of the proposal and decided to stick to “one share, one vote”. Why? Because we believe it is the most favorable market practice that gives investors the best protection.

Another issue: During the consultation paper process, a regulator contacted us as part of the clarification episode and told us that we were probably the only company that considered the interest of retail investors in our response. Our immediate response was to lean on our backs: “What a great job we are doing.” But our next thought was much less: why were we the only group concerned with retail investors? After all, they account for a negligible portion of the funds in SGX-listed companies. Should they focus on protecting their own interests? Perhaps this is an argument for adopting a stewardship policy in Singapore under which investors engage investing companies in more meaningful ways and help secure and manage their own investments.

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“Transparent Corporate Reporting”

Most investors demand transparent corporate reporting. Basic analysis requires accurate, thorough, relevant and timely information to assess income and risk. That is why we should be advocates for research, commentary and policy that advance the transparency of the report.

This means adopting policies that increase the need for disclosure. How listed companies come to their decisions, investors should have a better view of them, whether they apply to mergers, acquisitions, spinoffs, real estate, or anything else. Assumptions based on the method of valuation and valuation, without mentioning the independence of the valuers and the transaction information of the interested party should also be available.

Transparency improves corporate governance. Of course, the environmental problem – the “E” in the ESG – is after a warm 2019 in Singapore and the realization that drastic measures may be needed to protect our island country from rising tides. Even so, owning one is still beyond the reach of the average person. In fact, governance issues can outweigh environmental and social issues when they affect share price, corporate bond yields, and sovereign debt yields.

Evidence supports this. We often hear complaints from hedge funds about the state of corporate governance in Asia. “It just doesn’t exist,” one analyst told us. “We would rather invest in European companies that have strong regimes. At least we know the company has sound practice and credible numbers. ”

So whenever a consultation requests an opinion on transparency, our response should be a simple one: the more transparency the better.

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“And financial market fairness for all investors”

Why do we value justice? Because at some point in our lives we have all been treated unfairly. And we all know what it feels like. Fair and equitable treatment and its realization is essential to ensure wide market participation. It is true whether the investor has a high net worth or a young worker who is entitled to a little surplus income from their first full-time career in the workforce.

What are the consequences of an unfair financial market or what is perceived as such? Well, unscrupulous investors won’t invest as much if they don’t think they’re getting a fair shot than being richer or connected. For example, a private placement in a family office can be convenient for the issuer, fund manager, and high-value person – a win-win situation. For other retail investors, this could be a win-lose situation: they will question whether the issuer could grant them the right of first refusal. Probably issuers may have. Or maybe they couldn’t because the funds had to be rushed. REITs, for example, have to compete with family offices to bid for real estate acquisitions, and time to draw capital together is key. Accelerates the private placement process. Fundraising from existing shareholders slows it down. REITs will prefer the former.

Regulators and listings must strike a balance between such competitive objectives. A convenient move may feel bad in some parts, so it needs to be handled with care. If it doesn’t, the idea of ​​a flat playground can take over and when it does, it can be very difficult to change. And as a result, the volume may go south, including the valuation of listed stocks. And the low valuation list will prompt the lists to delist, relying only on one other share. And then the listed companies will take their IPO exercise to another exchange with higher liquidity. Which is not a scene we want.

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Investment industry Professionalism

This applies to those sector employees. And people really make this sector. Professionalism comes from our ability to perform our duties. And skills come from knowledge acquisition, application and experience. For professionalism we have to put the interest of our clients first and thus show a loyal mindset and live life. Why is it so important? Because professionalism builds confidence in the profession and builds respect for professionals in the sector. And this is the basis of the continued growth of the capital market and the economy.

In the context of the Global Financial Crisis (GFC), confidence in the financial sector around the world was at an all-time low. Relationship managers and private bankers get ears. The chorus grew louder with the Occupy movement on Wall Street.

Naturally, lawmakers, regulators and industry experts were concerned. And for good reason. A broken and faith-deprived financial system slows economic growth. Faith had to be regained. Laws, best practices and regulatory standards – effective solutions – had to be established to build confidence.

The process of building that trust is underway. And investors, the public and companies must participate. And answering consultations is a way to help regulators formulate approaches and policies. Not all perspectives will necessarily be integrated with the final regulations, but all sections of society should have their say.

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How can you contribute?

Short answer? Answer the advice – either as an individual or as an organization.

Long answer? Advocates for ethical markets on as many channels as possible. Yes, answer the advice, but also talk about ethics, beliefs and professional standards. Support fair and transparent financial markets and practices. Protect the interests of investors. Be a lawyer.

And effective advocacy today relies on three key principles:

  • The financial markets must be fair and free. Every investor should have the opportunity to make a fair return.
  • The most important market participant is the last investor. Their interests must come before the interests of everyone else.
  • Individual regulations and self-regulation are just as important as standards and regulations for fair and efficient management of the market.

When we are committed to professional ethics, it becomes much easier to understand problems and perspectives and to communicate with regulators in a coherent and consistent manner.

So let’s all do our part and respond to the advice letter. We can at least do this to help create a good capital market and a good investment profession.

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All posts are the author’s opinion. As such, they should not be construed as investment advice, or the opinions expressed must not reflect the views of the CFA Institute or the author’s employer.

Photo Credit: © Getty Images / Akapong Osotsil / IEM

Chan Fook Leong, CFA

Chan Fook Leong, CFA, Executive Director of CFA Society Singapore, Advocacy. He writes and researches on ethics, market integrity, financial literacy, and investor protection.



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