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Monday, October 20, 2008

Justice Bao Gong: What's the difference between Ah Longs and Banks?

(Source: Straits Times)
Very simple: Banks are clever while Ah Longs are at the short end of the intellect stick. Ah Longs hang PIG HEADS (Tiao Ter Tao) in debtor houses and get caught by police. Banks sell useless debt (Structured Products) but police cannot apprehend them. Why? Let us explain:

In today's forum, 2 concerned citizens have wrote in the Straits Times to suggest methods to prevent the same fiasco from occurring in future. But all these methods are already in place. With reference to our earlier post "MAS Speaks up- What investors need to beware", we have outlined how banks work behind the scenes and why they will never be wrong. We can only hope that they be ethical and assume responsibility rather than push the blame to the relationship managers (RMs).

Banks have already in place, compulsory compliance and audit training, risk disclosure forms for RMs to sign where they explicitly tell RMs that they have to disclose ALL the risks involved for every product that they sell to customers. As such, banks have already well protected themselves in case a debacle occurs, which it finally did, as in the Lehman Brothers case.

What banks have done was very clever: They need the revenue, but they want to thread on the safe end of the cliff, and thus, they create the above structures to protect themselves, while pushing the onus on the RMs to get the sales and take the blame. Imagine, using a reasonable man's point of view: If a RM is to tell the customer that he stand a chance to lose all his money should a reference entity faces a credit event; would the customer still want to buy the product? Definitely NO, so the onus is on the RM to subtly tell the risks involved while emphasising on the potential PROFIT of the product to influence the greed aspect of the customer such that the customer signs the product even though the RM has briefly mentioned about the risk (but only briefly & briskly) such that the customer did not heed the aspect of the risk but was actually thinking of the potential profits of the product. So when the tapes are replayed, it can be heard that the RM actually did mention about the risk, but the whole conversation was cleverly presented to emphasis on the emotional and the profit side of the product rather than the risk. That is why the suggestions given will not work. We do have a suggestion on a better way to protect the consumers, but the banks may not like it as it will hit their bottom line:

Currently, RMs' remuneration is pegged to the amount of revenue they make for the bank, which means the more 'high revenue' products they sell, the more they earn. What needs to be done is NOT to pay the RM according to the revenue they make, but rather peg the RMs' remuneration based on Customers' SATISFACTION and you can bet RMs will take much better care of their customers, as their income depends on the customers' satisfaction. As we speak, banks will HOWL with protest, as they know their bottom line will be hit. Well, it is for the public to judge: Do you want the banks to earn more? or do you want the bank staff to place priority for your financial well being? You be the judge.
Your humble servant

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