Under the new regulation that take effect from 1 January 2012, all investors in Singapore must take a simple test call the Customer Knowledge Assessment (CKA) before they invest in SIPs. For those who fail Customer Knowledge Assessment, they are not permitted to buy the product without advice (i.e. they cannot DIY).
Of interest to me is this: what exactly are the Specific Investment Products (SIPs)? Unit Trusts is definitely SIPs but how about others? The definition of SIPs is all investment products that are not part of the list in this Annex HERE.
For example, in the Annex, stock is listed as an excluded product. This means it is not an SIP. Investors who buy stocks from the SGX do not need to pass any test. Or consider part (e) of the Annex, a listed CIS that invests primarily in real estate is excluded. This means REITs from the SGX aren’t considered SIPs. Hence, there is no need to pass any test to buy REITs.
However, there is one sentence right at the bottom of the Annex that took me a long time to understand because it is worded in a negative sense: “but does not include any product specified in items (a) to (h) above that is listed for quotation or quoted only on a securities market or a futures market that is not operated by an approved exchange.” Today I finally understood what that means. For example, if the stock is not listed on an approved exchange (i.e. not on SGX), than the stock is considered an SIP. My understanding is consistent with a particular online brokerage which had taken a stand that stocks listed outside Singapore is considered as an SIP.
To put it in a nutshell, those who fail the Customer Knowledge Assessment cannot buy oversea stocks but they can continue to buy local stocks!
I hear of complain of people saying that they cannot buy unit trusts anymore. All is not lost. They can go through a financial adviser. The financial adviser is not permitted to sell the product under ‘no advice’ but instead need to document that the product sold is of reasonable basis. There is large numbers of financial advisers in Singapore that can give advice on unit trusts. So this is an immaterial problem.
How about derivatives like options? How to buy a derivatives (i.e. futures, options) when one has failed the CKA/CAR especially for newbies? Well, buying options from a financial adviser is not possible because I never heard of a financial adviser that is authorized to give advice to individuals on options (correct me if I am wrong). However, according to Annex 2 (2) of MAS SFA 04-N1, if one demonstrates sufficient understanding of the features and risks of derivatives through a learning module provided by an independent body, the investor is deemed to possess the knowledge to trade on the derivative provided it is LISTED. So we can say goodbye to those OTC options for newbie.
Unfortunately for ETFs it is quite tricky. ETF as a product is not available from the usual financial advisory firms. Firms that offer ETFs often target high networth investors only (accredited investors) who are all exempted from the CKA. Second, majority of the online brokerage does not offer any financial advice because their business model is one of DIY. So how to buy ETF if you fail CKA? ETFs should be considered as a listed SIP. But I cannot find a provision in the SFA 04-N1 that allows one to buy listed SIPs like ETFs without financial advice after attending a training module. I suspect this could be an oversight. For now, the only way is to go through a financial adviser which I mentioned is not feasible. I.e. there is no way which you can buy ETF if you fail CKA.
Now, how does one pass the CKA? It is very difficult to pass the CKA just based on education and working experience as the education and working experience are quite specific to finance. Most man-in-the-street would pass the CKA based on their historical transactions of having at least transacted six times for the past three years. So if you are an active trader, I guess passing the CKA is easy. But if you are a buy-and-hold type of person, you may not pass the CKA! For those who pass the CKA based on transactions, do not be too happy. You need to make sure you trade at least on average six times in the past 3 years because CKA is to be done every year. Of course, for those who past their CKA based on their academic qualification, they do not need to worry because a diploma or degree awarded is usually permanent.
Personally I find the entire exercise to be pretty messy and complicated. Is the client’s interest protected? I am unsure. But what I am very sure is that cost of doing this business has increased tremendously. No prize for guessing who is going to bear the increased cost.
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