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Friday, September 28, 2012

Beware unregulated get-rich-quick schemes

The Business Times

AN ECONOMIC and financial environment fraught with uncertainty surely makes a fertile ground for investment scams. Add to that all-time low interest rates and rising inflation, and you have restless investors who are easy prey for any number of unregulated investment schemes. Not all schemes, of course, are scams, although many skirt a fine line between the sale of a tangible product such as gold and over-promising returns that are unsubstantiated and ephemeral. Too many investors have come to grief lately, whether it is landbanking, property, wine, multi-level marketing, gold or even the ubiquitous weekend trading seminars that promise to turn your $1,000 into $1 million.

There are already a slew of regulations in place to protect unsophisticated investors. But the ambit of the framework covers only regulated products and advisory firms - and understandably so. Bona fide firms that market investment products will submit themselves and their products to the licensing and regulatory regime. Those that are unlicensed should be viewed with scepticism, and their business models should be even more intensely scrutinised. That is why the Monetary Authority of Singapore publishes its Investor Alert list, which today numbers nearly 150 entities. Even so, in the time that it takes to put an entity on the list, many investors would already have parted with their funds.

It is of course not possible to extend protection to all products and investors. Many persist in investing against their better judgement, and even in the knowledge that a company is on the Investor Alert list. Some, by the standard profile of investible assets and investment experience, may even be classified as sophisticated. Such investors can clearly fend for themselves. But more can be done for the less educated who are typically less wealthy. Greater outreach, for instance, by MoneySense, a national investor education programme, will go a long way towards arming retail investors with the necessary scepticism and confidence to ask tough questions. There should also be controls on advertising by unregulated schemes, with the appropriate disclaimers in large- enough print.

It is ironic that legitimate fund management companies have to comply with very strict restrictions on return forecasts, yet unregulated schemes including courses by trading coaches can claim gravity-defying returns. Most of all, prospective investors in such schemes should be made aware that they fall through the gap in terms of recourse to financial industry mediation schemes. In the event that an unregulated scheme is in default of promised payments or returns, investors' recourse is likely through the courts, which will surely be a costly exercise, if not also futile.

Ultimately, greed is an all-too-human flaw that investors wrestle with. Knowledge can help to temper it, along with a hard look at the consequences of loss.

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