Editorial: BI needs to act quickly

Tue, 01/06/2009 11:12 AM  |  Opinion

Soon after newspapers reported in late September that retail investors who had bought Lehman Brothers principal-protected market-linked notes through Citibank Indonesia could lose millions of dollars (because of Lehman's bankruptcy), Bank Indonesia (BI) deputy governor Muliaman D. Hadad promised that the central bank would regulate banks' marketing of offshore investment products.

Two months later, another investment product "bomb" exploded, with preliminary investigations revealing investors could lose an even a more staggering figure -- this time up to Rp 1.4 trillion (US$124 million) -- from (failed) investment products issued by PT Antaboga Delta Sekuritas and marketed through Bank Century.

Again, late last month, Muliaman said Bank Indonesia would issue regulations to control banks in the sale of risky investment products, to protect investors from huge losses.

How many more victims must fall before the central bank really moves to rein in the marketing of foreign and domestic investment products?

Bank depositors will remain vulnerable to risky financial derivatives for as long as there is no strong oversight or guidelines on how banks sell such products of other financial institutions to their clients.

The Lehman notes offered by Citibank's Citigold relationship managers to clients turned out to be complex structured financial products suitable only for those well-versed in derivative products who were capable of analyzing risk-return trade-offs thoroughly.

Private banking services (wealth management) executives of major banks, in overzealous efforts to increase their sales bonus, have been known to overlook the risk profiles or the level of the financial literacy of clients. They often ignore that their clients are not experienced investors and they are treated as premier customers not because of their education or financial knowledge but because of the size of their accounts.

What is worse, as chartered finance analyst Lin Che Wei (who is also the founder of Independent Research & Advisory Indonesia) pointed out in this paper last week, "even bankers who sold structured financial products sometimes had limited knowledge and did not give proper explanations regarding the risks such products entail".

It is urgent and imperative for the central bank to issue strong directives on the marketing of investment products by banks, not least because of the current global financial turmoil. Increasingly, the major banks' private banking services departments have adopted aggressive tactics to sell investment products to big depositors, to generate more fee-based income.

However, if we are to draw on the important lessons of the Lehman and Antaboga debacles, strong marketing directives alone are not enough to protect bank depositors and consumers in general from risky financial derivatives, given the increasing complexity and variety of financial products available.

Bank Indonesia and the capital market watchdog, Bapepam, should strengthen mechanisms that review and certify risky investment products (issuing risk ratings) before making them publicly available.

We have institutions in charge of certifying the quality and safety of industrial products such as food, beverages, gas equipment, electronic goods etc. Likewise, we have Bapepam (irrespective of its shortcomings) in charge of reviewing domestic investment products before they are licensed for marketing.

It is ridiculous, however, that offshore investment products are not subject to similar Bapepam regulation. Worse still, the marketing of such products has yet to be regulated by the central bank. This means there has been virtually no oversight of the sales of foreign financial derivatives in Indonesia to date.

As the experiences of Bank Century and Citibank depositors show, in terms of security and potential loss, risky financial products are no less dangerous than, say, gas stoves. Risky investment products could wipe out the life savings of retail investors or cause them to lose their homes.

Bank Indonesia should also look into investors' complaints about what they claim are completely one-sided investment subscription contracts that they signed with banks.

Muliaman urged banks to be fully transparent in selling investment products, but such transparency can only be effective if financial products are assessed by the capital market watchdog before they become publicly available, so that all necessary information can be made available to potential investors.

Only through such a review process and under strong marketing guidelines would such information be useful in forewarning investors about what they are getting into.

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