On the 21st July 2014, the Monetary Authority of Singapore published a consultation paper inviting public opinion to enhance the regulatory framework. The aim of this paper is to propose stronger measures to protect and safeguard investor interests. Three main issues were highlighted and they included 1. regulating investments in non-conventional investment products, 2. implementing a complexity risk rating for investment products and 3. extending to accredited investors the same set of safeguards available to all retail investors.
I believe it is a step in the right direction and I am all for this set of regulations.
Currently, many companies are structuring their products (including collective investment schemes in properties, landbanking and precious metal buyback schemes) to fall beyond the gambit of the MAS. By expanding the regulatory umbrella, MAS will be able to check and contain the dishonest amongst them and prevent investors from falling prey.
In addition, assigning a complexity ranking to investments will go a small way towards preventing inexperienced retail investors from investing in complex products way beyond their ability to comprehend. This is especially so if the providers are eventually prevented from hawking them to everybody due to a high complexity score.
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Yet on the other hand, I also realise that regulation is insufficient. Regulation itself is not a long term measure and excessive regulation has a downside.
Taleb and Fragility
In his 2012 book Antifragile: Things that Gain from Disorder, Nassim Taleb defines Antifragile systems as one that grows stronger and benefit when exposed to random, unexpected events. He used the example of the airline industry, whereby after every accident or incident, in-depth investigations are conducted, lessons are derived and improvements are made to prevent future occurences. In the process, the entire industry benefits and grows stronger.
In contrast. Fragile systems are ones in which random and unexpected events would bring about great harm. Fragile systems are ones whereby randomness and uncertainty are consciously and systematically being eradicated. In doing so, the system becomes weaker because it no longer has the ability to bounce back and adapt to future difficulties.
A good example would be a protective parent who creates an overly sterile environment for a kid. Little setbacks are part of the growing process and by preventing nature from taking its course, the ability to build resilience would become weakened and eventually lost.
Excessive regulation of the financial systems to protect retail investors would eventually cause Investor Fragility.
Investors, knowing at the back of their minds that their interests are being safeguarded to a huge extent by the authorities begin to let their guard down. The subconscious thinking becomes one in which if an investment opportunity is available it must be safe, because otherwise the government would never have allowed it. The environment becomes sterile.
The level of due diligence reduces and consequently the level of knowledge and investing ability goes down. When things turn bad and an investment does not go as planned, they are quick to assign blame to the authorities and bray for blood. They clamor for more protection, when in fact it is less they need. Investors will gradually lose the acumen and their abilities to make sound money decisions. They system becomes extremely fragile and a random and unexpected event would do great harm to the investing population.
Imagine the effect it would have on the investing abilities and financial literacies if this is to go on for an entire generation.
Education and Learning
Imagine the opposite. Instead of a top down approach where investors depend on regulations to protect them, they take it upon themselves to educate, be exposed and to learn.
Imagine a system where investors want to learn because they understand that financial markets are random and unexpected. They want to learn because they realise that they only way to prevail and be financially secure is to be responsible for their own money. Imagine a scenario whereby instead of taking the authorities to task for not regulating errant firms and prevent them from operating, investors instead chastise themselves for not learning enough and making the correct decision.
Furthermore, imagine a scenario whereby kids are exposed to the inexplicable relationship between risk and reward, where they learn basic financial literacy, about good personal finance habits, about the heuristics and biases that will prevent them from making good sound money decisions. Imagine them being given a chance to make and review their own financial decision from young, imagine the deep seated lessons that will stay with them for an entire lifetime.
And now, imagine the effect it would have on the investing abilities and money habits of the entire population if this is to go on for an entire generation. Would we then require more or less regulations from the authorities?
The Onus is on Us.
The authorities can only do so much for retail investors. The onus remains on us. Only we ourselves can make financial decisions that protect and work in our best interest.