The most dangerous object in finance: your signature
Jake van der Kamp
If dividing by two is difficult, can dividing by three be any easier? This is a question the chief executive of the Securities and Futures Commission, Martin Wheatley, should ponder.
Wheatley is of the common view that separating investors into two categories, professional and retail, did little to stop the sharks of the financial markets from selling complicated derivative instruments to people who had no understanding of what they had bought and should not really have been sold these things.
He is absolutely right, of course. This division of investors has indeed failed. He has therefore come up with a brilliant solution to the problem - let's have more of the same. Instead of two categories, he now proposes that we have three - professional, sophisticated and retail. The idea is just as sure to fail. What, for instance, might be the distinction between a sophisticated and a professional investor? If we wish to be literal and say that the professional makes his or her living from investment, then we must include in the ranks of the professionals all those harridans of the private client fishbowls whom I tried to avoid when I was a stockbroker and who would buy anything if the sum of the stock code and the chairman's licence plate number was 888.
If we say, instead, that the test should be how frequently the investor deals, then once again we get all the residents of the fishbowl while excluding some very professional investors who only make a serious move in or out of the market once every few years.
So perhaps we can distinguish them by wealth - retail investors have a net worth of up to HK$10 million, sophisticated investors are to be worth between HK$10 million and HK$100 million, and professional investors must be worth more than HK$100 million. Adjust these parameters as you will.
But, then, how do we assess such wealth? Do we require an audited balance sheet from each individual seeking classification? Shall that be value on the basis of cost or of present market prices at current exchange rates? If we choose cost, and the professional investor wipes out in Japanese Reits, is he still a professional?
And if we do it on the basis of market value, and the professional is demoted to retail, do we allow him to demand his money back from his financial adviser because a retail investor should not be allowed to hold Japanese reits? Can we classify him as a professional for the purpose of investment in derivatives when his wealth is entirely in property?
Bring on the lawyers. With the sorts of disputes that these distinctions will introduce, that is one profession that will never be out of work.
Wheatley himself appears to favour the idea that professional investors prove they have deep investment knowledge. This will create a conundrum for him, however. On the one hand, it could produce a demand for many more regulators, and the SFC has never been averse to seeing its empire grow. Someone will have to test this deep investment knowledge. Guess who?
But, as very few regulators can claim to have deep investment knowledge (their knowledge lies in law), he may quickly find himself embarrassed. What is 'deep investment knowledge' anyway? I don't think I can yet define it.
Admittedly, it is only in recent years that we have seen hard selling of complicated derivatives to the general public on so wide a scale. But telling financial advisers that they must now be careful of what they sell to the general public or they will find themselves making up the loss will only induce them to offer the general public no advice at all. Thus, the more that retail investors are in need of help, the less they will get. The more options they need to raise their returns, the fewer will be offered.
We don't need three categories of investors - just one, who needs regular reminders that personal signatures are dangerous things. Read before you sign.
Jake van der Kamp is a former Post columnist