Review of Convertible Bonds for Retail Investors
Prime Minister's OfficeSpeakers
Summary
This question concerns Assoc Prof Walter Theseira's inquiry on whether the Monetary Authority of Singapore (MAS) should review the sale of convertible bonds to retail investors due to their complexity. Senior Minister Tharman Shanmugaratnam replied that MAS requires safeguards like knowledge assessments and suitability advice for complex products to empower informed investment decisions. While standard convertible bonds are currently classified as non-complex, he noted that newer hybrid securities with unconventional features, such as trigger-based conversions, require a classification review. Consequently, MAS is currently evaluating these instruments and expects to issue a public consultation paper by the end of the year. This review aims to ensure that the regulatory treatment of such products remains appropriate in light of their evolving risks and features.
Transcript
18 Assoc Prof Walter Theseira asked the Prime Minister whether MAS will review if convertible bonds should be issued, marketed, sold or traded to retail investors in light of the complexity and risks associated with these hybrid securities.
Mr Tharman Shanmugaratnam (for the Prime Minister): In regulating the sale of investment products, Monetary Authority of Singapore's (MAS) objective is to empower investors to make informed investment decisions which are compatible with their investment objectives, risk appetite, and financial situation. Our approach has worked well so far, and is a common approach adopted by many advanced jurisdictions.
Hence, for complex investment products which the average retail investor may not understand, MAS requires financial institutions (FIs) to implement various safeguards, including:
First, assessing a customer's investment knowledge and experience before selling the product to the customer;
Second, explaining to the customer the general features and risks associated with investing in such products; or
Third, advising the customer on the suitability of the product.
Convertible bonds are currently classified as non-complex as the product is well-established in the market, and the terms and features can be understood by most retail investors. It is sold as a bond, and stays as a bond, unless the investor or the issuer decides to convert it to equity.
However, in recent years, issuers have introduced non-conventional convertible bonds with features that retail investors may not be familiar with. For example, certain bonds may not have a fixed maturity date or may be converted to equity upon the occurrence of certain trigger events which are beyond the investor's control. MAS is therefore reviewing the classification of these products and other hybrid securities. MAS expects to issue a public consultation paper by the end of the year.