Why Bother with Consultation Papers?

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Responding to consultation papers can feel tedious.

In Singapore, the typical consultation papers circulated to stakeholders in the financial sector for their feedback are issued by either Singapore’s central bank, the Monetary Authority of Singapore (MAS), or Singapore Exchange Regulation (SGX RegCo).

And organizations and individuals do respond to them to further their own interests. Which is understandable. But our first instinct as investment professionals when asked to share our input with policymakers is often to ignore the request.

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Admittedly, I’ve been guilty of this myself. Nevertheless, I responded to a few of these papers and that prompted me to wonder: Why should anybody give their views and feedback on these lengthy not-so-easy-to-comprehend documents? Aren’t we sticking our necks out? Wouldn’t our time and resources be better deployed elsewhere? Wouldn’t we rather go bouldering or trail running, catch up on sleep, or simply do nothing?

The short and snappy answer, in my opinion, is an elevator pitch on policy advocacy inspired by CFA Institute.

By giving our feedback, we can stand up for and speak out on three core advocacy principles:

  1. “Policies and regulations that serve investor protection over commercial interests”
  2. “Research and commentary that seeks transparent corporate reporting and financial market fairness for all investors.”
  3. “Support and adoption of best practices, laws and regulatory standards which improve and expand investment industry professionalism.”

My thoughts on the above are as follows:

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“Investor Protection over Commercial Interests”

That investors supply funds is a point we tend to forget. These funds are generated mostly through hard-earned savings. If there are no funds to manage or to be aggregated to fund development projects or loans, then a central component of the financial sector will cease to function and the conduit between the fund suppliers and end users is effectively broken. And that means investors may not achieve such goals as retirement accumulation. That’s a rather important and crucial point for us in Singapore where one in four or five people will be over 65 in 2030.

Moreover, at the macro level, without thriving capital markets, economic growth will be slower. This has implications for our standards of living and efforts to lift people out of poverty, especially in developing countries. It also inhibits our efforts to transition to a low-carbon economy and prevent ecological catastrophe.

Therefore, all investors must be protected, especially the most vulnerable — less experienced retail investors. When these retail investors encounter well-funded companies staffed by professionals, a typical David and Goliath situation develops. The Goliath Adam Smith company is for profit: Commercial interests are paramount. And often those commercial interests come at the expense of the investors.

In this respect, investor protection should come before commercial interests because investors play the central role in channeling funds towards productive investments. Over the long term, protecting investors ensures the long-term development of the capital markets and our profession.

A case in point: Global stock exchanges want to attract and host the next big tech unicorn that may one day join the ranks of BAT — Badu, Alibaba, and Tencent — and FANG stocks. The big carrot they dangle? Dual-class shares. These give their holders an iron grip on the company through disproportionate voting rights even when they aren’t majority shareholders. There are good reasons for such structures. But there are also pitfalls.

SGX requested feedback through a consultation paper in early 2017. Our community carefully weighed the pros and cons of the proposal and decided to stand firm on “one-share, one-vote.” Why? Because we believe it is the most optimal market practice that best protects investors.

Another case in point: During one consultation paper process, a regulator contacted us as part of the clarification phase and told us we were probably the only organization that considered the retail investor’s interest in our response. Our immediate reaction was to pat ourselves on the back: “What a noble job we’re doing.” But our afterthought was far less sanguine: Why were we the only party concerned about retail investors? After all, they account for a not-insignificant portion of the funds in SGX-listed companies. Should they look into safeguarding their own interests? Perhaps this is an argument for embracing the Stewardship Principle in Singapore under which investors engage the investee companies in a more meaningful way and help protect and steer their own investments.

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“Transparent Corporate Reporting”

Most investors demand transparent corporate reporting. Fundamental analysis requires accurate, thorough, pertinent, and timely information to assess returns and risks. Which is why we should advocate for research, commentary, and policies that advance reporting transparency.

That means embracing policies that enhance disclosure requirements. Investors should have a better view into how listed companies arrive at their decisions, whether they apply to mergers, acquisitions, spinoffs, real estate, or whatever else. Data on valuation methodology and the assumptions underpinning the valuation, not to mention on the independence of the valuers and interested party transactions should be available as well.

Transparency improves corporate governance practices. Of course, environmental issues — the “E” in ESG — have come to the fore in Singapore after a rather warm 2019 and the realization that drastic measures may be required to protect our island nation from rising tides. Nevertheless, many of us in finance believe that the “G” governance, is just as, if not more, important. Indeed, governance issues may outweigh environmental and social issues when it comes to the impact on share prices, corporate bond yields / spreads, and sovereign debt yields.

Anecdotal evidence backs this up. Very often we hear complaints from hedge funds about the state of corporate governance in Asia. “It just doesn’t exist,” one analyst told us. “We’d rather invest in European companies, which have stronger governance. At least we know the company has sound practices and believable numbers.”

So whenever a consultation paper requests feedback on a transparency issue, our response should be an easy one: The more transparency the better.

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“And Financial Market Fairness for All Investors”

Why do we value fairness? Because we have all been treated unfairly at some point in our lives. And we all know how it feels. Fair and equitable treatment and the perception of it is essential to ensure market broad participation. That holds true whether the investor is high net worth or a young worker with a little surplus income from their first full-time stint in the labor force.

What are the consequences of an unfair financial market or one that is perceived as such? Well, mistrustful investor won’t invest as much if they don’t think they’re getting a fair shot compared to the more wealthy or connected. For example, private placements to family offices may be advantageous to the issuer, fund manager, and high net worth individuals — a win–win–win situation. For other retail investors, it may be a case of win–lose: They will question whether the issuer could have given them the right of first refusal. Perhaps the issuers could have. Or maybe they couldn’t because the funds had to be raised in a hurry. REITs, for example, do need to compete with family offices to bid for real estate acquisitions and time is of the essence when drawing the capital together. Private placements expedite the process. Raising funds from existing shareholders slows it down. REITs will prefer the former.

Regulators and listcos must balance out such competing objectives. An expedient move may be perceived poorly in some quarters, so it has to be managed carefully. If it isn’t, the perception of an unlevel playing field can take hold, and when it does, it can be a very difficult to change. And as a result, volumes may go south, along with valuations of listed stocks. And lower valuation will prompt listcos to delist, only to relist in another bourse. And then the yet-to-be-listed firms will take their IPO exercise to another exchange with higher liquidity. Which is not a scenario we want.

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Investment Industry Professionalism

This applies to those who staff the sector. And the people really do make the sector. Professionalism comes from competency in performing our duties. And competency comes from knowledge acquisition, application, and experience. Professionalism requires us to put clients’ interest first and thus demonstrate and live the fiduciary mindset. Why is this so important? Because professionalism creates trust in the profession and respect for professionals within the sector. And that is the foundation of the continued growth of the capital markets and the economy.

In the wake of the global financial crisis (GFC), trust in the financial sector was at an all-time low across the globe. Relationship managers and private bankers got an earful. The chorus grew louder with the Occupy Wall Street movement.

Naturally, lawmakers, regulators, and industry experts were worried. And with good reason. A broken and trust-deprived financial system means slower economic growth. Trust had to be regained. Laws, best practices, and regulatory standards — viable solutions — had to be put in place to shore up trust.

That trust-building process is ongoing. And investors, the public, and organizations must participate. And responding to consultation papers is one way we can help shape the views and policies of regulators. Not all perspectives will necessarily be integrated into the final regulations, but all segments of society should have their say.

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How Can You Contribute?

The short answer? Respond to consultation papers — either as an individual or an organization.

The long answer? Advocate for ethical markets in as many channels as possible. Yes, respond to consultation papers, but also speak up for ethics, trust, and professional standards. Support fair and transparent financial markets and practices. Protect the interests of investors. Be an advocate.

And effective advocacy today comes down to three core principles:

  • Financial markets must be both equitable and free. Every investor should have the opportunity to generate a fair return.
  • The most important market participant is the end investor. Their interests must come before those of all others.
  • Individual ethics and self-regulation are as critical to the fair and efficient operation of the markets as standards and regulations.

When we’re committed to professional ethics, it becomes much easier to understand the issues and the perspectives and communicate to regulators in a coherent and consistent manner.

So let’s all do our part and respond to consultation papers. It’s the least we can do to help build better capital markets and a better investment profession.

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All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.

Image credit: ©Getty Images / Akapong Osotsil / EyeEm

Chan Fook Leong, CFA

Chan Fook Leong, CFA, is the Executive Director, Advocacy, at CFA Society Singapore. He writes and researches on ethical issues, market integrity, financial literacy, and investor protection topics.



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