SIDREC 2022 Report: Investment Risk in Malaysia Highlighted by Surge in Market Conduct-Related Disputes

Eligible Disputes by Nature of Claim

In 2022, of the 72 eligible disputes received by SIDREC, 40 or 56% of total disputes received centred on market conduct issues, 23 or 32% on service standards and nine or 13% on practices and policies of SIDREC Members. Thus, in a reversion to a pre- COVID-19 pandemic trend after a brief departure from it in 2020 and 2021, market conduct formed the leading issue in relation to disputes received by SIDREC by nature of claim in 2022.

Nature of Eligible Disputes

Eligible disputes are classified according to the nature of the issues raised. The following are the three main catagories of eligible disputes, including specific examples of issues that fall under each category:

Market Conduct
  • Fraud, defalcation or misappropriation
  • Sales practices such mis-selling, bad advice, product suitability, inadaquate disclosures
  • Unauthorised transactions or non-compliance with client instruction
  • Others
Services Standard
  • Delays, errors or glitches in online system
  • Delays, errors or  lapses in disclosure
  • Others delays or errors in process
Members’s Practices/Policies
  • Fees and charges
  • Disclosure policy
  • Product development and sales policy
  • Others

Eligible Disputes by Nature of Claim, 2020-2022

This shift in profile of eligible disputes received by SIDREC is due to the significant 122% increase in the number of market conduct-related disputes received in 2022 compared to the previous year (2022: 40 disputes; 2021: 18 disputes). On the other hand, service standard-related disputes received in 2022 increased by a more modest 5% compared to 2021 (2022: 23 disputes; 2021: 22 disputes).

Market Conduct-Related Eligible Disputes, 2011-2022

Service Standard-Related Eligible Disputes, 2011-2022

Eligible Disputes Relating to Market Conduct

The marked increase in market conduct-related disputes received by SIDREC in 2022 is largely due to the significant surge in sales practices-related disputes received. The number of such disputes received in 2022 was over four times greater than in 2021.

This sharp increase in sales practices-related disputes returns the profile of market conduct-related disputes received in 2022 to the pre-COVID-19 pandemic trend, where disputes relating to sales practices made up the majority of market conduct-related disputes received. Out of the 40 market conduct-related eligible disputes received by SIDREC in 2022, 29 pertained to sales practices, six to fraud, defalcation or misappropriation, four to unauthorised transactions or non-compliance with instructions and one to several conduct-related issues.

Eligible Disputes Relating to Market Conduct, 2022

Note: More than 100% due to rounding-up

Eligible Disputes Related to Sales Practices, 2011-2022

Eligible Disputes Related to Fraud, Defalcation & Misappropriation, 2011-2022

Eligible Disputes Related to Unauthorised Transactions or Non-Compliance with Client Instruction, 2011-2022

In 2022, a significant number of the sales practices-related eligible disputes received by SIDREC pertained to issues of alleged mis-selling, bad advice, inadequate disclosures and unsuitability of investment products. These disputes are claimed to have stemmed mainly from cases where:

  • The risk-return profile of the client and the investment product sold allegedly do not align. For instance, a conservative investor may claim to have been sold a high-risk investment product with a complex structure, which was not appropriate for their risk tolerance;

  • The key features of the investment product sold were allegedly misrepresented to clients. For example, the claimant may have been promised a principal-protected investment with a guaranteed rate of return, but later found out that the investment did not have these promised guarantees; and

  • Adequate disclosures of factors that could impact investment returns were allegedly not provided. This can include the lack of disclosure of various fees and charges associated with the investment, such as sales charges, administration fees, management fees, trustee fees and switching fees.

SIDREC Members are strongly encouraged to maintain vigilance in ensuring that investors are equipped with the necessary information to make informed investment decisions through the implementation of good sales practices. Some of these practices were highlighted in previous SIDREC Annual Reports, including:

  • Continuously reinforcing sales ethics among agents and sales representatives to ensure that clients are treated fairly. This involves providing them with ongoing updates on sales-related guidelines from regulators and Members and implementing a system to reward appropriate sales behaviour;

  • Continuously providing adequate training to agents and sales representatives to ensure that they have a full understanding of the investment products they are selling, enabling them to better explain the key features to clients and prospects;

  • Continuously reminding agents and sales representatives to be mindful of the following when conducting a sale:

  • Adequately assessing the risk profile of a client and prospects, taking into account factors such as age, education level, source of income or funds, dependants and diversification of investments;

  • Highlighting factors that could affect investment returns, including clearly explaining the key risks and fees associated with the investment;

  • Avoiding aggressive sales pitches that suggest a particular investment product is similar to fixed deposits but offers higher returns, as this could lead to confusion about the product’s characteristics and risks;

  • Avoiding allowing clients to pre-sign blank investment-related documentation, to be filled in later by the agent and sales representative without the client’s knowledge. If requested by the client or as part of the service offered, the agent or sales representative should fill in the documentation in the presence of the client, which provides both parties the opportunity to clarify any issues and ensures that clients are aware of how the documentation is being completed;

  • Providing clients with all signed documentation at the point of sale.

Additionally, if not already in place, Members may consider implementing after-sales call-back confirmation procedures or cooling-off periods, particularly for higher risk investment products.

Eligible Disputes Relating to Service Standards

In 2022, out of the 23 service standard-related disputes SIDREC received, eight arose from delays, errors or glitches experienced while using online platforms and the remaining 15 related to other shortcomings in service standards such as mis-labeling of products and prolonged delays in processing client-related transactions.

Eligible Disputes Relating to Service Standards, 2022

A notable observation regarding disputes related to service standards is the decrease in the number of disputes related to online platform received by SIDREC in 2022 compared to the period during the COVID-19 pandemic in 2020 and 2021. As was the case in previous years, an overwhelming majority of online platform related disputes received by SIDREC in 2022 involved shares and warrants i.e. seven out of eight disputes or 88% of total online platform related disputes received.

Eligible Disputes Arising from Delays, Errors or Glitches with an Online Trading Platform, 2011-2022

Eligible Disputes Arising from Delays, Errors or Glitches with an Online Platform by Type of Product or Services, 2017-2022

The decrease in the number of online platform related disputes received in 2022 may indicate a shift towards more in-person transactions following the reopening of the Malaysian economy. Nevertheless, with the growing digital adoption among investors in Malaysia, it is crucial for SIDREC Members to maintain their vigilance in ensuring the reliability, efficiency, accuracy and security of their online platforms, websites or mobile applications, offered to investors.