MF Gobble. A Tale of Regulatory Failure

Gobble as in client funds in supposedly safe segregated accounts being gobbled up by outright corporate fraud. In all this, MAS, the financial industry regulatory authority in Singapore has kept a very low and quiet profile.

The initially estimated US$600 million of client funds (worldwide) missing has now ballooned out to an estimated US$1.2 billion. We have also discovered that some of their Singaporean clients' funds have been traced to accounts scattered across the world.

How did this happen? What exactly does it mean that client accounts are segregated? How and what measures does MAS take to ensure that regulations are followed? Without effective checks and enforcement, regulations are worth less than the paper they are printed on when clients open up a trading account at MAS approved and therefore deemed reputable and credible financial institutions. Getting MAS approval is (was?) supposed to mean something.

As a result of criminal breach of trust cases by conveyancing lawyers in handling monies related to real estate transactions, safeguards have been put in place to prevent future such abuses. Do we always have to wait for unfortunate incidents like this to happen before regulatory authorities wake up to their duties and responsibilities and actually DO their jobs? Here's a suggestion: Client funds have to be kept in Singapore based banks and NO transactions other than for settlement of client trades are allowed for those accounts. I would have thought that would be a minimum requirement for safeguarding client funds.

This is not like the Lehman bonds case where MAS could duck its responsibilities by saying: Caveat Emptor! This is front and center a case of MAS caught napping on the job. How much trust can Singaporeans (and anyone else) have in financial institutions here in safeguarding their funds?

In the effort to create a financial industry here, I fear the government/MAS has lowered standards to the extent that outright illegal activity can apparently occur with impunity without detection. The MAS of today (or at least their operating charter) seems to have changed from the days when MAS was awake enough to keep the likes of BCCI out of Singapore.

So while clients are locked out from closing their open positions, have no access to their funds, and are likely to lose a significant portion of that, our no doubt highly paid MAS staff can look forward to at least 1.75 months of bonus for a job not done at all!

Here's a fair suggestion: Make MAS management directly and personally liable for losses incurred by the public arising from regulatory failure. Having some skin in the game should keep them alert and hopefully prevent other abuses like regulatory capture as has occured in some other countries.

Meanwhile if Mr Tan Kin Lian has any further presidential ambitions, he should consider taking up the cause of MF Global's clients. It should help to buff up his resume. President Tony Tan who has very close ties to the MAS, I fear will be keeping very quiet (it's outside of his presidential duties you see).