The Lehman Bros debacle resulted in the extension of CPFTA to protect consumers in the financial industry. What does this means to the financial institutions?
The Legal Implications of the Consumer Protection (Fair Trading) Act to the Financial Industry
Scope of CPFTA
The scope of the Consumer Protection (Fair Trading) Act (Cap 52A) (“CPFTA”) is now extended to govern all “financial products”1 and “financial services”2 regulated by the Monetary Authority of Singapore and all commodity trading under the Commodity Trading Act. Thus, the CPFTA will govern: (i) all banking activities under the Banking Act (eg deposits, mortgages, letters of credit, bank guarantees, credit facilities etc; (ii) all financial products provided by a financial adviser under the Financial Advisers Act (eg structured deposits, foreign exchange, leveraged foreign exchange, life policies, investment-linked policies etc); and (iii) all activities relating to dealing in securities, fund management, marketing collective investment schemes, trading in futures and leveraged foreign exchange etc under the Securities and Futures Act. The CPFTA no longer governs only retail consumer goods and services but applies to a wide range of financial products and services as well. It may be worthwhile to note that the CPFTA does not apply to the acquisition of estate or interest in immovable property (however, it applies to rental of residential property), employment contracts and pawn broking.3
Objective and Application of CPFTA
As the name of the Act implies, the objective of the CPFTA is to protect the consumer4 against “unfair practices”5 by the supplier6 in relation to any consumer transaction.7 The CPFTA only applies to a supplier or consumer who is resident in Singapore; hence a tourist will not enjoy any protection under CPFTA. Also, the offer or the acceptance relating to the consumer transaction must be made in or sent from Singapore. Hence, there must be sufficient “nexus” between the consumer transaction and Singapore.8
What is Unfair Practice
According to s 4:
It is an unfair practice for a supplier, in relation to a consumer transaction-
a.to do or say anything, or omit to do or say anything, if as result, a consumer might reasonably be deceived or misled;
b.to make a false claim;
c.to take advantage of a consumer if the supplier knows or ought reasonably to know that the consumer-
i.is not in a position to protect his own interest; or
ii.is not reasonably able to understand the character, nature, language or effect of the transaction or any matter related to the transaction; or
d.without limiting the generality of paragraph (a), (b) and (c), to do anything specified in the Second Schedule.
There are four types of “unfair practices”. First is misrepresentation (s 4(a)). For instance, a relationship manager (“RM”), in selling a financial product to a consumer, may choose only to highlight the benefits of a financial product but not the risk that may be peculiar to that product. Second is making false claims (s 4(b)). A RM may make certain claims relating to the performance of a financial product which cannot be substantiated. Third is taking advantage of consumer (s 4(c)). During the Lehman Brothers debacle, there were clear instances of mis-selling where RMs were selling complex financial products to “vulnerable investors” such as lorry driver, delivery man, elderly seamstress and other less educated elderly non-English speaking customers. These consumers did not understand nor did they have the means to protect their own interests when they purchased the financial product. Fourth is specific unfair practices ( s 4 (d)). The 2nd Schedule has specified 20 instances of “unfair practices”. Item 11 is of particular interest. It states: “Taking advantage of a consumer by including in an agreement terms and conditions that are harsh, oppressive or excessively one-sided so as to be unconscionable”. It is common knowledge that most banking and financial product documents are drafted in a “one-sided” manner. It is also interesting for suppliers (including financial advisers) to note that using small prints to conceal a material fact from a consumer is also a “specific unfair practice” under item 20 of the 2nd Schedule. This is particularly relevant to disclaimers and warnings used by suppliers in the marketing materials.
In determining whether a supplier is engaged in an unfair practice, the reasonableness of the supplier’s action, in the circumstances he was in, must be considered. Hence, the test of “reasonableness” should be used. For instance, due consideration ought to be given on whether the RM has performed a proper product due diligence before selling the financial product to a consumer to ensure the suitability of the financial product for the particular consumer.
Consumer’s Right to Sue for Unfair Practices
It is interesting to note that there is no provision for criminal sanction under the CPFTA for the acts of unfair practice. The “penalty” lies in a civil action against the supplier. Pursuant to s 6 (2), a consumer who has entered into a consumer transaction involving an unfair practice may commence a civil action against the supplier if the claim does not exceed the Prescribed Limit of S$ 30,000. If the claim exceeds $30,000 (eg $32,000), the consumer may abandon the excess amount ($2,000) and sue the supplier for the sum of $30,000. But why would a consumer want to sue for a lesser amount? The answer is obvious. There are clear advantages for the consumer to sue the supplier under the CPFTA than under common law. We shall examine these legal advantages.
Burden of Proof (Section18A)
According to s 18A, it states:
If, in any court proceedings taken in any court between a consumer and a supplier in relation to a consumer transaction, any dispute arises as to whether the supplier has complied with any specific requirement of this Act ……, the burden of proving that the supplier has so complied shall be on the supplier.
Under s 18A, the consumer need only allege that the supplier was engaged in an unfair practice. The supplier will have to prove that it has not engaged in any of the four types of unfair practices described earlier. In other words, under the CPFTA, the burden of proof is reversed from the consumer (plaintiff) to the supplier (defendant) to avoid any liability under the consumer transaction. This reversal of the conventional rule of evidence that a plaintiff must prove his case certainly favours the consumer.
Parol Evidence Rule Abolished (Section 17)
Section 17(1) states :
Notwithstanding sections 93 and 94 of the Evidence Act (Cap 97), parol extrinsic evidence establishing the existence of an express warranty is admissible in any action relating to a consumer transaction between a consumer and a supplier even though it adds to, varies or contradicts a written contract.
Generally under the parol evidence rule, oral evidence cannot be used to vary, add to or contradict a written agreement. The effect of s 17 is to dis-apply the general parol evidence rule under the Evidence Act. In a typical scenario where a RM sells a financial product to a consumer, he/she may make statements which may not be in the sale agreement. For instance, to encourage a consumer to purchase the financial product, the RM may assure the consumer that it is a “very safe product” or “you won’t lose any of your capital” etc. This may directly contradict the prospectus or profile statement which classified the financial product for “growth” or “not capital guaranteed”. A tape recording of such a sale presentation may be admitted as evidence to contradict the sale agreement which would otherwise be inadmissible.
Interpretation of Documents (Section18)
Section 18 states:
If a consumer and a supplier enter into a consumer transaction and –
a.all or any part of the transaction or contract is evidenced by a document provided by a supplier; and
b.a provision of the document is ambiguous, the provision must be interpreted against the supplier.
This means that where there is ambiguity in a consumer transaction agreement, the ambiguity must be interpreted in favour of the consumer.
No Contracting Out (Section 13)
Section 13 (1) and (2) provide:
(1) The provisions of this Act shall prevail notwithstanding any agreement to the contrary and any term contained in a contract is void, if and to the extent that it is inconsistent with the provision of this Act.
(2) Any waiver or release given of any right, benefit or protection conferred under this Act shall be void.
Under s 13, a supplier and a consumer is not allowed to mutually agree to contract out of the CPFTA. Thus any provision in the contract that is inconsistent with the CPFTA and any waiver of benefit, right or protection by the consumer under the CPFTA is void. This is to prevent the supplier from coercing the consumer into signing an agreement that would compromise his right, benefit and protection under the CPFTA.
Concluding Comments
As can be seen from the above discussion, the legal significance and legal implications in extending the scope of the CPFTA to the financial industry are clear. Banks and other financial institutions will be more vulnerable to civil suits for unfair practices under the CPFTA. With the tweaking of the rules of litigation/evidence to benefit the Consumers, Consumers will have a better chance in winning their cases against the financial institutions. To avoid this, the financial institutions will have to review their consumer transaction documents to ensure compliance with the CPFTA. This will be quite a massive undertaking.9
►Tan Sin Liang
SL Tan & Co
E-mail: [email protected]
Notes
1 “Financial Products” is defined in s 2 to include “any arrangement, transaction or contract regulated or supplied by any person regulated under – (a) any written law administered by the Monetary Authority of Singapore; (b) the Commodity Trading Act (Cap 48A); (c) such other written law as the Minister may by order prescribe”.
2 “Financial Services” is defined in s 2 to include any services regulated or supplied by any person regulated under items (a), (b) and (c) in the definition of “Financial Products”.
3See definition of “Excluded Transaction” in the 1st Schedule.
4 “Consumer” is defined in s 2 to mean “an individual who, otherwise than exclusively in the course of business – (a) receives or has the right to receive goods or services from the supplier; or (b) has the legal obligation to pay a supplier for goods and services that have been or are to be supplied to another individual.
5 To be discussed later.
6 “Supplier” is defined in s 2 to include (amongst others) ”a person who, in the course of the person’s business (a) provides goods and services”.
7 “Consumer Transaction” is defined in s 2 to mean – (a) the supply of goods or services by a supplier to a consumer, as a result of a purchase, lease, gift, contest or other arrangement; or (b) an agreement between a supplier and a consumer, as a result of a purchase, lease, gift, contest or other arrangement, in which the supplier is to supply goods or services to the consumer or to another consumer specified in the agreement, but does not include any transaction specified in the First Schedule”.
8 See s 3
9 The Association of Banks in Singapore has recently called upon all the banks in Singapore to review their banking documents to ensure compliance with the CPFTA.
Erratum
We refer to the article Declining to “Advise” a Person with Opposing Interests Under Rule 30 PCR in the April 2012 issue. On page 27, the sub-heading ‘American Bar Association: Interpreting “Advice” Based on Need to Prevent Lawyer Over-reactiong’ is incorrect. The correct sub-heading should read as: ‘American Bar Association: Interpreting “Advice” Based on Need to Prevent Lawyer Overreaching’.
We apologise for the error.