The present global financial crisis has been proven to have been caused by overzealous financial organizations and their sales staff to close deals. Whether selling below the prime interest rate mortgages to first time home owners, who could not clearly comprehend the inevitable jump in monthly payments and how to plan for it, or selling bundled investment instruments to other financial institutions worldwide as highly rated mortgage backed securities. These financial organizations along with the rating agencies and the financial regulators have successfully exposed that no one is there to protect the (non-financially educated) buyer.The root problem resides with the regulators, independent bodies established by law to oversee all financial institutions and the products offered for sale in their respected territories, who instead of setting clear guidelines to benefit the (end user) buyer, have traditionally only looked out for the sellers. The regulators have in place a complex procedure requiring lawyers and accountants to win approval to operate and sell a financial product in each regulated territory and an industry examination to become a licensed financial trader, broker or adviser. These financial salespersons offer to design solutions to fit the individual needs but, because they are associated to particular financial organizations, they already know the products needed before they meet the individual. Public education on financial matters is, in most cases, insufficient. Hence, standardizing communications on the terms and conditions of financial products must be strengthened for anyone to understand and compare.
Comparing Apples to Apples and Oranges to Oranges will enable non-financial buyers to make informed decisions. With fixed rate instruments (cash deposits or consumer loans) the comparison of rates has helped many in their decisions, but when rates can fluctuate the comparison becomes distorted. Regulators must mandate financial institutions to communicate in a standard format the flexible terms and conditions of their products.
For example, investment instruments should be clearly categorized in all communications to prospective buyers firstly by type; equity instruments (stocks or shares and equity based funds), debt instruments (bills or bonds and debt based funds), combined debt and equity instruments (pensions or annuity and balance funds), real estate instruments (property and mortgage backed funds). Secondly by benefactor; government, bank, insurance, broker or other privately held organizations. Then, by time per rate, instruments must state their historical returns for a particular period, next to the real inflation rate for the same period, giving a clearer indication of the value of projected returns. No more spreadsheets showing the power of compound interest without the unavoidable decreases due to inflation as many elders can attest to.
Lending instruments and all relevant communications should clearly state their relationship to the prime lending rate for all to see (the earnings spread) and if preferential borrowers get a special rate it must be reported to the regulators (as a public document) in a timely fashion.
Rationale
T.A.J & Associates Company Limited uses this occasion to comment on topics that have been covered, both academically and by the mainstream media, to add its opinion and point out investment opportunity, not to invoke any social action.
