Attracted to schemes that offer high returns? Tempted to earn huge profits within a short time? Think again!

In the current low interest rate environment, many avenues that promise attractive returns have emerged. For example, there are gold buyback schemes that offer returns of 18% to 30% per annum and foreign exchange trading seminars that claim to help one make substantial profits over a very short period of time.

The returns and promises advertised are enticing but investors need to exercise caution. Ask the operators of these products or schemes two questions:

First, how are the returns generated?

The old adage that there is no free lunch holds true. In other words, if a product or scheme promises exceptional returns, it usually comes with higher risks. In the gold buy-back schemes, the customer usually ends up taking the credit risk of the operators of the scheme. Typically the customer buys physical gold bars from a company at a 20% to 30% premium over the market price of gold. The company in turn, commits to buy back the gold at an even higher price (thereby claiming returns of 1.5% to 5% per month) after a few months. How the company is able to do so is not clear. But for it to be able to run this business on a sustainable basis, it is likely that it will need to earn even higher returns than it had committed so as to cover overheads and costs such as rental, staff salaries or commissions, and utilities. The media has written about investors who suffered losses when some of these firms closed down.

In the case of foreign exchange trading seminars, these often feature catchy success stories of participants who claim to have earned attractive extra income or made huge profits within months, days or even minutes. All these can be purportedly achieved when one attends seminars or buys a programme, which could comprise computer software, coaching sessions, workshops or updates on a trading guru’s next trade. Foreign exchange trading is essentially about betting on the future movement of exchange rates. These markets are complex and fast paced. Foreign exchange trading carries with it risks. Hence, any promises of easy profits must be viewed with caution.

Second, are the operators offering the products or schemes regulated?

The Monetary Authority of Singapore (MAS) strongly encourages consumers seeking financial services to deal only with firms that are regulated by MAS. Consumers can look up the Financial Institutions Directory to check if the firm they intend to deal with is regulated by MAS, and the specific regulated activities it is authorised to conduct in Singapore.

Capital markets products such as securities, futures contracts and collective investment schemes are regulated by MAS. MAS’ regulatory regime safeguards the interest of consumers in the following ways. First, the laws require adequate and accurate disclosures on the nature and risks of these products. Second, should disputes arise, financial institutions are expected to have a process to review and resolve complaints. In instances where the matter cannot be resolved, retail consumers may approach the Financial Industry Dispute Resolution Centre for mediation and adjudication. These safeguards do not apply to consumers that invest in unregulated investment products or schemes.