“The US system, with its class actions and the Securities and Exchange Commission’s (SEC) Fair Funds programme, is a strong deterrent,” adds Sivakumar.
The Fair Funds for Investors provision, introduced in 2002, returns wrongful profits, penalties and fines to defrauded investors in the US. These investors could be victims of collusion between funds and brokers, interest rate fixing, undisclosed fees, false advertising, pump-and-dump schemes or other forms of securities fraud and manipulation.
However, the US system is also widely criticised for high legal costs and disproportionate legal fees, says Sivakumar.
A notable example is a case from May involving mutual fund giant Vanguard, where a judge rejected a proposed US$40 million ($51.89 million) settlement as over US$13 million had been allocated to legal fees. The judge concluded the settlement provided “no value” to investors compared to what they would already receive from a parallel SEC action, rendering the proposal unfair.
See also: MAS to consult on ways to enhance investor recourse
“The key takeaway for Singapore is to avoid this kind of excessive litigation,” adds Sivakumar, who has been in practice for more than 30 years.
Indeed, MAS is wary of “frivolous legal actions” that may arise from its efforts to enable investors to seek civil recourse should there be losses suffered due to market misconduct. To mitigate this, the regulator said in July that it would look to put in place “appropriate safeguards” in its final set of measures.
MAS is consulting on three areas of focus, including ways to enhance existing legal provisions that enable investors to ride on — or “piggyback” — a court action or civil penalty to seek compensation.
See also: Resource for recourse: How should MAS enhance avenues for investor recourse?
According to Sivakumar, the US’s “opt-out” class action model may serve as an example of allowing investors to “piggyback” on regulatory actions. “An automatic opt-in system ensures that investors do not need to duplicate efforts once misconduct is proven.”
In contrast, the UK practises an “opt-in” system. The group litigation order enables the grouping of multiple claims with related issues for greater efficiency, notes Sivakumar. “Crucially, this is an optin system and, being court-managed, is less prone to abuse than the US model.”
In the UK, representative and collective actions are limited to specific sectors where consumers are most vulnerable, says Clare Lee, director at Ascendant Legal. “Only court-approved representatives may bring claims, and judicial supervision ensures claims are well-founded. This targeted and controlled approach is geared toward delivering remedies for investors without opening the floodgates of claims.”
An inspired process could be implemented in Singapore as follows, says Sivakumar: “A representative proposes a group claim to the court, a public notice is issued on the MAS website, and interested investors submit a claim form to join the group. Any damages awarded are then distributed only among those who opted in. Finally, compensation should be calculated transparently via a distribution scheme administered by a neutral body.”
Taiwan a ‘leader’
Closer to home, NUS Business School accounting professor Mak Yuen Teen says a number of markets in Asia, including China, Japan and South Korea, allow class actions. “Singapore is behind in this regard.”
In Mak’s view, Taiwan is “a leader in Asia and arguably, the world” when it comes to investor protection.
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Mak, who is also director of the Centre for Investor Protection at NUS Business School, visited Taiwan in 2024 and met with representatives from Taiwan’s Securities and Futures Investor Protection Centre (SFIPC), which he says has “developed a formidable reputation” for taking class action lawsuits and other actions against those who have harmed investors in the capital market.
For any securities investment or futures trading fraud involving 20 or more victims, SFIPC may file lawsuits or arbitration applications as an authorised representative of the victims.
In 2024, the SFIPC filed 300 class action lawsuits.A third of these were relating to false financial statements, financial and business information or prospectuses, and these involved a total of 89,547 “authorisers”, or claimants. Other categories of class action lawsuits undertaken by SFIPC include stock price manipulation and insider trading.
“SFIPC was set up given the growing retail participation and some scandals at that time,” wrote Mak in an August 2024 blog post. “The government believed that small investors may face difficulties in protecting themselves.”
According to Mak, legal actions are taken by the SFIPC’s Legal Affairs Department, which has nearly 20 lawyers; they do not use external legal counsel.
“While there may be contextual differences, I think Singapore can learn a lot from Taiwan and other markets, which are placing strong emphasis on investor protection,” wrote Mak nearly a year before MAS’s announcement. “Further research in other markets may identify other investor protection measures that Singapore can consider adopting.”
Role of institutional investors
Even before things come to a head in the courtroom, bodies like SFIPC can help improve transparency among listed companies.
SFIPC buys a number of shares in each company listed in Taiwan. As a shareholder, the non-profit sends letters to listed issuers, raising concerns on a range of issues, such as excessive compensation for directors and supervisors, disproportionate dividend policy and guarantees or excessive loans to others, according to Mak.
A big gap in Singapore is the lack of stewardship and activism by institutional investors, says Mak, especially compared to our closest neighbour just across the Causeway.
Malaysia’s major pension funds Employees Provident Fund (EPF), Kumpulan Wang Persaraan (Diperbadankan) (KWAP) and Permodalan Nasional Berhad (PNB) are significant investors in many Malaysian listed issuers, notes Mak. “[They] have clear voting guidelines and vote their shares to hold the board and management accountable.”
Malaysia also has the Minority Shareholders Watch Group (MSWG), a government initiative set up in 2000 to protect the interests of retail and institutional minority shareholders. “MSWG is also active in attending AGMs and also has voting guidelines,” notes Mak.
For Singapore, the ideal path is a hybrid approach, says Sivakumar. “We should blend strong, regulator-led action with controlled avenues for private redress, similar to the UK model. The goal is to enhance investor protection effectively while avoiding the pitfalls of excessive litigiousness.”
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Resource for recourse: How should MAS enhance avenues for investor recourse?
