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Private bank incentives for bond deals face pressure

* Wealth managers address concerns over conflict of interest

By Daniel Stanton

SINGAPORE, Nov 21 (IFR) - Controversial private bank rebates in Asian bond issues could soon become a thing of the past, after UBS stopped indulging in the practice and banks in Singapore started disclosing details of the incentives they receive.

Bookrunners routinely offer one-off rebates of 25 cents to one dollar per $100 in face value to encourage private banks to study a bond offering and potentially recommend it to clients.

Sources said UBS had recently stopped accepting rebates on bond deals it sells to PB clients. In Europe, the rebate is passed on to clients and, in Asia, it does not accept the rebate at all. UBS declined to comment.

In recent weeks, Singapore banks have also started telling their PB clients when they stand to receive a rebate on bond deals they market.

High-net-worth customers are especially important in Asia's high-yield credit market and, in some local currency markets, often take up the majority of a new issue. Wealthy individuals are keen to chase yield and can often magnify their returns by putting down as little as a third of the investment in cash and borrowing the rest from the bank.

There are no strict rules on the beneficiaries of the rebate, but it often goes to relationship managers at PBs.

That has sparked claims that the practice creates a conflict of interest, since PBs have an extra incentive to sell the bonds to clients and often do not disclose the extra payment they receive. FULL DISCLOSURE The Association of Banks in Singapore, an industry group, said that, "with effect from 1 Oct 2016, PBs in Singapore are required, under the PB Code of Conduct, to specifically disclose bond rebates to clients prior to or at the point of sale".

The Monetary Authority of Singapore is believed to be taking the issue of PB rebates seriously. Earlier this year, it set up a task force to examine practices at PBs, including disclosures related to sales concessions. Tan Su Shan, co-chair of the MAS PB industry group, is also group head of consumer banking and wealth management at DBS.

The MAS declined to comment on the issue.

A DCM banker in Singapore said standards might need to be set on the phrasing of communications related to bond offerings, since it might be possible to remove the part that discloses whether or not banks receive rebates for PB sales.

"There is some talk of putting it in the terms," said the banker. "If it is just mentioned in an update, bankers can remove it, but they can't remove it from the terms."

The Asia Securities Industry and Financial Markets Association, a capital markets industry body, went as far as to suggest the wording that banks should use to disclose such concessions - in July 2014.

Such rebates are especially common in the Singapore dollar market, where PB investors are often willing to buy risky unrated bonds at tighter yields than institutional investors will demand.

After a series of defaults, however, investors have started to question if their wealth managers are always acting in their best interests when they recommend investments.

A bond investor said a particular Singapore dollar bond issue in recent years had been marketed with a 25-cent PB concession, but had struggled to attract interest due to a low yield. Instead of raising the yield, the issuer had simply increased the PB concession to 50 cents to motivate sales staff.

"They doubled the rebate and, the next day, the deal was done," said the investor. "If you increase the coupon by 25 basis points, that's a recurring cost. If you increase the rebate, that's a one-time cost." (Reporting by Daniel Stanton; Editing by Vincent Baby and Steve Garton)

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