Ordinary US mortgage loans are usually non-recourse and offer the borrower the option of both early repayment and of default if the price of the house falls below the value of the loan, leaving the lender to recover what they can from re-sale of the house at what will be an uncertain price. US sub-prime mortgages also embed an option for the lender. Essentially sub-prime mortgages are structured as a rolling sequence of short-term loans, with the lender sharing in some of the increase in housing equity when house prices rise and having discretion over whether to offer a new and affordable loan depending on whether house prices have risen or not (see Gorton, 2008, for further details). As a consequence of these embedded options, RMBS, particularly of sub-prime mortgages, have a rather complex payoff structure that is tricky to price and difficult to monitor. CDOs are yet more complex. These re-package the payoffs in bundles of asset-backed securities into an ordered hierarchy of other securities, with each tranche only bearing losses once tranches above it have been wiped out. A bundle of risky assets could thus be repackaged into other assets, some of which offered bond-like returns suitable for investors such as pension funds seeking low-risk assets, while the tranches bearing more risk would be sold to those willing to carry more risk 6 . But the pay-offs to these assets are highly nonlinear in the underlying risks (see Fig. 11).

The FSPB’s objective is to drive the development as well as the advocacy of professional standards, ethics and continuous professional development across the financial services industry. I would strongly urge the AFA to work together with the FSPB to develop and implement industry codes of conduct and ethics for its member firms and representatives which should express in very clear terms the professional responsibilities that a financial adviser must demonstrate towards its clients. This should be accompanied by an effective mechanism for investigating and addressing complaints on a breach of these responsibilities, and the ability to act against errant members in order to preserve the integrity of the profession. In line with efforts to ensure a high level of professional competence among financial advisers, the Bank also intends to require qualifying and continuing professional development programs for financial advisers to be formally accredited by the Finance Accreditation Agency (FAA). As you may already know, the FAA is an independent quality assurance and accreditation body for the financial services industry that was established by the Bank and the Securities Commission in 2012. It provides programme accreditation, individual accreditation and institutional accreditation services for learning initiatives within the financial services industry locally and internationally. Since its inception, FAA has registered 28 training providers and accredited 18 professional and academic learning programmes offered in Malaysia, the Middle East, Asia, and the United Kingdom, including those offered and recognised by highly reputable and established international professional bodies. FAA has also developed Continuous Professional Development Guidelines for the financial services industry.