After 8 months of intense deliberation, the Financial Advisory Industry Review Panel (the Panel), a special task force led by the Monetary Authority of Singapore (MAS), released its recommendations for the financial advisory industry in mid January 2013. The Panel made 28 recommendations which are grouped under 5 thrusts, a summary of which is set forth below:
THRUST 1: RAISING THE COMPETENCE OF FINANCIAL ADVISORY REPRESENTATIVES
The Panel recommends raising the minimum academic entry requirement for financial advisory representatives from 4 GCE ‘O’ level credit passes to a full GCE ‘A’ level certificate, an International Baccalaureate diploma qualification, or a diploma awarded by a Singapore polytechnic (or its equivalent). The Panel also recommends grandfathering all existing financial advisory representatives who do not meet the proposed minimum academic entry requirements.
Besides academic qualifications, the Panel also feels that is important to pay attention to continuing professional development (CPD) programmes, and has recommended that financial advisory representatives be required to undergo at least 30 hours of formal training annually, including at least 8 hours on rules and regulations and 5 hours on ethics.
THRUST 2: RAISING THE QUALITY OF FINANCIAL ADVISORY FIRMS
The recommendations under this thrust apply mainly to licensed financial advisory firms (LFAs), with requirements calibrated to the volume and type of services provided by such LFAs.
- Competency Requirements
Currently, CEOs of LFAs are required to have at least 5 years of relevant working experience, of which at least 3 years must be in a managerial capacity. The Panel recommends raising the minimum working and managerial experience of such CEOs to 10 years and 5 years respectively, and for such LFAs to employ at least 3 full-time resident professionals with at least 5 years of relevant experience each.
- Compliance Arrangements
The Panel recommends that all LFAs have a compliance function independent of their advisory and sales functions, with larger LFAs (those generating annual gross revenue of more than S$5 million or which have more than 20 financial advisory professionals) having dedicated staff for their compliance function.
- Financial Requirements
The Panel recommends imposing a minimum “base capital” requirement calibrated to the type of financial advisory services provided (instead of the type of investment product that LFAs advise on). The Panel also recommends enhanced requirements for continuing financial resources and professional indemnity insurance cover calibrated to a LFA’s scale of operations.
- Interaction between Financial Advisory and Non-Financial Advisory Activities
To raise the professionalism of the industry and to ensure that LFAs remain focussed on conducting activities for which they are licensed, the Panel recommends restricting LFAs in the type and scale of non-financial advisory activities they undertake.
In addition, the Panel is recommending that insurance broking firms that provide the full range of financial advisory services be required to meet requirements on compliance, management expertise and financial soundness similar to those imposed on LFAs.
THRUST 3: MAKING FINANCIAL ADVISING A DEDICATED SERVICE
To ensure that financial advisory representatives maintain a high level of professionalism and competence, the Panel proposes requiring financial advisory firms to only recruit representatives whose professional focus are primarily on their financial advisory roles. In addition, the non-financial advisory activities undertaken by such representatives should not conflict with the financial advisory firm’s business or lead to the representative neglecting his financial advisory role.
The Panel also recommends that the MAS should (i) require financial advisory firms to introduce measures to ensure that no conflicts of interest arise from the appointment of introducers; (ii) prohibit remuneration structures for introducers that are tied to volume of sales or transactions; and (iii) prohibit financial advisory firms from acting as introducers on investment products for which they are permitted to provide advice.
The Panel has also identified money lending, promoting junkets for casinos, selling real estate and marketing investment products that are not regulated under the Financial Advisers Act (Cap. 110) as examples of activities that should not be conducted by financial advisers.
THRUST 4: LOWERING DISTRIBUTION COSTS
The Panel proposes to lower distribution costs through harnessing competitive market forces, particularly in the insurance market.
- Product Comparability
To enable consumers to compare life insurance and critical illness insurance products and to foster greater competition in the life insurance market in Singapore, the Panel recommends that the MAS works with the Life Insurance Association, Singapore to develop a web aggregator for life insurance and critical illness insurance products.
- Product Accessibility
The Panel noted that consumers who are self-directed or who wish to pay for independent financial advice currently lack the option of buying life insurance products directly from life insurers without incurring commissions, and recommends that life insurers in the retail market should provide certain basic insurance products through a direct channel.
- Product Transparency
The Panel recommends that disclosure on distribution costs for specific products should be increased by improving the format and content of existing disclosures. In particular, consumers of bundled investment and insurance products should be made aware of protection, savings or investment features making up such products.
THRUST 5: PROMOTING A CULTURE OF FAIR DEALING
To supplement rules and regulations, the Panel proposes embedding a fair dealing culture into the industry through shaping remuneration structures, management responsibilities and the involvement of industry associations.
- Remuneration of Financial Advisory Representatives
The Panel proposes that the remuneration of representatives should be better aligned with customers’ interests by implementing the following:
- spreading commission payouts for regular premium life insurance policies more evenly, with no more than 40% of the total commissions to be paid in the first year;
- requiring all financial advisory firms to adopt a balanced scorecard framework to remunerate representatives, incorporating non-sales key performance indicators (“KPIs”); and
- prohibiting all product-specific incentives to financial advisory representatives as these may bias their advice to clients.
- Focussing Management Attention on Fair Dealing
The Panel recommends incorporating the assessment of a financial advisory firm’s board’s and senior management's efforts in promoting a culture of fair dealing within the organisation into MAS’ risk assessment and regulatory review of the financial advisory firm. The Panel also recommends that the MAS should consider strengthening regulatory requirements on financial advisory firms with regard to their complaints handling and resolution processes.
- Involving Industry Associations
The Panel recommends that industry associations (such as the Association of Banks in Singapore and Life Insurance Association, Singapore) develop KPIs for their members, establish a monitoring mechanism and share the results of such assessments with the public and the MAS on a regular basis.
In response to the Panel’s recommendations, the MAS has on 5 March 2013 released its consultation paper for feedback, and we will be examining this in a forthcoming issue of our Chronicle.