INDUSTRY UPDATE 22 March 2013

CONSULTATION ON THE RECO-MMENDATIONS OF THE FINANCIAL ADVISORY INDUSTRY REVIEW

INTRODUCTION

On 26 March 2012, the Monetary Authority of

Singapore (“MAS”) announced the launch of the

Financial Advisory Industry Review (“FAIR”), with

the aim of raising standards of practice in the

financial advisory (“FA”) industry and improving

efficiency in the distribution of life insurance and

investment products in Singapore. Subsequently, a

panel, chaired by MAS and comprising

representatives from industry associations,

consumer and investor bodies, academia, media,

and other stakeholders (“FAIR Panel”), was

formed on 2 April 2012 to conduct the review.

Following the submission of the FAIR Panel’s

recommendations (“Panel Recommendations”) in

early 2013, MAS has agreed in principle to

implement the Panel Recommendations, and has

now released a consultation paper (“CP”) for

interested persons to submit their views on the

implementation of the Panel Recommendations.

The closing date for the CP is 4 June 2013.

FAIR PANEL RECOMMENDATIONS

The Panel Recommendations are grouped

according to the following five key areas:

(a) Raising the competence of FA

representatives;

(b) Raising the quality of FA firms;

(c) Making financial advising a dedicated

service;

(d) Lowering distribution costs; and

(e) Promoting a culture of fair dealing.

Raising the competence of FA representatives Raising the minimum academic entry

requirement

The FAIR Panel had recommended raising the

minimum academic entry requirement for new

financial advisory representatives (“FA

representatives”) from the current four GCE ‘O’

Level credit passes to: (i) a full certificate in GCE

‘A’ Level; (ii) an International Baccalaureate

Diploma qualification; or (iii) a diploma awarded by

a polytechnic in Singapore; or their equivalent.

It was felt that the current minimum academic

entry requirements were inadequate, given the

increasing complexity of financial products and

higher expectations from a more literate and

sophisticated clientele in the context of

Singapore’s rising educational levels. The current

requirements are also lagging behind those in

other jurisdictions, such as the United Kingdom

where the Financial Services Authority requires

financial representatives to have tertiary-level

qualifications. MAS has estimated that 20% of new

entrants to the financial advisory industry will not

be able to meet the new entry requirements. To

address this, MAS has indicated that it will work

with the polytechnics in Singapore to offer a

special diploma course in financial advisory

services. Individuals with this diploma will be

deemed to have met the new academic entry

requirement.

To recognise the experience of existing FA

representatives, all existing FA representatives will

be grandfathered when the new academic entry

requirements come into effect. Individuals who are

on a temporary career break from the financial

advisory industry may also be grandfathered

provided that they have left the industry no more

than one year prior to the date when such new

academic entry requirements take effect and

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subsequently re-join the industry within a year from

such date. Continuing professional development

The FAIR Panel had recommended that MAS

prescribe a minimum of 30 hours per annum of

continuing professional development (“CPD”)

training for all FA representatives, save for

representatives who only advise on mortgage

reducing term assurance policies and/or group

term life insurance policies. For such

representatives, a minimum of 16 hours per

annum will be prescribed. For all FA

representatives, CPD training will comprise at least

four hours of training in ethics and at least eight

hours of training in rules and regulations.

Raising the quality of FA firms Competency and experience requirements

The FAIR Panel had recommended that a Chief

Executive Officer (“CEO”) of a licensed FA firm

(“LFA”) should have at least ten years of relevant

working experience, of which at least five years

should be at a managerial level.

A further recommendation is that LFAs will be

required to employ a minimum of three full‐time,

resident professionals each with at least five years

of relevant experience. The management staff of

the LFA (including the CEO and Executive

Directors) can count toward this requirement. If

this is implemented, MAS proposes to provide all

existing LFAs a transitional period of six months

from the date of implementation to meet this

requirement.

The above represents a tightening of requirements

for CEOs of LFAs who are currently required to

have a minimum of five years of relevant working

experience, of which at least three years must be

in a managerial capacity. The requirement for

Executive Directors remains unchanged at five

years of relevant working experience with a least

three in a managerial capacity. Corporate track record

An applicant for a financial adviser’s licence

(“Licence Applicant”) is required to have a proven

track record in the financial advisory industry. MAS

is proposing to raise this track record requirement

to five years from the current requirement of three

years. For Licence Applicants who do not meet the

track record requirement, the CEO is required to

hold at least 20% of the shares of the Licence

Applicant. The CEO and Executive Directors

should also, in aggregate, hold at least 50% of the

shares of the Licence Applicant. This minimum

shareholding requirement is to indicate that the

CEO and Executive Directors are committed to the

Licence Applicant and the financial advisory

business it will operate in Singapore.

In addition, MAS proposes to formalise the current

practice of having the parent entity of an existing

LFA or Licence Applicant provide a Letter of

Responsibility to MAS to demonstrate their support

for the entity’s operations in Singapore. A

transitional period of six months from the date of

implementation is proposed to be provided to meet

this requirement. Compliance arrangements

The FAIR Panel has recommended that MAS

require that all LFAs put in place a compliance

function that is independent of their sales and

advisory functions. For example, compliance

officers should not be appointed as FA

representatives, or have any front‐office

responsibilities. For LFAs with more than 20 FA

representatives or annual gross revenue of more

than S$5 million, a more stringent requirement of

having dedicated compliance officers would apply.

It is proposed that a transitional period of six

months from the date of implementation would be

allowed for LFAs to put into place such compliance

arrangements. Financial requirements Minimum financial requirements

Currently, under Regulation 15 of the Financial

Advisers Regulations (“FAR”), LFAs are required

to have a minimum paid‐up capital of:

(a) S$300,000 if they advise on futures

contracts, foreign exchange contracts or

leveraged foreign exchange contracts; or

(b) S$150,000 if they undertake other FA

activities.

The FAIR Panel had noted that the current

concept of paid-up capital does not take into

account capital erosion due to operational losses

and dividends. As such, the FAIR Panel has

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recommended imposing a “base capital”

requirement on LFAs which will be defined as the

sum of:

(a) Paid‐up ordinary share capital;

(b) Irredeemable and non‐cumulative

preference share capital; and

(c) Any unappropriated profit or loss in the

latest audited accounts of the LFA, less

where applicable, any interim loss in the

latest accounts of the LFA, and/or, any

dividend that has been declared since the

last audited accounts of the LFA.

Limb (c) of the proposed definition seeks to

address operational losses and dividends.

Currently, LFAs advising on futures contracts,

foreign exchange contracts or leveraged foreign

exchange contracts are subject to a higher

minimum paid-up capital requirement. This stems

from the traditional view of such financial products

as being riskier. Given the recent trend where the

demarcation between types of financial products

becomes increasingly blurred, the FAIR Panel had

recommended that it may be more appropriate to

consider the type of service being provided by the

LFA instead of the type of financial product.

Taking into account the risk exposure of LFAs

during the global financial crisis as well as the

coverage provided by professional indemnity

insurance, the FAIR Panel had recommended that

LFAs which are pure research houses be subject

to a lower “base capital” requirement of S$250,000

given the lower market and legal risks that such

LFAs are exposed to. On the other hand, it is

recommended that LFAs which conduct all other

types of FA activities be subject to a “base capital”

requirement of S$500,000, or, in the alternative, be

subject to a “base capital” requirement of

S$300,000 provided that such LFA has

professional indemnity insurance coverage of at

least S$500,000. Continuing financial requirements

Currently, under Section 10(1)(a) of the Financial

Advisers Act (“FAA”), read with Regulation 16(1)

of the FAR, LFAs are required to maintain a net

asset value (“NAV”) of not less than the higher of:

(a) One‐quarter of their relevant annual

expenditure of the immediate preceding

financial year; or

(b) Three quarters of the required minimum

paid‐up capital.

The FAIR Panel had noted that the current NAV

requirement does not take into account the extent

to which LFAs hold illiquid assets, which may

adversely affect their ability to meet short term

financial obligations. The FAIR Panel therefore

recommended that MAS require LFAs to maintain

minimum “financial resources”. “Financial

resources” will be defined as the sum of:

(a) Paid‐up ordinary and preference share

capital;

(b) Subordinated loans with not less than two

years to maturity;

(c) Revaluation reserves;

(d) Other reserves;

(e) Unappropriated profit or loss in the latest

audited and interim accounts, less any

dividend that has been declared since the

last audited accounts of the LFA; and

(f) General provision,

less the sum of the illiquid items in the latest

available accounts of the LFA which would include:

(a) Assets that cannot be converted to cash

within 30 days;

(b) Non‐current assets;

(c) Pre‐paid expenses;

(d) Deposits other than qualifying deposits;

(e) Unsecured amounts due from directors of

the LFA and its connected persons that

are included as current assets;

(f) Unsecured loans and advances made by

the LFA and its connected persons that

are included as current assets;

(g) Any unsecured amount owed by a related

corporation;

(h) Intangible assets;

(i) Charged assets, except to the extent that

the LFA has not drawn down on the credit

facility if the charge is created to secure a

credit facility, or as permitted by MAS;

(j) Future income tax benefits included as

current assets; and

(k) An amount equal to 8% of the value of

any contingent liability, which includes

any letter of credit or guarantee issued on

behalf of the LFA.

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The above definition is aimed at better reflecting

the resources that the LFA has available to cover

short term operational risks.

Based upon the above definition of “financial

resources”, LFAs will be required to maintain

minimum “financial resources” that are the higher

of:

(a) 10% of the average audited gross

revenue in the immediate three preceding

financial years; or

(b) S$150,000.

“Gross revenue” will be used as the proxy for

measuring operational risk since as the current

use of “gross expenditure” may discourage

spending on middle and back office activities such

as risk management and compliance as such

activities inflate the “gross expenditure” number. Professional indemnity insurance

The FAIR Panel had recommended that the

minimum professional indemnity insurance (“PII”)

coverage required of LFAs be calibrated according

to the type of customer they serve, the type of

activity they engage in and the amount of their

gross revenue.

The MAS proposal is that only LFAs which serve

retail customers be subject to a minimum PII

coverage requirement. For LFAs which are pure

research houses serving retail customers, the

minimum PII coverage is proposed to be set at

S$500,000. For LFAs which serve retail customers

in respect of all other types of FA activities, the

proposal is that LFAs with annual revenue of up to

S$5 million be subject to a minimum PII coverage

of S$1 million whilst LFAs with annual revenue of

more that S$5 million be subject to a minimum PII

coverage equivalent to 20% of their audited gross

revenue for the immediate preceding financial

year.

MAS is also proposing to cap the deductible for the

PII policy at 10% of the LFA’s base capital. This is

to prevent LFAs from purchasing PII policies with

very high deductibles in order to pay lower

premiums. In the event where a claim is made, the

LFA may face difficulty in paying the high

deductible.

All existing LFAs will be given a transitional period

of one year from the date of implementation of the

new rules to meet the above enhanced financial

requirements. Non-financial advisory activities conducted by LFAs

Recognising that LFAs play a key role in helping

their customers make sound financial decisions,

the FAIR Panel had made recommendations

aimed at encouraging LFAs to focus on their core

business and to avoid situations of conflict.

The MAS proposal is that the non‐FA activities of

LFAs would be restricted to the following:

(a) Acting as introducers or making referrals

in respect of non‐FA activities to financial

institutions licensed by MAS, subject to

the following conditions:

(i) LFAs should not provide

customers with advice or

product information;

(ii) The revenue generated from

referrals should not be tied to

successful referrals or a

percentage of customers’

spending arising from the

referral; and

(iii) LFAs should disclose to

customers the following; that

they cannot and have not given

advice in respect of the referred

business, whether there are

potential conflicts of interest

arising from their referral activity,

and the amount and basis of

remuneration the LFA will

receive for carrying out the

referral activity.

(b) Providing training and consultancy in

respect of financial planning or financial

literacy aimed at educating and

empowering consumers, subject to the

following conditions:

(i) Where financial products are

covered in the scope of such

training and consultancy, limiting

these to investment products as

defined in Section 2(1) of the

FAA; and

(ii) Disclosing to consumers as to

whether financial advice will be

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provided in the course of the

training or consultancy.

In addition, the gross revenue generated by LFAs

from their non‐FA activities must be capped at 5%

of the total annual revenue derived from their FA

business.

All existing LFAs will be given a transitional period

of six months from the date of implementation of

the new rules to meet the above requirements. Financial advisory activities of insurance broking firms

Currently, insurance broking firms registered under

the Insurance Act are allowed to conduct FA

activities without the need to hold an FA licence

once they have filed a notification with MAS. MAS

has noted that in the last few years, an increasing

number of insurance broking firms have branched

out into FA activities such as marketing of

collective investment schemes (“CIS”) but may not

have adequate management expertise and

resources to support such activities, and this has

resulted in poor market conduct practices.

In respect of such related FA activities, the FAIR

Panel was of the view that where an insurance

broking firm provides FA services, they must be

fully capable of managing this part of their

business. Accordingly, insurance broking firms

should meet the same management expertise,

financial and compliance requirements applicable

to LFAs before they are allowed to commence

such FA activities. Otherwise, their FA activities

would be limited only to advising on and arranging

group or individual life insurance policies.

To ensure that insurance broking remains as the

core business of such firms, MAS is also

proposing that the total revenue from FA activities

be capped at 25% of the insurance broking firm’s

annual total revenue, and that the brokerage

income from the sale of incidental individual life

policies be capped at S$200,000 per annum.

All existing insurance broking firms will be given a

transitional period of six months from the date of

implementation of the new rules to meet the above

requirements.

Making financial advising a dedicated service Non‐FA activities conducted by FA representatives

The conduct of non‐FA activities by FA

representatives can potentially undermine the

quality of FA services received by customers,

particularly in situations where there are clear

conflicts of interest. The FAIR Panel has

recommended that the onus be placed on FA firms

to assess the conduct of non-FA activities by their

representatives. FA firms are to ensure that the

such non-FA activities do not conflict with the FA

business of the firm, that the non-FA activities do

not tarnish the image of the FA industry, and that

the representative will not neglect his/her FA role

in the conduct of such non-FA activities.

Examples of non-FA activities have been identified

and are proposed to be excluded from what would

be permitted to FA firms. These include licensed

moneylending activities, junket promotion

activities, real estate agency activities and making

investments not regulated under the FAA.

The FAIR Panel has also recommended that FA

firms require prospective representatives who

have other gainful employment to obtain the

approval of their other employers prior to

appointing them as FA representatives. For

existing FA representatives with other gainful

employment, FA firms would be required to ensure

that they disclose their representative status to

their other employers.

MAS had further stated they would expect FA firms

to put in place proper systems and controls to

monitor their representatives’ conduct of such non-

FA activities. A transitional period of six months

from the date of implementation of the new rules

will be given for existing FA firms and FA

representatives to meet the above requirements. Use of introducers by FA firms

The MAS has reiterated that it is not their policy

intent to regulate introducer arrangements that are

passive or ad hoc in nature, such as personal or

friendly referrals where no reward is received, or

the passive placement of brochures at third party

premises. However, the FAIR Panel had noted

that the current introducer framework poses two

key concerns – namely, (a) that there were no

restrictions on the types of individuals or entities

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that can be appoint as an introducer; and (b) the

line between introducing and FA activity can be

easily blurred.

Given the above concerns, MAS has proposed to

tighten the existing introducer regime in the

following areas:

(a) Persons permitted to act as introducers;

(b) Scope of introducing activity;

(c) Remuneration structure for introducers;

and

(d) Additional disclosure requirements for

introducers. Persons permitted to act as introducers

FA firms must adhere to two principles in

appointing introducers. First, that no conflicts of

interest must arise in the appointment of any

introducer, and second, that the appointment of

any introducer must not tarnish the image of the

FA firm or the FA industry. Thus, the appointment

of a person with a criminal record for fraud,

dishonesty or misrepresentation, or one who has

been suspended or struck off by a professional

body or a regulator would not be appropriate.

MAS is also proposing that introducer agreements

can only be entered into with corporations only

(and not individuals), so that FA firms are better

placed to ensure that the introducer complies with

applicable laws and regulations. Scope of introducing activity

Introducers are currently allowed to perform the

following activities on behalf of FA firms:

(a) Arranging for customers to meet with or

speak to the FA firm;

(b) Forwarding the particulars of customers

to the FA firm; or

(c) Providing customers with factual

information on the products distributed by

the FA firm.

The FAIR Panel had noted that provision of factual

information by the introducer can lead to confusion

on the part of the customer as to the entity they

are dealing with as the FA firm would provide the

same factual information to the customer during

the advisory process. As such, MAS is proposing

that introducers be prohibited from providing such

factual product information to customers. For FA

firms, the MAS is proposing that the FA firms be

prohibited from acting as introducers in respect of

products that they themselves are licensed to

advise on. This is so that there is no confusion on

the part of the customer as to whether the

customer is dealing with an FA firm acting as an

introducer or as an adviser. Remuneration structure for introducers

The FAIR Panel had noted that remuneration

structure for introducers are frequently volume-

based, such as remunerating introducers based on

a percentage of the first year premiums paid by

customers. Such remuneration structures may

incentivise introducers to cross the line into

advisory activities so as to increase the likelihood

of a customer signing up for a financial product

hence increasing their remuneration.

The MAS is therefore proposing that

volume‐based remuneration models would be

prohibited for introducers. What would however be

permitted would be a model whereby the

introducer receives a fixed fee per introduction

irrespective of whether the customer eventually

signs up for a financial product. Additional disclosure requirements for introducers

Introducers are currently required to disclose to

customers the following, based on a script

provided by the FA firm:

(a) That the introducer is carrying out

introducing activities for the FA firm;

(b) That the introducer is not allowed to give

advice or provide recommendations on

any investment product to the customer,

market any CIS , or arrange any contract

of insurance in respect of life policies,

other than to the extent of carrying out

introducing activities;

(c) Whether or not the introducer will be

remunerated by the FA firm for carrying

out introducing activities; and

(d) Where the introducer will be remunerated

by the FA firm, the amount of

remuneration if so requested by the

customer.

The proposal is to enhance the disclosure

requirements as follows:

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(a) To add to the disclosure under paragraph

(b) above, by also requiring the introducer

to disclose to the customer that the

introducer has not given advice or

provided recommendations in respect of

the service or product that is provided or

sold by the FA firm;

(b) To abolish the disclosure requirement in

paragraph (c) and (d) above, and replace

this with a requirement for the introducer

to disclose to the customer the amount

and basis of remuneration received by

the introducer for carrying out the

introducing activity; and

(c) To impose a new requirement that the

introducer is to disclose whether the

introducer, its directors and/or

shareholders have any direct or indirect

stake in the FA firm, or whether the

introducer has any other relationship with

the FA firm or any of its representatives.

Lowering distribution costs

The FAIR Panel had proposed the following

measures to enhance market efficiency for the

distribution of FA products and with a view toward

lowering distribution costs:

(a) Facilitating comparability of products;

(b) Improving accessibility of “basic

insurance” products through a direct

channel; and

(c) Enhancing transparency of products. Facilitating comparability of products

The FAIR Panel had noted that whilst comparison

portals and websites exist for CIS in Singapore, no

portal yet exists for insurance products to allow

customers to easily compare pricing, benefits and

other features of life insurance products from

various insurance companies. The FAIR Panel

proposed that MAS and the Life Insurance

Association of Singapore should collaborate to

develop a web portal that would shortlist for a

customer various life insurance products available,

based on demographic data and desired product

preferences entered by the customer. MAS is

accordingly seeking feedback for the concept of

developing such a web aggregator portal in

phases, initially starting with simpler products such

as term life insurance products. To address

concerns by FA representatives, such a web

aggregator portal will not be capable of actually

executing product sales. Improving accessibility of “basic insurance” products through a direct channel

The FAIR Panel had noted that under the current

commission based model, the price paid by

customers of insurance products reflects the sum

of the cost of benefits provided to the customer

and the distribution costs for such a product. The

price would be the same irrespective of the

distribution channel through which the insurance

product was bought. Cost efficiencies of one

distribution channel over another are not reflected

in the price paid by the customer. Currently, there

would be no alternative channel for “self-directed”

customers, who may wish to buy life insurance

products directly from life insurance companies

without receiving any advice and thus not have to

pay commissions. Another group of customers

who are disadvantaged by the current model are

those who wish to seek advice from an

independent FA on their entire portfolio. Such

customers may have to pay an advisory fee to the

independent FA as well as pay commissions on

the insurance products.

The FAIR Panel had therefore recommended that

life insurance companies should make available a

set of basic insurance products to be sold via a

direct channel without any accompanying

dispensation of advice. The accompanying fees for

such products should be a nominal administrative

fee only. Existing distribution models will co-exist

with the new direct channel. Enhancing transparency of products

The FAIR Panel had reviewed the current

disclosure requirements and industry practices for

the sale of investment and life insurance products

and had made the following general observations:

(a) There has been insufficient disclosure of

the fees earned by FA firms for the sale

of CIS;

(b) Consumers might not have been aware

that some life insurance products (such

as endowment plans and whole life

insurance policies) bundle both protection

and savings/investment elements; and

(c) The Benefit Illustration (“BI”) for life

insurance products could be enhanced so

that it would be easier for consumers to

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understand the costs and features of life

insurance products. Collective Investment Schemes

Disclosures made by FA firms to their customers

currently do not contain information on trailer fees

paid by fund managers to the FA firms.

The FAIR Panel was of the view that it would be

useful for consumers to know that their FA firms

receive a portion of the management fees they pay

to the fund managers, as this may spur customers

to seek on-going quality advice or service from

their FA firm. Accordingly, the MAS is proposing to

require fund managers of CIS to disclose the trailer

fees paid to FA firms in the Product Highlights

Sheet. Life insurance products

To aid consumers’ understanding of the

information in the BI and Product Summary of

insurance products and investment-linked policies

(“ILPs”), the MAS is proposing to require life

insurance companies to add a cover page to the BI

and Product Summary to highlight the following

key information:

(a) Total distribution costs of the life

insurance product and the number of

years over which policyholders have to

pay these costs;

(b) The illustrative rates of return of the life

insurance product and a warning that

these returns are not guaranteed, do not

take into account management,

distribution and other expenses, and that

the actual returns will depend on the

performance of the sub‐fund(s) (in the

case of ILPs) or the participating fund (in

the case of participating products);

(c) The average expense (investment,

management, distribution and other

expenses) ratio of the participating fund

over the last three years;

(d) A warning that if the policyholder

surrenders his or her policy before a

certain year, the amount received (based

on the guaranteed return) would be lower

than the premiums paid;

(e) 14‐day free‐look period; and

(f) A brief description and the website

address of the proposed web portal for

insurance products as discussed above

under the paragraph “Facilitating

comparability of products”.

The above information is to be presented in a font

size of at least 10‐points Times New Roman and

FA firms are to obtain their customers’ signed

acknowledgement on the cover page.

Participating life insurance products

Currently, customers who wish to buy participating

products are not provided with information on

management expenses and distribution expenses

charged to the participating fund in prior years.

The FAIR Panel was of the view that this was

pertinent information for the customer as it would

affect the amount of return on the customer’s

policy.

Accordingly, the MAS is proposing that life

insurance companies will be required to disclose in

the Product Summary, the management,

distribution and other expenses for participating

products, as a combined total expense ratio,

averaged over the last three years. Bundled life insurance products

The FAIR Panel had observed that consumers

may not be clear as to the protection, savings or

investment components that make up a bundled

life insurance product. For example, for ILPs,

many consumers might not have been aware that

a large portion of the premium had been

channelled towards the investment element as

compared to the protection element. For whole life

and endowment plans, the FAIR Panel had

observed that consumers might not have been

aware that such plans comprise both a protection

component and a savings or investment

component.

The MAS is accordingly proposing to require FA

representatives to disclose to customers the option

of purchasing an unbundled term life insurance

product (with similar coverage) and placing the

difference in premiums (between the bundled life

insurance product and the term life insurance

product) in a fixed deposit. This proposal seeks to

make customers more aware of the option of

purchasing a term life insurance product which has

a protection component and coupling this with

another financial product or instrument which

provides a savings or investment component.

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The MAS is further proposing that the salient

features of bundled life insurance products

vis‐a‐vis term life insurance products must be

highlighted to customers so that a meaningful

comparison of the two products can be made.

Specifically:

(a) For term life insurance products, it must

be disclosed that there is no surrender

value and the death benefit is guaranteed

and fixed throughout the policy term; and

(b) For whole life insurance products, it must

be disclosed that policyholders may

receive bonuses (which are

non‐guaranteed) and as such, the death

benefit for whole life insurance products

may be more than the guaranteed

amount at the inception of the policy as

compared to term life insurance products.

Promoting a culture of fair dealing Commission payout structure of regular premium life insurance products Period of commission payout

The FAIR Panel had noted that a longer

commission payout period would better align the

interests of FA firms and representatives with

those of the customer. This would be because a

short commission payout period generally

incentivises the FA representative toward the

conclusion of sales as opposed to the provision of

quality after sales service.

Given the above, the MAS is proposing the

following:

(a) For regular premium life insurance

products with a period of six years or

more, the commission payouts be spread

over a minimum of six years; and

(b) For regular premium life insurance

products with a period of less than six

years, the commission payouts occur

throughout the duration of the product. Re-distribution of commissions

To further incentivise FA firms and representatives

toward the provision of quality after sales service,

the MAS is proposing a cap on the percentage of

commissions to be paid in the first policy year, to

be progressively implemented in phases. For the

first year after the implementation of this new

measure, commission payouts for the first policy

year will be capped at 50% of total commissions.

Subsequently, commission payouts for the first

policy year will be capped at 40% of total

commissions. The remaining commissions apart

from those paid during the first policy year are to

be distributed evenly over the remaining years of

the policy. Balanced scorecard framework for remuneration of FA representatives

The Guidelines on Fair Dealing – Board and

Senior Management Responsibilities for Delivering

Fair Dealing Outcomes to Customers (“MAS Fair

Dealing Guidelines”) issued by MAS had

articulated the general principle that FA firms

should remunerate their representatives in a

manner that encourages them to act in the best

interests of customers.

The FAIR Panel had observed that whilst there

had been improvement in remuneration structures

after the issuance of the MAS Fair Dealing

Guidelines, FA representatives continued to be

remunerated primarily based on sales

performance. In addition, supervisors of FA

representatives were in turn remunerated based

upon the sales performance of their

representatives and would typically receive a

percentage of the overriding commission for each

product sold by FA representatives whom they

supervise.

To better align the interests of FA representatives

and their customers, the MAS is proposing that FA

firms adopt a balanced scorecard (“BSC”)

framework incorporating non‐sales key

performance indicators (“KPIs”) in the

remuneration structure for FA representatives and

their supervisors. MAS will work with the industry

associations to design an industry‐wide BSC

framework, with common parameters on the types,

measurement methods and weights of non‐sales

KPIs. Types of non-sales KPIs

The initial proposal as to non‐sales KPIs will be in

the following four areas:

(a) Quality of advisory and sales process ‐

whether there is sufficient fact‐find

conducted to understand the

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circumstances and needs of the

customer;

(b) Suitability of recommendations ‐ whether

the product recommended is suitable for

the customer based on his or her financial

objectives, investment horizon, risk

profile, financial situation and particular

needs;

(c) Adequacy of information disclosure ‐

whether the representative has

highlighted and explained all material

information to the customer; and

(d) Customer complaints ‐ the number,

nature and severity of substantiated

complaints against the FA representative

for misconduct relating to the provision of

financial advice and poor after‐sale

services. Methods for measuring non‐sales KPIs

In order to measure whether representatives have

met the non‐sales KPIs, MAS proposes that all FA

firms put in place pre‐transaction documentation

reviews and customer call‐backs by supervisors

for all sales conducted by their FA representatives.

In addition, MAS proposes that all FA firms

establish an Independent Sales Audit Unit (“ISAU”)

to perform another level of post‐sale checks on the

quality of the advisory and sales process and as to

whether the recommendations made suit the

customer. Such checks may be done on a sample

basis and include customer surveys. MAS has

noted that it may not be adequate to rely solely on

checks done by supervisors as the remuneration

of supervisors tends to be correlated with the sales

performance of their FA representatives. To

ensure independence, the ISAU should be staffed

by personnel who are not involved in the sales

process and should have access to board and

senior management of the FA firm. Proportion of remuneration to be subject to deductions under the BSC framework

The FAIR Panel had recommended that the

weights assigned to non-sales KPIs should reflect

the primary role of FA representatives in providing

customers with good quality advice and suitable

recommendations, and that the proportion of

remuneration subject to deduction under the BSC

framework be set accordingly.

In addition, where FA representatives have failed

to meet the non-sales KPIs, their supervisors and

managers should incur heavier penalties in the

form of larger deductions from their own

remuneration. This is to take into account the fact

that supervisors and managers have an important

role to play in supervising the provision of FA

services by their representatives. This principle

would apply unless the FA firm is able to

demonstrate that the failure of the FA

representatives to meet non-sales KPIs has not

been due to poor supervisory oversight.

MAS had noted that the remuneration structures

for FA representatives and their supervisors vary

across different sectors and firms. MAS will work

with the industry on the appropriate proportion of

remuneration to be subject to the BSC for

representatives and their supervisors, taking into

account the different remuneration structures in

the industry. Banning of product-specific incentives for FA representatives

The FAIR Panel had noted that product-specific

incentives, which reward FA representatives for

promoting and selling certain financial products,

may encourage pressure selling or the improper

switching of products. Such practices are

detrimental to the customer as they may result in

the customer receiving biased advice or in the

customer signing up for products which are

unsuitable.

Accordingly, the MAS is proposing that FA firms be

prohibited from paying their FA representatives

cash and non‐cash incentives which are tied to

sales volumes of a specific product, or which are

over and above typical commissions paid for

selling that product. Accountability for fair dealing responsibilities in FA firms

The MAS Fair Dealing Guidelines had articulated

five fair dealing outcomes:

(a) Customers have confidence that they

deal with financial institutions where fair

dealing is central to the corporate culture;

(b) Financial institutions offer products and

services that are suitable for their target

customer segments;

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(c) Financial institutions have competent

representatives who provide customers

with quality advice and appropriate

recommendations;

(d) Customers receive clear, relevant and

timely information to make informed

financial decisions; and

(e) Financial institutions handle customer

complaints in an independent, effective

and prompt manner.

Since the introduction of the MAS Fair Dealing

Guidelines, MAS has been assessing FA firms on

their ability to produce fair dealing outcomes.

Shortcomings have been noted in several areas

such as a failure to conduct comprehensive

fact‐finds, inadequate disclosures on products

recommended and inappropriate

recommendations of products that did not match

customers’ financial objectives.

MAS is accordingly proposing to incorporate into

its risk assessment and review of FA firms the

degree to which FA firms’ boards and senior

management promote a culture of fair dealing

within their organisations. The supervisory

intensity with which MAS oversees FA firms will

vary in part according to this assessment. Complaints handling and resolution process

MAS had also noted that there have been varying

standards of Complaints Handling and Resolution

(“CHR”) processes among FA firms.

To address such issues and to ensure consistent

minimum standards in the handling of customer

complaints, the FAIR Panel has recommended

strengthening existing requirements in respect of

CHR processes of FA firms. This would be in line

with other jurisdictions such as the United

Kingdom and Australia where statutory provisions

relating to CHR processes have been

implemented to safeguard consumer interests.

Accordingly, MAS is considering the issuance of

Regulations under the FAA to enhance the CHR

processes of FA firms dealing with retail customers

by requiring such FA firms to:

(a) Establish a CHR process for retail

customers, which would be independent

of the business unit complained against,

and which would be prompt in responding

to and resolving the complaint;

(b) Designate a person or committee

responsible for oversight of the FA firms’

compliance with the regulatory

requirements on CHR;

(c) Make information on their CHR process

available at their place of business or on

their website (if any); and

(d) Track and manage complaints data and

report such data to MAS on a biannual

basis. Involvement of industry associations in promoting fair dealing

The FAIR Panel had also recognised that industry

associations play a useful role in assessing and

monitoring the implementation of fair dealing

outcomes by their members, and accordingly,

MAS is also inviting comment on what initiatives

industry associations could undertake to promote a

culture of fair dealing within the FA industry.

IMPACT ASSESSMENT

It will not be an overstatement to describe the

FAIR Panel’s recommendations as a massive

overhaul of the regulatory regime for the FA

industry. This is so, notwithstanding that the most

controversial suggestion for a ban on commission

payouts has now been withdrawn. This present

CP continues to retain several proposals which

some within the FA industry will be expected to

continue to oppose strongly. As is the case in any

reform of a regulatory framework, the devil would

very much be in the details, and so one should

expect further debate when the actual statutory

provisions and amendment are released for further

comment. At this stage, one can only hope that

MAS will continue to retain an open mind and be

receptive to feedback from all quarters as it

pursues the laudable objective of improving the

regulatory framework for FA services, keeping

firmly in mind not only the interest of consumers

but also the broader interest of the FA industry.

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REFERENCES

Please click on the links below to refer to the

relevant documents:

1. Consultation Paper on the

Recommendations of the FAIR Panel

2. Report on Recommendations of the

FAIR Panel

________________________________________

If you have any questions or comments on this

article, please contact:

Eric Chan

Director, Financial Services Regulation T: +65 6531 2784 E: eric.chan@drewnapier.com

The content of this article does not constitute legal advice and should not be relied on as such. Specific advice should be sought about your specific circumstances. Copyright in this publication is owned by Drew & Napier LLC. This publication may not be reproduced or transmitted in any form or by any means, in whole or in part, without prior written approval.

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