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Singapore Policy Body Urges Reforms To Wealth Advisory Industry
Chrissy Coleman
18 January 2013
The Financial Advisory Industry Review Panel, a Singapore-based body, has drawn up a report of 28 recommendations, with the view of improving advisory industry standards, a process which saw the panel considering a ban on commission, a regulation which exists in the United Kingdom and Australia. FAIR, set up by the Monetary Authority Singapore, spent the last eight months deliberating over the recommendations, which were released yesterday under five headings: Raising the Competence of Financial Advisory Representatives; Raising the Quality of Financial Advisory Firms; Making Financial Advising a Dedicated Service; Lowering Distribution Costs; and Promoting a Culture of Fair Dealing. The proposals come at a time when some other jurisdictions, notably the UK, have pushed through reforms aimed at making financial advice more impartial and professional. Starting this year, the UK has enacted a programme called the Retail Distribution Review, which, among other features, aims to stamp out the use of trail commissions on financial products. The RDR was introduced in the wake of the financial crisis and concerns about whether investors had been sold inappropriate financial products. In his presentation of the FAIR report, the body's chairman and assistant director of the MAS, Lee Chuan Teck, explained why FAIR was established, he said: “ needed to raise the standard of practice in the Financial Advisory industry. This was demonstrated starkly by the mystery shopping exercise that MAS conducted at the end of 2011. In the sample of 500, 30 per cent of the products recommended were clearly unsuitable.” Consequently, the panel put forward its recommendations under the five “thrusts” outlined above. Competence With the aim of raising the competence of financial advisory representatives, FAIR suggested raising minimum academic qualifications required to enter the sector as a professional. “Financial products and client needs are becoming more complex. A higher level of education will better enable representatives to keep up with these developments,” Lee said. Under the same theme of raising competence, FAIR recommended paying close attention to Continuing Professional Development , namely increasing the number of hours financial advisors are required to spend on regulations and ethics. Quality Lee said that licensed financial advisory firms in Singapore , need to generally improve in quality and suggested measures of how they would do so. This included raising the minimum working experience of CEOs to 10 years and requiring these firms to have an independent and dedicated compliance function. “The changes are significant and sufficient time should be given for firms to meet these new requirements,” he added. Dedicated service FAIR put forward the aim of making financial advising a dedicated service, saying that while the panel does not completely oppose financial advisers working on non-FA activities , it believes there are three risks involved in doing so: conflict of interest; tarnishing the image of the industry; and dilution of focus. In order to avoid these jeopardies, FAIR have crafted a set of principles to guide FA firms., which prescribe selling real estate and marketing investment products that are not regulated under the Financial Advisers Act, as examples of activities that should not be conducted by financial advisers. Another issue under this theme of making financial advisory a dedicated service addressed the role of “introducers”, which FAIR said should not operate under remuneration structures that are tied to volume of transactions and should be prohibited from providing customers with product information. Distribution costs It seems FAIR intensely considered how the industry could lower distribution costs, at one stage considering to re-impose a hard cap on commissions or even ban commissions altogether, like the United Kingdom and Australia have recently done. “However, it was not clear that fees would necessarily be cheaper than commissions. In fact, it was more likely that customers with smaller investments ended paying more. When we started this review, we did an on-line survey on Singaporean’s receptivity towards a fee-based model. 80% were not prepared to pay an up-front fee for advice,” Lee said. Among measures to reduce distribution costs is FAIR’s requirement of fund managers to disclose trailer fees paid to financial firms for collective investment schemes in the “Product Highlights Sheet”. Specifically with regards to the insurance sector, a web aggregator will be developed for consumers to compare life insurance and critical illness insurance products. Fair dealing Finally, the panel recognised that a fair dealing culture cannot be instilled by rules alone - it needs to be embedded into remuneration structures and management responsibilities. “We believe that representatives’ remuneration, which is largely tied to sales volume now, should be better aligned with customers’ interests, said Lee.” This includes the recommendation of banning all product-specific incentives. Another set of recommendations dealt with management responsibilities. – according to FAIR, board and senior management should be responsible for building a fair dealing culture in their firm, encouraging the strengthening of complaints handling and resolution processes. These recommendations from FAIR, come after MAS conducted a review of the financial advisory industry to enhance the professionalism and competence of financial advisors, and create a more competitive and efficient system for distribution of life insurance and investment products, in March last year. At that time, MAS’s managing director said: "Many life insurance and investment products are often not easy to understand. Many people are not financially savvy. And many of those who are, do not have the time to review the range of insurance and investment products available, and understand what is best suited for their needs. This is where financial advisory service comes in. Financial advisors can help people identify their insurance and financial planning needs and recommend suitable products."