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Singapore – MAS Issues Consultation Paper On Implementation Of FAIR Proposals.

20 November, 2014

 

Legal News & Analysis – Asia Pacific – Singapore  Capital Markets

 

On 2 October 2014, the Monetary Authority of Singapore (“MAS”) released a consultation paper on legislative amendments to the Financial Advisers Act and Insurance Act to implement the policy proposals under the Financial Advisory Industry Review. The main proposals in the “Consultation Paper on (1) Draft Legislation and Proposed Legislative Amendments to Effect the Policy Proposals under the Financial Advisory Industry Review; and (2) Proposed Legislative Amendments to Authorise Inspections by Foreign Regulatory Authorities under the Financial Advisers Act” (“Consultation Paper”) are summarised below.


Continuing Professional Development


A more structured Continuing Professional Development (“CPD”) training framework will be put in place for representatives of Financial Advisers (“FAs”) who provide financial advisory services in respect of life insurance and other investment products. Under this framework, a FA representative must fulfil prescribed a number of minimum hours of CPD training: 16 hours for FA representatives who only advise on or arrange mortgage reducing term assurance and/or group life insurance policies, and 30 hours for all other FA representatives. At least four of those hours must be in Ethics and eight in Rules and Regulations.

 

Enhanced Financial Admission Criteria And Ongoing Requirements


The MAS will be enhancing the financial admission criteria and ongoing requirements for licensed FAs (“LFAs”) as follows:

 

  • Minimum Base Capital:
    • LFAs who only advise others by issuing or promulgating research analyses or research reports concerning investment products will be required to maintain a minimum base capital of SGD 250k.
    • All other LFAs will be required to maintain a minimum base capital of SGD 500k. However, if the LFA purchases Professional Indemnity Insurance (“PII”) coverage of SGD 500k on top of the minimum statutorily specified amount it may maintain a lower base capital of SGD 300k instead.
  • Financial Resources: LFAs will be required to maintain financial resources that are the higher of:
    • one quarter of their relevant annual expenditure of the immediately preceding financial year; or
    • SGD 150k.
  • Minimum PII Coverage:
    • LFAs with an annual revenue of up to SGD 5m will be required to obtain minimum PII coverage of SGD 1m.
    • LFAs with an annual revenue of more than SGD 5m will be required to obtain minimum PII coverage of 20% of their audited gross revenue of the immediately preceding year, subject to a cap of SGD 10m.
    • LFAs who only advise others by issuing or promulgating research analyses or research reports concerning investment products will be required to obtain minimum PII of SGD 500k.
    • The amount of deductible for the PII policy will be capped at 10% of the LFA’s base capital.

Existing LFAs will be given a two-year transitional period to meet the new requirements on base capital and financial resources, and a one-year transitional period to meet the new PII requirement.


Enhanced Admission Criteria And Minimum Standards


In addition, an LFA applicant should be able to show the following:

 

  • It should have at least five years of proven track record in carrying on a business of providing any FA services.
  • Its proposed CEO appointee should have at least 10 years of relevant working experience, of which at least five years should be at a managerial level.
  • It should employ a minimum of three full-time, resident professionals with at least five years of relevant experience each.
  • It should have a compliance function that is independent of the advisory and sales function. For LFAs with more than 20 FA representatives or a gross annual revenue of more than SGD 5m, the compliance function should be both independent and dedicated.
  • Where appropriate, the holding company of the LFA applicant should provide a Letter of Responsibility to the MAS.

FA Activities Of Registered Insurance Brokers


Registered insurance brokers will be required to meet the same management expertise, financial, and compliance requirements applicable to LFAs, failing which their FA activities will be restricted.

 

Non-FA Activities Conducted By LFAs


The non-FA activities of LFAs will be restricted to:

 

  • Acting as introducers or making referrals in respect of non-FA activities to financial institutions licensed by the MAS;
  • Providing training and consultancy in respect of financial planning or financial literacy aimed at educating and empowering consumers; and
  • Providing will writing, estate planning, and tax planning services.

The gross revenue generated by LFAs from such activities must not exceed 5% of their total annual revenue derived from their FA business, based on their last audited financial returns. They must also establish and maintain a register of representatives who carry out any of the above non-FA activities.


Non-FA Activities Conducted By FA Representatives


FA firms should only recruit representatives whose professional focus is primarily on their FA role. Accordingly, the MAS will require FA firms to, among other things, assess the non-FA activities of their representatives to ensure that:

 

  • The activities do not conflict with the FA firm’s business;
  • The activities do not tarnish the image of the FA industry; and
  • The conduct of the activities by the representatives will not lead to a neglect of his FA role.

The following are prohibited non-FA activities:

 

  • Carrying on a moneylending business;
  • Promoting junkets for casinos;
  • Acting as real estate agents; and
  • Marketing products that are not regulated under the Financial Advisers Act.

 

Use Of Introducers By FA Firms


The following restrictions are proposed to apply to the use of introducers by FA firms:

 

  • FA firms must institute adequate policies and procedures to assess, and to be satisfied that, the appointment of introducers would not give rise to any conflicts of interest to the FA firms or their customers, and would not tarnish the image of the FA firm or the FA industry.
  • Introducers may not provide product information to customers.
  • FA firms may not act as introducers in respect of investment products for which they are permitted to provide advice, unless a customer initiates an enquiry on that class of investment products or a specific product within that class.
  • FA firms must prepare a Client Acknowledgement Form (“CAF”) containing all the information which the introducer is required to disclose to the customer, and which the introducer must use as a script when carrying out introducing activities. After the customer has provided his or her acknowledgement and consent on the CAF, the FA firm must ensure that the introducer provides a copy of the CAF to the customer for his or her retention. The FA firm is required to retain records of every customer’s acknowledgement and consent obtained by the introducer.

Remuneration Structures


Commissions for regular premium life policies paid by product manufacturers to FA firms, representatives, and supervisors are to be distributed over a minimum period of six years or the premium payment period of the policy, whichever is shorter. First year commissions will be capped at 55% of total commissions; the remaining commissions of at least 45% will be paid out over the next five years or the remaining premium payment years, whichever is shorter.


To further align the interests of FA representatives and their supervisors with that of their customers, the following additional measures are proposed:

 

  • FA firms will be required to implement the Balanced Scorecard framework in the remuneration structures for representatives and supervisors as from 1 January 2015. However, to give the industry sufficient time to adjust, the MAS has indicated that the legislative changes will only come into force in January 2016.
  • The MAS will ban short-term product-related incentives that reward FA firms, representatives, and supervisors for recommending specific investment products or a specific class of investment products. Productrelated incentives which are given for the sale of pure protection products will be excluded from the ban.

 

Access To Life Insurance Products


The MAS will be launching an online web aggregator to enhance the transparency of information in respect of life insurance products. Participating life insurers must submit information on life insurance products to the MAS for publication on the web aggregator, and pay a fee for the hosting, operation, and maintenance of, and system changes to, the web aggregator. In addition, life insurers catering to the retail market will be required to offer a class of life insurance products directly to consumers, without charging any commissions.


Authorising Inspections By Foreign Regulatory Authorities


The MAS is proposing to amend the Financial Advisers Act to allow it to grant permission to foreign regulatory authorities or their appointed agents to conduct inspections of FA firms in Singapore.

 

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For further information, please contact:

 

Elaine Chan, Partner, WongPartnership
elaine.chan@wongpartnership.com

 

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