Legal News & Analysis – Asia Pacific – Singapore –  Regulatory & Compliance

Introduction

 
On 26 March 2012, MAS had initiated a review of the regulatory framework for financial advisers, with a view to raising the standards and professionalism of the financial advisory (“FA”) industry generally and also to enhance market efficiency in the distribution of life insurance and investment products in Singapore. This review became named the Financial Advisory Industry Review (“FAIR”).

 
The following are the five key thrusts of FAIR:

• Raising the competence of FA representatives;
• Raising the quality of FA firms;
• Making financial advising a dedicated service;
• Lowering distribution costs by enhancing market efficiency; and
• Promoting a culture of fair dealing.

 
Following the issuance of the FAIR report, in March 2013, MAS published a consultation paper sharing its own policy thinking on various measures recommended under FAIR and inviting comments. The formal policy decisions taken by MAS as a consequence of FAIR were later published on 30 September 2013 when MAS gave its response to the feedback under the consultation paper on FAIR. This current consultation paper further elaborates on the actual measures that MAS intends to undertake to give effect to the policy position already decided upon.

 
Raising The Competence Of FA Representatives

 
Currently, all FA representatives are required to undergo CPD training. To ensure consistency in the quality of CPD training for FA representatives who provide FA services in respect of life insurance and other investment products, a more structured CPD training framework will be put in place.

 
MAS Notice FAA-N13 will be amended to provide for a minimum of 30 hours of CPD training annually for FA representatives. FA representatives who only advise on or arrange mortgage reducing term assurance and/or group life insurance policies will be required to undergo at least 16 hours of CPD training annually. Out of the applicable minimum CPD hours, at least four hours must be in Ethics and eight hours in Rules and Regulations. Only a training course that has been accredited by the Institute of Banking & Finance or the Singapore College of Insurance may be counted towards meeting the minimum CPD hours in Ethics as well as Rules and Regulations.

 
Raising The Quality Of FA Firms – Financial And Personnel Requirements

 
To ensure that licensed financial advisers (“LFAs”) are adequately staffed, properly managed and sufficiently resourced to better safeguard the interests of consumers, MAS will be enhancing the admission criteria and ongoing requirements for LFAs. The details are as follows:

• LFAs would be required to maintain a minimum base capital of SGD 500k, or a lower base capital of SGD 300k if the LFA purchases an additional Professional Indemnity Insurance (“PII”) coverage of SGD 500k. LFAs who only advise others by issuing research analyses or research reports concerning investment products would only be required to maintain a minimum base capital of SGD 250k. This would be effected by means of amendment to the Financial Advisers Regulations (“FAR”).
• LFAs would be required to maintain financial resources that is equal to (i) one quarter of their relevant annual expenditure of the immediately preceding financial year; or (ii) SGD 150k, whichever is higher. This requirement would be effected by means of a new MAS notice that would be authorised under a new regulation 16 of the FAR.
• LFAs with annual revenues of up to S$5 million would be required to obtain minimum PII coverage of SGD 1m, while LFAs with annual revenues of more than SGD 5m would be required to obtain minimum PII coverage of 20% of theiraudited 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 would 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. This would be effected by means of a revised regulation 17 of the FAR.
• 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 requirement on PII.

 
In addition, MAS will tighten up the admission criteria for LFAs by amending the MAS Guidelines FAA-G01 (which would be renamed as the Guidelines on Criteria for Grant of an FA licence and Minimum Standards for LFAs):

• An LFA applicant 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;
• An LFA applicant should employ a minimum of three full-time, resident professionals with at least five years of relevant experience each;
• An LFA applicant 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; and
• Where appropriate, the holding company of the LFA applicant should provide a Letter of Responsibility to MAS.

 
Existing LFAs would have six months from the time the Guidelines are revised to comply with the new requirements.

 
Raising The Quality Of FA Firms – FA Activities Of Registered Insurance Brokers

 
Under the existing legal framework, the regulation of insurance brokerage activities is divided between the FAA (which covers life insurance brokers as financial advisers) and the Insurance Act (“IA”) (which covers general insurance brokers as insurance intermediaries). Insurance brokers already registered under the IA are exempt from having to hold a FA licence for FA services provided that they give the requisite notifications to MAS that they are providing FA services.

 
To ensure that registered insurance brokers which provide FA services are fully capable of managing their FA business, MAS would be amending the FAR to specify that registered insurance brokers who wish to carry on the full range of FA activities as exempt financial advisers must meet the same management expertise, financial and compliance requirements applicable to LFAs, failing which their FA activities will be restricted.

 
To assist registered insurance brokers who are exempt financial advisers, a new set of Guidelines on Requirements for Registered Insurance Brokers would be issued.

 
Raising The Quality Of FA Firms – Non-FA Activities Conducted By LFAs

 
MAS will also introduce into the FAR a new Part VIA that would control the types of non-FA activities which LFAs are allowed to conduct. This is to ensure that LFAs remain professional and dedicated to their role as FA firms, and remain focused on FA services as their core activity. The permissible non-FA activities are:

• Acting as introducers or making referrals in respect of non-FA activities to financial institutions licensed by 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.

 
LFAs will be required to establish and maintain a register of representatives who carry out any non-FA activities. The gross revenue generated by LFAs from their non-FA activities will also be capped at 5% of their total annual revenue derived from their FA business.

MAS will allow for a transition period of one year for FA firms to review their activities and comply with the requirements in the new Part VIA of the FAR, which is expected to take effect on 1 January 2016.

 
Making Financial Advising A Dedicated Service – Non-FA Activities Conducted By FA Representatives

 
Consistent with the restrictions imposed on the LFAs themselves, to ensure that FA representatives maintain a high level of professionalism and competence in their dealings with customers and to minimise possible conflicts of interest, FA firms would also be required to exercise greater control over their representatives, whose professional focus should be primarily on their role in FA services.

 
MAS will specify that FA firms should 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 or her FA role.

 
In addition, MAS will directly prohibit FA representatives from conducting the following non-FA activities:

• Carrying on money-lending business;
• Promoting junkets for casinos;
• Acting as real estate agents; and
• Marketing products that are not regulated under the FAA.

 
For prospective representatives with other gainful employment, the FA firm must require them to obtain the approval of their employers prior to appointing them as representatives. For existing representatives with other gainful employment which the FA firm has assessed as acceptable, the FA firm must ensure that these representatives disclose their representative status to their other employers. In addition, FA firms must put in place processes to ensure that they are informed of any non-FA activity that their prospective or existing representatives conduct or intend to conduct, and have proper systems and controls to monitor their representatives’ conduct of non-FA activities on an ongoing basis.

 
A one year transition period would be given for FA Firms to review their representatives’ activities and comply with the new requirements. In preparation for the new rules coming into effect on 1 January 2016, MAS has specifically advised that FA Firms should complete their assessment by 30 June 2015, and activities that might be in conflict would have to be unwound before the new requirements take effect.

 
Making Financial Advising A Dedicated Service – Use Of Introducers By FA firms

 
To minimise the risk of persons that are not fit and proper acting as introducers, and to enable consumers to ascertain whether they are dealing with an introducer or an FA firm, MAS will also amend the existing regulation 31 of the FAR (which concerns the use of introducers) as follows:

• Requiring FA firms to 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;
• Disallowing introducers from providing product information to customers;
• Prohibiting FA firms from acting 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; and
• Requiring FA firms to 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.

 
Promoting A Culture Of Fair Dealing – Commission Payout Structure Of Regular Premium Life Insurance Products

 
MAS will require the commissions for regular premium life policies paid by product manufacturers to FA firms, representativesand supervisors to be distributed over a minimum period of six years or the premium payment period of the policy, whichever is shorter. This will better align the interests of the FA industry with that of its customers and encourage good after-sales services to customers. First year commissions will also 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.

 
The FAA and the IA will be amended to vest MAS with powers to make regulations on remuneration, and the issuance of a new set of FA regulations to regulate remuneration and incentives.

 
Promoting A Culture Of Fair Dealing – Balanced Scorecard (“BSC”) Framework For Remuneration Of FA Representatives And Supervisors

 
MAS will amend the FAA to require FA firms to implement the BSC framework in the remuneration structures for representatives and supervisors. This is to better align the interests of FA representatives and supervisors with that of their customers and minimise conflicts with customers’ interests that are inherent in volume-based remuneration arrangements. The BSC framework does not apply to:

• a LFA or an exempt financial adviser (“EFA”) who is also a dealer in respect of its carrying on a business of providing execution-related advice;
• a LFA or an EFA in respect of 

i. any financial advisory service provided to a client who is a high net worth individual, an accredited investor, an expert investor or an institutional investor;
ii. any recommendation made with respect to life policies which are sold as an ancillary product to loans with a simple payment basis for the insurance cover; or
iii. any transaction where only factual information has been provided to clients with respect to any excluded investment products, and prior to such transaction, no advice or recommendation has been provided by the LFA, EFA or their representatives, to the clients; and

• a bank or merchant bank.

 
MAS will set out the main components of the BSC framework including the types of key performance indicators that are not related to sales, proportion of variable income subject to the BSC framework, type of infractions that will be subject to the review methodology, assignment of BSC grades, and the responsibilities of the Board and Senior Management of FA firms in a new Notice. It is expected that FA firms must implement the BSC framework by 1 January 2015. To assist in implementation, MAS will also issue a new set of Guidelines on reference checks and transactions checks under the BSC framework.

 
Promoting A Culture Of Fair Dealing – Banning Of Product-Related Incentives For FA Firms, Representatives And Supervisors

 
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 as such incentives may encourage poor market conduct practices such as product pushing and improper switching. Such product related incentives which are given for the sale of pure protection products will be excluded from the ban.

 
This will be done by means of an amendment to the FAA and the issuance of new regulations on remuneration and incentives.

Lowering Distribution Costs By Enhancing Market Efficiency – Facilitating Comparison Of Life Insurance Products And Cheaper Access To Life Insurance Products

 
MAS will launch an online web aggregator to enhance the transparency of information in respect of life insurance products. Theweb aggregator will allow consumers to compare the premiums and other key features of life insurance products offered by various insurers so that they can make informed financial decisions. MAS will require participating life insurers to submit information on life insurance products for publication on the web aggregator, and to pay a fee for the hosting, operation andmaintenance of, and system changes to, the web aggregator.

 
Life insurers catering to the retail market will also be required to offer a class of life insurance products directly to consumers, without charging any commissions. This will provide consumers, who do not require financial advice, with access to a class of life insurance products that meet their basic protection needs at a lower cost. The features of such products will be broadly standardised to make them easier for consumers to understand and purchase without financial advice.

 
The IA would be amended to give effect to these changes.

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