Debated in Parliament on 13 Jul 2015.
Order for Second Reading read.
Madam, I beg to move, "That the Bill be now read a Second time".
In 2012, the Monetary Authority of Singapore (MAS) launched the Financial Advisory Industry Review (FAIR) and a panel chaired by MAS was set up to explore ways to enhance the professional standing and the competence of the financial advisory industry and to create a more competitive and efficient market for the distribution of insurance policies and investment products. The panel, which includes representatives from the industry and consumer bodies, consulted the public and received over 1,300 responses and suggestions. The panel subsequently made 28 recommendations in January 2013, most of which were accepted by MAS, after another public consultation.
The proposed amendments to the Financial Advisers Act (FA Act) will give effect to the accepted recommendations made by the panel. Amendments will also be made to facilitate inspections of financial advisers by foreign regulatory authorities.
Madam, the proposed amendments should be seen in the context of the enactment of the FA Act earlier in 2002 which helped to transform the landscape for financial advisory services in Singapore. There is now greater consistency and better quality in the advisory services provided on both life insurance and investment products. Financial advisers have also made steady progress in upgrading their standards and professionalism. The FAIR initiatives will build on this foundation and put the industry on a stronger footing to meet the needs of consumers for more holistic financial advice in a more complex financial landscape.
MAS has consulted the industry and the public on the amendments. The feedback received has been carefully considered and incorporated into the Bill where appropriate.
Mdm Speaker, I will now go through the main amendments in the Bill.
The first set of changes is in relation to the remuneration structure of the financial advisory industry.
Representatives of financial advisers or FA representatives and their supervisors are today remunerated largely based on sales performance. To better align the interests of FA
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representatives and supervisors with those of consumers, the Bill will require financial advisers to implement a remuneration framework that also incorporates non-sales key performance indicators (KPIs). These non-sales KPIs include assessments on whether the representative has taken steps to understand the customer's needs, recommended suitable products, provided adequate disclosures and conducted himself professionally. A significant proportion of the remuneration of FA representatives and their supervisors will depend on how well they meet the non-sales KPIs. All financial advisers will have to establish an independent sales audit unit to audit the quality of the financial advisory services provided by their FA representatives.
The Bill will also vest MAS with the powers to regulate the payment and receipt of remuneration of financial advisers, representatives and supervisors. This amendment will improve the remuneration practices of the financial advisory industry in two areas.
First, the commissions paid to FA representatives and their supervisors for sales of life insurance policies are currently heavily front-loaded, with the bulk payable in the first year of the policy. With this amendment, the Bill will limit upfront commissions and require total commissions for a life policy to be spread over a specified period. This change will create an incentive structure for FA representatives to support the continuous needs of their customers even after the purchase of a financial product.
Financial advisers and their representatives may be given short-term incentives that are tied to sales of a specific investment product or type of investment product currently. Also to guard against any undue influence from these incentives in the choice of product recommendations, MAS will prohibit the industry from offering such incentives to financial advisers and their representatives. Again, this will encourage financial advisers and their representatives to focus solely on recommending products that are suitable for their customers.
These changes will better align the interests of financial advisers and their representatives with those of their customers. We are not alone in regulating the remuneration of financial advisers. Countries such as the United Kingdom, Netherlands and Australia have also moved in the same direction in recent years to better protect customers.
That is the first set of changes. The second set of changes concerns making the provision of financial advisory services a dedicated profession. To ensure that customers continue to receive good advice, it is important for financial advisers and their representatives to be primarily focused on their financial advisory roles. The Bill will allow MAS to restrict licensed financial advisers from conducting non-financial advisory activities which conflict with their financial advisory roles or result in a neglect of their financial advisory duties, or bring
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disrepute to the industry. This restriction would also apply to all FA representatives.
[Deputy Speaker (Mr Charles Chong) in the Chair]
The third set of changes will strengthen MAS' regulatory powers over insurance brokers. Currently, insurance brokers registered under the Insurance Act are allowed to provide financial advisory services upon notification to MAS. While these firms are subject to financial requirements for their insurance broking activities, no additional financial requirements are imposed on their financial advisory activities as the scale of their advisory business has been small.
However, over the past few years, there has been an increase in the number of insurance brokers expanding the scale of their financial advisory activities. And some of these insurance brokers may not have adequate financial resources to support their larger financial advisory business. To address this risk, the Bill will empower MAS to prescribe or vary the financial or professional indemnity insurance requirements for insurance brokers which are similar to those currently imposed on licensed financial advisers.
The Bill will also empower MAS to approve inspections of financial advisers in Singapore by their foreign parent regulatory authorities, and such inspections will allow foreign regulatory authorities to carry out effective consolidated supervision of financial groups headquartered in their jurisdictions.
Sir, these amendments to the FA Act are part of MAS' efforts to strengthen the financial advisory industry so that it can continue to grow with the changing needs of customers. MAS will work with the industry to uphold the image of a highly competent and professional workforce, able to cope with fast-evolving market and technological changes, and dedicated to meeting consumers' needs. Sir, I beg to move.
Question proposed.
Mr Deputy Speaker, in Mandarin.
(In Mandarin): [Please refer to Vernacular Speech.] Mr Deputy Speaker, firstly, I would like to declare that I am the President of the Singapore Chinese Chamber of Commerce and Industry. After thoroughly understanding the Financial Advisers (Amendment) Bill by the
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Monetary Authority of Singapore, I am very pleased with three positive areas.
The first is establishing non-sales KPIs by the financial institutions, enabling their financial advisers to concentrate on the customers' actual needs and improving on service quality, rather than aggressively promoting products and services to achieve sales KPIs with no concern for professional ethics.
Secondly, it is to put in stringent measures to regulate other types of business that financial advisers can engage in concurrently, in order to avoid any conflicts between the products they represent personally and their financial advisory services.
Thirdly, it is to work with stakeholders to establish a specialised web portal to list life insurance products offered by different life insurance companies. This would enable the consumers to make an easy comparison without the help from financial advisers.
These three fundamental amendments could reduce the tendency for financial advisers to aggressively push their financial products to clients in order to chalk up individual KPI and increase their income and facilitate building up a pool of consumers with clearer mindset for self-help services. These improvements are good learning points for other Government agencies.
Upselling also exists in the application for Government assistance schemes. As many local SMEs are unfamiliar with the preparation of documents and filling in application forms, they tend to outsource the work to consultants. Last year, 44,000 SMEs applied for the Productivity and Innovation Credit Scheme (PIC), representing a 21% increase over the 2011 figures. Such good results must be attributed to the efforts of consultants.
However, some unscrupulous consultants who are keen to clinch a business deal may not care to understand the companies' actual needs; instead, their approach is to promote the products and services aggressively and persuade the client to apply for the Government assistance scheme. Let me cite two actual cases, which are in fact failures.
At the end of last year, a shop owner was persuaded by a consultant to sign an agreement to let the consultant design a Facebook page for market expansion and spent a grand total of $15,000! Why did it cost $15,000? Apparently, $15,000 is the overall cap for the PIC Bonus. This happened to be the "special package" designed by the consultant to help enterprises "get money" from the Government. Some consultants even give enterprises a "rebate". The clueless SME boss was made to buy a cheap product at a high price, much to his chagrin.
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Another gentleman, Mr Koh, fell into the same trap when he encountered an unscrupulous consultant. Last year, he appointed a consultant to help him buy a Customer Relationship Management (CRM) software, to store customer data, and record performance of his sales people. The consultant also charged $15,000, inclusive of the service fee and purchase of hardware and software. However, Mr Koh discovered that this system was incompatible and he had no choice but to revert to using Excel to manage the customer database. Due to work requirements, he is still looking for a suitable system and I hope he can find the right product soon.
In reality, SMEs could approach the SME Centres to help them apply for Government assistance schemes. Government agencies have already streamlined their procedures, and the process is not all that complicated. Just like the specialised web portal to be launched by the Monetary Authority of Singapore (MAS), Government assistance schemes from different Government agencies can be found in the EnterpriseOne portal. However, the EnterpriseOne portal lists much detailed content on Government assistance schemes, including the programmes of many Government agencies. SMEs would need more time to digest all the information and select schemes deemed more applicable. Since the Government mooted the productivity drive, schemes that are most well-received and have the highest take-up rate have been frequently featured in the media. SMEs can take note of these news reports, and decide on which schemes would suit them best.
How do we prevent Government policies from being abused? I believe we could learn from MAS, trace the problem and get to the root cause. We should see what motives and mechanisms have caused the companies to pursue monetary gains instead of upgrading and restructuring.
Every year, newspaper reports tell us that "the Government has set aside an amount of budget to support enterprises embarking on certain programmes." Many programmes would be reported in this manner: "The following scheme benefited x number of enterprises and the total funds utilised were X dollars." From observing such news reporting, I wonder if Government agencies are using monetary grants as a selling point when helping enterprises upgrade. In time to come, business advisers will be inclined to be money-conscious, so will enterprises, and eventually everyone would concentrate on financial gains.
Upgrading of enterprises requires financial support, just as patients need blood transfusion. However, blood transfusion is not a permanent solution. Successful enterprises have to learn how to generate their own blood. Similarly, besides supporting enterprises financially, the Government could also consider other measures. Today, MAS has proposed establishing Non-sales KPIs and I believe this would steer the financial advisers away from merely focusing on the monetary value. I hope other Government agencies could also follow
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this practice. In closing, I support the Financial Advisers (Amendment) Bill.
(In English): Mr Deputy Speaker, Sir, I support the Bill.
Mr Deputy Speaker, I support the Bill as it raises professional standards across the Financial Advisory (FA) industry. Nonetheless, I have several queries.
I do not think it can be disputed that many of us, even those with higher education, know very little about investment or financial products, and especially their risks.
Statistics indicate that poor or insufficient financial advice is a cause for concern in Singapore. Despite the disproportionately large number of FA representatives in Singapore compared to other countries, Singaporeans are under-insured and under-prepared for retirement.
A 2013 survey shows that more than half of Singaporeans lack adequate insurance. And a 2014 survey shows that only a quarter of Singaporeans are following a retirement plan for financial needs, another quarter are working out their plans, while the rest have no concrete ideas at all. Then, there is the 2012 MAS Mystery Shopper survey which indicates that much of the advice dispensed by FA representatives is less than satisfactory: of the recommendations solicited, only 28% were suitable, while 40% may be suitable and 30% were plainly unsuitable.
The extent of our knowledge is usually what we are told by the FA representative, and they tend to focus on the upsides of an investment. We can, of course, read the fine print or do our own research, but most of us will not. So, while this Bill seeks to give more protection to the consumer, we must continue to remind them that this Bill will not eliminate risks or bad practices and that they need to protect themselves by either asking questions or finding out more about the investments they enter into.
It runs contrary to the Bill's purpose for representatives who do in fact advise and influence unsophisticated clients to be allowed to avoid responsibility. In this regard, I have a concern that the intent of the Bill may be undermined by exclusion clauses. The Bill prescribes minimum standards for non-sales key performance indicators, the fulfilment of which affects the FA representatives' remuneration. However, these minimum standards can be contracted out of. For example, a FA representative may ask his client to sign a document stating that he only wants to receive product advice or that the transaction is
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"execution only". In such a case, it would seem that the representative cannot be taken to task for unsuitable recommendations or for poor after-sales service.
Next, I wish to clarify the scope of section 23B, which makes Financial Advisory a dedicated profession. Section 23B introduces a new requirement that a representative must work exclusively as a FA representative unless the conditions prescribed under section 104 are fulfilled. A breach of this and related provisions is an offence. It is not clear on the face of the Bill what the purpose of this restriction is. One likely reason is to prevent a conflict of interest. An example is where a FA representative cum property agent improperly recommends that a client purchase an investment property instead of for further insurance because the former gives him a higher commission. But in other situations, the conflict may be less clear or less probable. I would like to ask the Minister to elaborate on the requirements that will be prescribed under section 104. Will there be a blanket ban on FA representatives holding another job? And what other mischief does the provision target?
My last point is a broader one on the FA industry in Singapore. The Bill tackles the problem from one angle: that of the financial advisers and their representatives. The Bill realigns incentives by improving the remuneration structure to promote fair dealing. It extends its reach to supervisors and also makes financial advisory a dedicated profession. But the best protection is really a well-informed consumer.
The question, therefore, is whether we should do more to improve the financial literacy of Singaporeans. Singaporeans must be alert to the need for insurance and retirement planning, and able to sniff out deals which are too good to be true. One danger is that once we have these regulations in place, people will assume that all FAs are regulated and that they, therefore, have nothing to fear. That will certainly not be the case. I wonder if the Minister has plans to tackle this aspect of the problem.
Tackling the problem from the consumer's perspective also means enabling consumers who are dissatisfied with financial advisory services to seek redress. In this regard, consumers may turn to the Financial Industry Disputes Resolution Centre (FIDReC) to resolve their disputes. FIDReC deals with insurance claims up to a sum of $100,000 and with claims against banks, capital market disputes and other claims up to a sum of $50,000. I would like to ask the Minister how many cases FIDReC handles each year and, more importantly, if there are plans to expand FIDReC's jurisdiction so that disputes can be handled quickly and with lower costs. With that, Mr Deputy Speaker, I support the Bill.
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Mr Deputy Speaker, I thank the Members for their points and I thank Mr Thomas Chua for his support of the Bill. He spoke on several useful points on SMEs, not entirely directly relevant to the Bill, but I think these are useful points and feedback on SMEs which our economic agencies will certainly find useful. He also suggested that other agencies can learn from MAS and I am sure MAS will be happy to share its experience. I also agree with him that compensation models do shape behaviour and that is the key reason why MAS is introducing its new remuneration framework that incorporates non-sales KPIs so that the focus of financial advisory representatives will not be solely on sales.
I would also like to thank Mr Hri Kumar for supporting the Bill and I will address the questions he has raised.
First, on the point about consumers having the option to request only product advice or "execution-only" services from the FA representatives. This flexibility is, indeed, available today. It caters to customers who are more sophisticated or who want to opt out of receiving financial advice. Nevertheless, MAS will take regulatory actions against any FA representatives found to have abused this flexibility to influence unsophisticated customers to purchase unsuitable products.
There are also a few safeguards to deter and detect such behaviours by FA representatives. First of all, under the new remuneration framework, the checks to be conducted on FA representatives will include an assessment of whether they have undertaken the necessary due diligence to understand their customers' investment objectives, financial condition and personal needs. FA representatives who fail to conduct such due diligence, could suffer cuts in their remuneration.
Second, for the more unsophisticated or vulnerable customers, supervisors of FA representatives are required to call such customers after each transaction to ensure they have not been unduly influenced by their FA representatives to purchase unsuitable products.
Third, such abuses may be detected through mystery shopping exercises which are conducted regularly and the Financial Advisers are expected to do so. These safeguards are all subject to MAS' supervisory oversight and MAS will work closely with the FA industry and consumer bodies to assess if further safeguards are necessary.
The Member also asked about the scope of section 23B of the FA Act. I would like to clarify that MAS has no intention of imposing a "blanket ban" on FA representatives holding another job. FA representatives may hold another job, provided the job does not conflict with their financial advisory roles, result in the neglect of their financial advisory duties or
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bring disrepute to the industry.
In consultation with the industry and consumer bodies, MAS has identified four specific jobs that FA representatives are not allowed to engage in. These are: selling real estate, moneylending, promoting junkets for casinos and marketing products that are not regulated under the FA Act. These jobs are clearly in conflict with financial advisory activities. For example, MAS has received complaints against FA representatives who use their regulatory status to market questionable schemes in products which do not accord safeguards to customers under the FA Act. So, MAS will monitor the situation and expand the list of prohibited jobs where appropriate.
Mr Hri Kumar also asked about the annual caseload handled by the Financial Industry Disputes Resolution Centre (FIDReC) and whether there are any plans to expand FIDReC's jurisdiction. Since the launch of FIDReC's operations 10 years ago, it has handled an average of 855 complaints each year. FIDReC's jurisdictional claims limits were set to cover the majority of retail transactions. FIDReC can already take on cases that exceed its jurisdictional limits if the financial institution agrees to allow FIDReC to hear the claim. Nevertheless, I would like to assure the Member that MAS and FIDReC will keep the jurisdictional limits under review to ensure that FIDReC continues to provide an affordable alternative dispute resolution scheme that covers the majority of retail transactions.
Mr Deputy Speaker, the amendments to the FA Act will raise the standards and professionalism of the financial advisory industry to better serve the changing needs of customers. But, ultimately, customers must take responsibility for their financial decisions. I fully agree with the Member that the best protection is a well-informed customer.
MAS has been and will continue to work with the industry and other Government agencies to enhance financial literacy among Singaporeans. The centrepiece of our efforts is MoneySENSE, which is the national financial education programme. Through MoneySENSE, we provide financial education through diverse channels, customised to the needs of different segments of society, in order to raise the overall financial capabilities of all Singaporeans.
For example, to reach out to Singaporeans in the heartlands, MoneySENSE has been organising road shows at public libraries and community centres using games, talks and info-displays to disseminate financial messages. These programmes provide guidance, tools and checklists to help customers and consumers assess their financial needs, including insurance and investment needs.
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In addition, we will be launching an education campaign soon, to remind Singaporeans about the importance of saving and investing for the future, and to introduce low-cost options like Exchange Traded Funds and the upcoming Singapore Savings Bonds. So, campaigns like these also have a role to play in encouraging consumers to learn more about their financial choices and plan ahead for their financial well-being.
Sir, I believe I have addressed the points and queries raised by the Members and I thank all of them for their support of the Bill.
*Bill accordingly read a Second time and committed to a Committee of the whole House.*
*The House immediately resolved itself into a Committee on the Bill. – [Mr Lawrence Wong.]*
*Bill considered in Committee; reported without amendment; read a Third time and passed.*
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