Financial Advisers (Amendment) Bill

Mr Speaker, Sir, first, I wish to declare my interest as an employee of Standard Chartered Bank. I speak in support of the Bill.

The Financial Advisers (Amendment) Bill seeks to improve the protection of the investing public by extending civil liability to FAs on their obligations to furnish product information to investors, and not to make false and misleading statements.

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The introduction of this Bill is timely in the wake of the Mystery Shopping exercise commissioned by MAS. In their report released in July 2012, MAS found the quality of financial advice and information provided by FAs to be "inadequate". Up to 30% of the products recommended did not match the client's financial objectives and investment horizon, and there is significant room to improve market conduct.

The amendments proposed are in line with expectations that FAs are to exercise due care and diligence when making representations of products that they recommend to clients. Only when clients have thorough and accurate information will they be able to properly evaluate financial products in terms of suitability, risk exposure and expectations of investment returns. This Bill will further raise the standards expected of FAs in disclosure requirements.

However, Sir, section 26 of the Bill may have gone too far in imposing liability with the range of prohibited conduct as it relates to FA representatives, not so on FA firms. I would like to seek clarification on the level of due diligence that one can reasonably expect from a licensed FA representative. Product information is prepared by financial product specialists, and it may be asking too much of an FA representative to judge whether every piece of information provided in the Product Highlights Sheet is correct. The amendments extend liability from "intention to deceive with false and misleading statements", to include recklessness and negligence. Given that the technical elements in financial products are assessed by specialists, I am concerned about the challenges in ascertaining if an FA representative "knows or ought reasonably to have known that the statement is false or misleading", per the Bill.

Sir, as MAS implements this series of tightened regulations, and also a slew of measures set out in the 2010 Consultation Paper, I would like to sound a cautionary note about imposing overly onerous requirements. These could well stifle the development of the financial market and have unintended consequences for investors, in terms of product choice, costs and convenience.

I have observed how FAs in other Asian markets, in their efforts to comply with regulations, end up building safeguards into their client investment processes that are bureaucratic and inconvenient. This ends up becoming a frustrating experience for their clients. One example is the insistence that financial transactions can only take place in person at the FA's branches where interactions with clients are fully recorded.

Another example is clients being subjected to lengthy documentation, confirmations, double confirmations and independent checks in order to guarantee that compliance can never be disputed. And each time the client buys the same product, he is subjected to the same lengthy disclosure process, as if he is buying the product for the first time.

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To facilitate the implementation of this Bill, I urge MAS to guide FAs in their interpretation of the changes so as to strike the right balance between building appropriate levels of safeguards for the investing public and unnecessary bureaucracy with no value added outcomes for investors.

Another point of caution, I urge MAS to ensure that, in tightening the regulations, they do not inadvertently constrain consumers' access to advice and products that meet their financial planning and retirement needs. Allow me to illustrate this danger with the sweeping reform of the UK's financial advice industry, known as the Retail Distribution Review. This reform, currently underway, will raise the costs and requirements for dispensing financial advice so sharply that industry players believe they can no longer afford to advise less affluent consumers in retail settings. These consumers will have to turn to non-advised service or use online "do-it-yourself" channels to navigate their own financial planning and retirement planning alone.

One major UK bank has announced that they will no longer offer retail customers financial advice at their retail bank branches. And several other key players have decided to stop servicing mass market customers, preferring to only offer holistic financial planning services to clients with a minimum level of investible assets because they believe it is no longer commercially viable to serve smaller clients.

So, MAS should ensure that the proposed amendments do not adversely impact the average consumers' access to the much needed financial advisory services that help to secure their financial future. The changes should not limit access to quality and variety of products to meet their needs.

In reality, raising the standards of market practice can only be achieved by raising the skills, knowledge and expertise of practitioners within the financial industry. It is often the case that when FA representatives provide inaccurate information to clients, they do so not out of wilful intent but rather because of a lack of knowledge and expertise.

Sir, currently, the entry requirements for anyone seeking to be an FA representative are four GCE "O" level passes. I find these to be inadequate, and not in keeping with the rising complexity of financial products, and also the intricacies involved in financial planning and the rising service expectations of a more educated and sophisticated public.

I hope that MAS will review the competencies of FA representatives critically as part of the wider Financial Advisory Industry Review, in consultation with the industry players and also benchmarking them against other jurisdictions, such as Australia and the UK.

I believe there is room for a higher standard in academic preparedness for a select group of FA representatives, so that they can serve the burgeoning wealth management market in Asia. I would like to ask that MOE consider introducing a course of study leading to a Degree in Applied Banking and Finance, which, in turn, would lead to a professional qualification for the Financial Advisory industry. This practice-oriented degree, which should be developed in close consultation with MAS and the financial industry, should equip students with a strong understanding of financial products and deep expertise in financial planning.

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The programme should aim to produce graduates with a very special focus on understanding Asian investors and investment opportunities in Asia. Such an approach will generate a pool of Singaporean graduates who are able to serve the needs of increasingly sophisticated investors. They will be able to tap into the huge opportunities presented by the rapidly growing mass affluent segment throughout Asia who are attracted to bank in Singapore.

Sir, I support the amendments under section 98C, which empower the Court to have regard to the claimant's reasonable effort to minimise his loss and resolve the dispute before commencing civil action in court. With this amendment, I would like to suggest that the jurisdiction of the Financial Industry Disputes Resolution Centre Ltd, FIDReC, be expanded to cover cases beyond $100,000 for claims on insurance companies and $50,000 for disputes between consumers and banks. Lifting the cap to higher amounts will help to make sure that investors have access to a low-cost dispute resolution scheme that is both independent and impartial.

Finally, I believe that the best protection against mis-selling is a knowledgeable investor. Investors should understand their rights, what they can expect from a financial adviser, and questions they should always ask of any product they are considering, to ensure complete understanding. They should absolutely be jointly responsible for ensuring the suitability of products that they purchase. In this regard, I believe there is much we can do to educate the investing public on risks, pitfalls and the importance of sharing their own details with the FA to allow proper assessment of what is best for them.

In conclusion, I believe that the proposed amendments will enhance market conduct. They are in line with the standards set in other leading financial centres. When implemented effectively, they should augment our efforts to further strengthen Singapore's position as a leading international financial centre and improve consumer confidence and trust. Mr Speaker Sir, I support the Bill.

Mr Speaker, Sir, I would like to thank both Ms Foo and Mr Gan for their support of the Bill, and the pertinent issues that they have raised. Mr Speaker, if I may make a broader observation of the three speeches we just heard from Mr Ong, Ms Foo and Mr Gan. Legislation concerning the financial markets often appears and is abstruse and highly technical. But it is critical to the smooth functioning of our financial markets and our economy, and it is critical to preserving investors' confidence in our market. I think the speeches we have heard from Mr Ong, Ms Foo and Mr Gan, and the very thoughtful points they have made illustrate the real value of having in this House a few Members with experience in the financial markets. I just like to make that broader observation.

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The first question that has been raised concerns how far we should go in requiring Financial Advisory firms to exercise care and diligence when making representations on products they recommend to their clients. How far should we go? The proposed amendments in section 26 of the Bill set out this duty and penalise recklessness or negligence when making representations to clients. The amendments are, in this regard, similar to the standards in other jurisdictions, certain other major jurisdictions like the United Kingdom and Australia. The amendments do not seek to impose liability on FA firms or their representatives where they have acted honestly, carried out the necessary due diligence and have reasonable basis for the statements that they make.

Specifically, with regard to the question that Ms Foo has posed, the law will not impose liability on FA representatives – in other words, the individuals who represent the FA firms – when they use statements that have been approved for dissemination by the FA firms which they represent. Where the representative uses statements approved by his or her FA firm, the representative cannot be said to have been negligent or reckless. In taking the decision to distribute certain investment products, an FA firm needs to ensure that it has reviewed and understood the key features of the product, and is able to explain the product to its clients. An FA firm should seek explanations from the issuer or the manufacturer, as they call it, of the product, if necessary, as part of its due diligence process.

Mr Gan Thiam Poh raised a useful point, which is that you have situations in rapidly changing markets where investments go wrong for reasons that are quite unrelated to the advice that has been provided by the FA firm. Sometimes, an investor turns around and accuses the FA firm of having misled him. Let me just make two points in that regard. First, it is important for an FA firm to inform customers upfront of the key risks involved in an investment, not just the potential upside. Sometimes, we notice the tendency to place great emphasis on the potential upside and only routine or passing mention of the potential risks. So, that is a duty. It is a duty that the FA firm owes its customers.

The second point I like to make is that the Act makes the FA firm liable only if a false or misleading statement is made recklessly or negligently, and the loss incurred by the investor can be attributed to the statement. Ms Foo's observation on clients in other jurisdictions being subjected to excessive documentation to absolve FAs of liability is worth bearing in mind.

In formulating our proposed amendments, MAS' aim has been to improve the financial advisory process in the way that better serves the investors and develops a culture of advice over the long term that will benefit retail investors in particular. In this regard, I strongly urge both the industry and investors to view the documentation process and the compliance cost that FA firms will have to bear, not merely as regulatory requirements, but as a process, as part and parcel of a process that enables FA firms to carry out their duties in the best interest of their clients. We must have a robust process, one that ensures that the FA has obtained the necessary information about the client and, therefore, understands the client's ability to take on risks and his investment time horizon before recommending an investment product. The process must also ensure that all relevant and material information is disclosed to investors to enable them to make a well-informed investment decision.

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Putting one's savings into an investment product is an important decision for anyone, and especially for retail investors. Even if the product remains the same, the circumstances of the investor may have changed. MAS, therefore, encourages investors to take their time and not rush into making an investment decision. They should ask the FA the right questions and not sign on documents that they do not understand. I cannot emphasise enough. Never sign documents that you have not fully understood. Therefore, I can assure Members that as part of the ongoing review of the financial advisory industry, MAS would take into account the experiences of other jurisdictions when it calibrates the rules and best practices that are appropriate to our situation in Singapore. We are mindful of the risks of over doing things; over doing the documentation and leading to excessive compliance costs.

On FIDReC, Ms Foo has suggested the FIDReC's jurisdictional limits be raised. I should first clarify that FIDReC operates as an approved dispute resolution scheme under the MAS Act, but it is an independent institution that operates in accordance with its own terms of reference.

The jurisdictional limits of FIDReC or the claim limits are set out in its terms of reference, which FIDReC will review from time to time. The current claim limits were established in 2005, taking into account FIDReC's role as an affordable dispute resolution option for the average consumer. That was the intent, as well as the fact that its awards bind financial institutions but do not bind the consumers. The limits were set to cover the majority of retail transactions.

Currently, if a complainant wishes to bring claims which exceed FIDReC's jurisdictional limits, FIDReC can hear the claim if, firstly, the financial institution agrees to allow FIDReC to hear the claim; and, secondly, if the complainant agrees that any award will be capped at FIDReC's jurisdictional limits.

MAS will bring Ms Foo's suggestion on the claims limit to FIDReC's attention as part of the continuing dialogue with FIDReC on how to ensure the relevance and efficacy of this alternative dispute resolution scheme.

Competency – a very important issue. Rules alone cannot work to raise standards or practice. As Ms Foo has pointed out, the skills and competencies of practitioners in the industry and the empowering of investors are two important elements in the equation. MAS has taken several steps to raise competencies, besides the measures that we have introduced in the past two years to enhance the sale and advisory process for listed and unlisted investment products. MAS has also required representatives to provide advice on more complex products, what we call "specified investment products", to pass additional examinations on product knowledge and analysis. This aims to ensure that representatives are apprised of developments relating to specified products and are quick to advise clients on their key risks and features. And I quite agree with Ms Foo that we should explore the development of practice-oriented degrees in Applied Finance. I am sure MOE will consider this together with our tertiary institutions. It is probably helpful that the present Minister for Education is a former Managing Director of MAS and, indeed, the present Minister in charge of the MAS is a former Minister for Education.

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At a broader level, the on-going Financial Advisory Industry Review (FAIR) process that I mentioned earlier, is looking into enhancing the professionalism and quality of financial institutions and their representatives so that they can deal with customers fairly. The FAIR process is an extremely important process and we are going about this carefully. The FAIR panel includes representatives from the financial advisory industry, as well as from investor and consumer bodies, academia, the media and other stakeholders. So, I think this diversity of the panel will ensure that the balance of perspectives is heard and that the recommendations are realistic and achievable. The FAIR panel is expected to issue its report within the next two months.

Finally, the need for knowledgeable investors, well-informed investors. We recognise fully the continuing need to raise financial literacy amongst investors themselves. We were talking about this during Question Time earlier as well. Better understanding of the basic risks involved in different investment products, different types of investments, and what information the customer should ask for before investing, will help customers and retail investors to evaluate the financial advice they receive and make informed investment decisions. The more informed customers are, the more the discipline that will be brought to bear on FA firms as well. It is a process that involves raising standards on both sides but there is a relationship between the two. The higher the standards of advice demanded by customers and the greater knowledge they have in evaluating the advice, the more we are likely to see the raising of standards amongst financial adviser firms. But investor education will continue to be our focus at the MAS in this coming year and, particularly, through the MoneySENSE programme.

Mr Speaker, Sir, to conclude, I stress again the package of amendments to the FAA as one that will seek a better balance in regulation; one that will encourage the development of a culture of financial advice that is centred on the needs of the customers. I urge the industry to view the amendments as a means to improve professionalism as a basis for sustained growth of the financial advisory business. Quality financial advice, coupled with competitive and transparent costs, will build consumer trust in the industry and enable the industry to grow on a sustainable basis in the years to come.

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Okay. The clarification is this. Would the Securities and Futures (Amendment) Bill, together with the Financial Advisers (Amendment) Bill, look at the overall OTC derivatives of financial institutions, perhaps not on a net basis, but on a gross basis, so that the gross overall exposures are in OTC derivatives or CDSs of financial firms, in addition to their credit ratings, before the products are allowed to be sold to the investing public?

Mr Speaker, that is a useful point. Indeed, the MAS does look at gross exposures of financial institutions and would want to discriminate between firms which have large gross exposures and subject them to greater or higher requirements. And that is the way we have to calibrate things generally. It cannot be one-size-fits-all. There are some players that are doing something dangerous but they are small and they do not pose systemic risks, and they do not have retail customers. We should not have to subject them to a large amount of regulation and a large amount of compliance costs. But there are other players which, by virtue of their size, do get involved in large bilateral exposures, as well as just large risks to their balance sheet, and which do have retail clients. We have to subject them to greater scrutiny, which means greater supervision as well as, possibly, a higher standard of rules that they have to comply with.

*Question put, and agreed to.*

*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 Tharman Shanmugaratnam].*

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*Bill considered in Committee; reported without amendment; read a Third time and passed.*

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