Key Supervisory and Regulatory Initiatives

MARKET CONDUCT

BOX 4
KEEPING PACE WITH PRODUCT INNOVATION

The FAA now regulates the sales and advisory process for several new hybrid investment products. MAS felt that growing retail interest in these products required adequate safeguards to protect Singapore investors.


Structured Deposits
Structured deposits are hybrid investment products where returns are tied to the performance of a reference financial instrument. MAS introduced Guidelines on Structured Deposits to raise standards of banks in the sale and marketing of these products.

The Guidelines on Structured Deposits require banks to ensure that:

  • All marketing materials on such products disclose key information in a clear and adequate manner, and do not include statements that are false or misleading.
  • Bank representatives selling these products are qualified and have a reasonable basis for making recommendations.
  • Steps are taken to segregate the sales process for such investment products from other deposits so that consumers will not be misled into assuming that structured deposits have similar risk-return profiles as traditional fixed deposits.

In addition, MAS issued a Consumer Guide on structured deposits to raise consumer awareness of the risks involved in investing in such products.

Traded Endowment Policies and Traded Life Policies
Traded endowment policies (TEPs) and traded life policies (TLPs) are second- hand insurance policies packaged as an investment product and sold to third party investors.

Given the incidence of fraud associated with foreign TLP product providers in other countries, MAS decided to only permit the distribution of TLPs to non-retail investors in Singapore. Distributors of TEPs will be permitted access to the retail market only with a minimum investment of S$20,000. The TEPs also need to be manufactured in a recognised country where the life company and product provider are regulated. Singapore investors investing in foreign TEPs should also have access to an appropriate overseas compensation and dispute resolution scheme, and a Singapore-based representative office.



FAs are required under the FAA to disclose any remuneration from making recommendations on investment products, or executing a purchase or sale contract of a designated investment product on their clients’ behalf. The purpose of requiring remuneration disclosure is to make consumers aware of the costs of the financial advisory services provided. This will allow them to make better-informed decisions. In May 2004, MAS issued a Practice Note on the Disclosure of Remuneration by Financial Advisers. This provided guidance to FAs on their obligations with respect to remuneration disclosure. It clarifies the types of remuneration to be disclosed, when FAs must disclose their remuneration, and how the remuneration should be disclosed.

In October 2004, MAS issued Guidelines on Switching of Designated Investment Products. The aim of these Guidelines is to provide guidance on the controls, procedures and processes that MAS expects FAs to implement in order to monitor and deter undesirable switching activities. The Guidelines address the disclosure requirements of FAs and their representatives, the types of monitoring procedures to be put in place by the FAs, and how the remuneration structure of representatives can affect their conduct. MAS will conduct a thematic inspection of selected FAs to assess the level of compliance with the Guidelines. We will also work with the CPF Board and the industry associations to address the problem of improper switching and churning in the financial advisory industry.