'New Chapter, Same Mission'
Keynote address by Mrs Hauw Soo Hoon, Executive Director (Insurance), Monetary Authority of Singapore at the 24th LUA Congress, 05 Mar 2002
Good morning, ladies and gentlemen. It is a pleasure to join you here today.
The "New Chapter" in the theme of this Congress refers to the Financial Advisors Act. The Act itself was passed by Parliament in October 2001 and requires the Regulations to operationalise it. I am pleased to announce that the MAS intends to release the draft Regulations for industry consultation by the end of this week. With this, we should be on target to effect the FAA in the second quarter of this year.
The FAA would provide an integrated regulatory and supervisory framework governing the provision of financial advisory services for a broad range of investment products, including life insurance.
While the upcoming FA framework would reshape the nature of distribution of investment products including life insurance in the market, let me first review the experience of the past year in the life insurance sector.
2. Review of Past Year - CEDLI
To recap, CEDLI - short name for Committee for the Efficient Distribution of Life insurance - was tasked by the MAS in early 2000 to make recommendations to raise efficiency, transparency and quality in the distribution of life insurance products. The recommendations were important because they were proposed by an industry-led Committee and represented a collective and decisive effort on the part of the entire life insurance industry to raise its professional standards. The recommendations were bold and covered three broad areas of
- Needs based sales process
- Training and competence, and
- Enhanced product disclosure.
They were ambitious also in terms of the agreed time undertaken to implement them, all within the year 2001. It is therefore timely to review the progress.
Needs based sales process
The requirement of a compulsory needs based sales process had at its core the principle of consumer interests. Insurance advisors are required to have a reasonable basis for their recommendations. This is to ensure that due consideration has been given to the person?s investment objectives, financial situation and particular needs.
Looking at the fact find ratios for the year 2001 based on statistics collected by the Life Insurance Association, we noted that 69% of total sales were for product or no advice with only 11.5% for full fact find. We note that the low ratio of full fact find may be partly attributed to the large volume of policies sold under the CPF Investment Scheme for which there is a reduced need for full fact find since these are typically intended for retirement savings. Nevertheless, this information is a useful starting point to track the transformation of life insurance agents from mere product peddlers to true insurance advisors.
Training and Competence
CEDLI recommended every insurer and intermediary principal to have a well-conceived Training and Competence plan that incorporates details on implementation. When the guidelines came into effect in April 2001, insurers were at different stages of completion with their T&C plan. The differential in standards remains even today, almost one year after its implementation date. While all insurance companies have comprehensive training programs, many insurers are required to strengthen the competence component of their T&C plan.
It is essential to continuously assess the adequacy of the knowledge and skills of the advisor. For this purpose, a good tracking system needs to be in place to monitor whether and when the desired level of competence has been attained, how to maintain the desired level of competence, and to identify when upgrading of skills is needed when the situation warrants change.
Another CEDLI recommendation, the disclosure of distribution cost and effect of deduction, was effected in 1 July 2001. It was widely anticipated that consumer reaction to enhanced disclosure would dampen business volume in the immediate. Again, this effect was probably negated as a result of the liberalization of CPF Investment Scheme. There is however a general recognition that there needs to be improved clarity in the benefit illustration which in its present form, could be confusing to the buyers of insurance.
3. Financial Advisors Act - Key Principles
I would like to highlight some key principles underpinning the FA framework.
Customers? Interest ?
I shall first touch upon the focus on customers? interest. Financial Advisors must, first and foremost, give due regard to the interests of its customers. The provision of financial advice must be conducted in a fair, professional and ethical manner. One practical application of this principle is that financial advisors are required to have a reasonable basis for their recommendations.
The first element under this concept is the Know your Client requirement in respect of his financial objectives and situation, risk tolerance, current investment portfolio. Subsequently, in conducting a Needs Analysis process, a FA rep should analyze the information provided by the client and identify appropriate investment products for the client. Proper documentation and record keeping of client information and recommendations should underpin this process to meet the objective of providing good advice to customers.
As an integrated framework, the scope of the FAA cuts across a number of financial services industries that provide financial advice relating to investment products. Consistency in regulatory approach is therefore an important desired outcome. The manifestation of consistency is that advisors from different distribution channels would be subject to the same rules and standards. Likewise, the sale of functionally similar products such as single premium investment-linked policies and unit trusts would be subject to similar rules and standards.
The principle of accountability is essential to ensure that there is a higher-level entity or person who would be accountable for the professional behaviour of a FA representative. This principle is captured under the 1 rep 1 principal rule under the new Act. Each FA rep can represent only one principal. So if you are a tied agent you cannot be a licensed FA rep at the same time. Your principal is responsible for developing, supervising and monitoring the conduct of their representatives at all times, including aspects of market conduct and competence. This is to ensure that there is absolute clarity to investors as to who to turn to for accountability.
The concept of independence was considered by many to be an important condition for customer interests. However, experience from other established markets have shown that this has not been borne out. It was therefore considered more important that FA reps put customers' interests at the forefront by giving good objective advice and be guided by the concept of reasonable basis for advice. Consequently, there was no mention of or requirement for independence under the FAA.
However, as a result of feedback received on the Consultation Paper, the MAS is reviewing the issue with respect to carving out an independent status within FAs. Even if the concept of independence is included, there is a need to clearly define the conditions under which the status of independence is operable.
4. Enhanced Opportunities under FAA - Life Insurance Agents
'New Chapter, Same Mission' is a fitting description of the broad implications under the FA framework for life insurance agents, which really is business as usual, with added emphasis on the consumer and enhanced standards.
Under the new FA Framework, most of you here today who are tied agents will become Exempt FA representatives. Your principal insurance companies are known as Exempt FA because they are already regulated under the Insurance Act so they are exempted from the licensing requirements However, Exempt FAs and their representatives, that is, their agents still have to comply with the full range of all other requirements with respect to their business conduct. These requirements include market conduct, sales and advisory process, and training and competence. From this perspective, insurance advisors, armed with the experience of CEDLI requirements and standards, should be well placed to make the transformation to Exempt FA Reps.
But before we call for a celebration, it will be useful to assess how the general public views practices in the life insurance industry.
One of the challenges that the agency force has to overcome in its transition to Exempt FA rep status, is its pre-existing poor public image. Although we recognize the efforts that some companies have put in to ensure ethical behaviour by their sales force, agents? misconduct remains an outstanding issue that all advisors and reps should strive to rectify.
The types of complaints that we observe relating to agent's misconduct include mis-selling, poor advice and even forgery. Insurance companies have been advised to take proactive steps to resolve these complaints, to be thorough in their investigations so as to identify the true cause of these problems. Insurance companies have been warned not to show forbearance for agents' misbehaviour at the risk of compromising customers' interest.
MAS expects all principals to have a firmer control over their intermediaries and our supervisory approach would be more rigorous and demanding then previously. Any breaches of the FA rules and regulations will more readily face penalties under the Act. The relevance of the 1 rep 1 principal rule becomes clearer in this context.
The enhanced opportunities for life insurance agents, with the coming out of the FAA include the ability to handle sale of unit trusts and cross-selling other life insurance companies products though both are subject to the strategies of their insurance principal to be a distributor for other product providers.
Exempt FA reps must, however, keep in mind that the sale of an expanded product range requires a greater level of competence and further proofs of competence. Life insurance agents should adopt the mindset and be prepared to be committed to a lifetime of continuous learning and development. There is no short cut. The recent experience with health insurance indicated that the mindset change has yet to happen. One of CEDLI's recommendations is to extend the competency requirements to health insurance. All existing life agents must pass a Health Insurance module by July 2002. As individual health insurance is a fairly new product in Singapore and there is no minimum standard in the market, the new entry exam was meant to set the benchmark. However, the MAS has received many requests for exemption from this exam requirement, citing many years of life insurance or general insurance selling as reasons. The fact remains that health insurance is very different from life insurance in terms of product features, contractual provisions, needs planning process and so on. So health insurance becomes the first of many new subjects whose knowledge the insurance advisors would have to acquire from zero-base.
While Exempt FA reps would possibly enjoy greater access to products under the FA framework, it is critical to note that an increased level of competence and professional provision of financial advice should transpire alongside the sale of an expanded range of products.
5. Enhanced opportunities under FAA ? Licensed FA
There may be those in the audience who are presently in the tied agency system but with aspirations to set up Financial Advisory firms or become licensed FA reps. So how do you decide what you should to do next, do you make the change?
I would refer you to my Keynote address made last week to the Association of Independent Life Insurance Brokers [AILIB(S)]. It is available on the MAS website. The speech noted observations that MAS had made over the last 20 months as an administrator of the Insurance Intermediaries Act. I had gone through an analysis; I called it a Reality check and gave some considerations for the Next Steps. The key message is that it has been a rough ride for many life insurance brokers, and there were many lessons learnt by the pioneer batch. Those who are waiting to come in could well learn from these practitioners what are the critical success factors. There is no need to repeat expensive mistakes. Do think through very carefully to select a business model or join a FA firm with a business model that is more likely to succeed.
Interestingly enough, there was feedback following my earlier speech that the MAS was pro-insurer and pro-agency with the message to discourage life insurance agents from becoming licensed FA. Let me reiterate that the MAS is impartial to any distribution channel. Our preference is for channels that are cost-efficient, competent, professionally managed and which adds value in the financial advisory process. Ineffectively managed channels pose risks and create instability in our financial markets. This would result in loss of public confidence that could undermine the MAS?s role to safeguard policyholders' interest.
In concluding, I would like to emphasize the importance of a consistent delivery of valuable, professional and trust-worthy services to an increasingly discerning client base. The participants in the life insurance sector are, the product providers, distributors, company staff, industry associations such as the LUA and the regulators. Every part of the value chain in insurance should be committed to safeguarding policyholders' interest and the maintenance of public confidence through ethical conduct and value add roles.
The FAA may be a new chapter in our lives but our mission continues as before.
Thank you and have a great Congress.