Keynote Address by Shane Tregillis, Assistant Managing Director, Monetary Authority of Singapore, Association of Financial Advisers (Singapore) Congress, 23 Sep 2003
1 Good morning ladies and gentlemen. It is a pleasure to join you here today.
2 While the last 12 months or so have been difficult for investors, the good news is that global stock markets have started to rally, and there is some cautious optimism that we are beginning to see signs of an economic recovery. But there is still a great deal of uncertainty in the external environment.
3 The theme of this year's conference is 'Dare to Change'. A noble objective, but often easier said than done, especially in the midst of an uncertain environment. In the words of the economist J.K. Galbraith, "Faced with the choice between changing one's mind and proving there is no need to do so, almost everyone gets busy on the proof."
4 Singapore however, as a small and internationally open economy, has not had the luxury to sit by and hope the worst will pass. Rather, we have had to grapple with uncertainty and embrace change. MAS too, has adopted this philosophy, forging ahead with our financial sector reform initiatives over the last five years in spite of the difficult business environment in East Asia.
5 The Securities and Futures Act (SFA) and the Financial Advisers Act (FAA) are products of this period of reform. As most, if not all of you here today have been affected in some way by the introduction of the FAA, allow me to delve into more detail in my talk about this recent piece of legislation.
6 In my talk today I would like to highlight two points:
- First, the regulatory environment is changing. The FAA is our attempt at producing a piece of legislation that can accommodate the emerging realities of the market, and meet the needs of both consumers and industry participants today. We have completed the first phase of fine-tuning the FAA, and will be issuing a consultation paper soon on some of our proposed regulatory changes as part of our second phase of Act amendments.
- Second, that the industry must be prepared to change. While the FAA has put in place regulations to improve business conduct standards across the financial advisory industry, it is crucial that industry participants take proactive steps to establish the trust and confidence of investors.
Reasons for the FAA
The Need for Harmonized Legislation
7 The FAA was introduced for two key reasons. First, to harmonize our legislation so that it would be supportive of an increasingly innovative and complex marketplace. Financial innovations have been developing at a rapid speed and new distribution channels for financial products have emerged to meet customer needs. Investors may now purchase unit trusts from fund managers, banks, securities dealers or Internet portals. Besides the traditional agency sales force, life insurance companies have been relying more heavily on external parties, such as life insurance brokers and banks, to market their policies.
8 The FAA deals with this more complex market by providing an integrated activity-focused regulatory framework for persons engaging in advisory services, consolidating all former regulations governing the provision of such services. The single licence under the FAA allows financial advisers to conduct a number of financial advisory services, reducing the administrative and compliance costs for industry participants. Those of you here who were previously life insurance brokers were once confined to selling life insurance policies under the former Insurance Intermediaries Act (IIA). Under the FAA you can now expand into other areas, such as the provision of advice on securities and the marketing of unit trusts. Since the implementation of the FAA, more than half of all life insurance brokers have been granted approval to expand the scope of their operations.
Rising Consumer Expectations
9 Second, the FAA was a necessary response to rising consumer expectations. Investors today demand to know more than just the basics. They increasingly want investment advice from trained, competent advisers who can help them work out sensible investment plans and who have an understanding of a variety of products that are available in the market.
10 The FAA includes business conduct rules designed to promote fair dealing with customers across the entire financial advisory industry. Key areas include:
- Requirements for financial advisers to consider the needs, objectives and financial situation of their client;
- Minimum standards of competency;
- Standards of conduct for financial advisers on confidentiality of client information, and disclosure of conflicts of interests to clients;
- Limits on the use of the term 'independent' given public expectations of advisers who use that term;
- Restrictions on the activities of a representative to a single principal FA.
11 On this last point, it has come to our attention that some representatives have other business interests or are involved in business activities outside the FA firms they represent. Let me clarify that while it is not our intention to require as matter of law or regulation representatives to be in full-time employment with an FA firm, we do expect FA firms to seriously assess if any potential conflicts of interest could arise from the representatives' engagement outside the firm. FAs should ensure that the advice given to clients is not compromised as a result of the representatives' involvement in other business activities.
12 Since the introduction of the FAA, MAS has embarked on a policy review to consider areas of improvement in our regulatory framework taking into account feedback we have received from the industry. Earlier this month we announced the first phase of amendments to the Act. These were primarily technical refinements.
13 We will also be releasing soon a consultation paper with our proposals for the second phase of Act amendments. In this consultation exercise we re-examine the scope of the FAA in terms of product lines, types of advice and class of investors. Our goal is to fine-tune the FAA so the rules prescribed are commensurate with the risks and complexity of the product being sold, the type of advice being offered - whether general or targeted - and the level of sophistication and hence protection required by the investor.
14 The FAA regulates the sales conduct and advisory process for investment products. These are currently defined as capital market products and life insurance policies. We are considering the need to bring two additional products, namely structured deposits and over-the-counter derivatives, under the ambit of the FAA, and we will be examining the appropriate sales conduct and advisory rules that should apply.
Type of advice
15 Currently, FAs providing financial advisory services must have a reasonable basis for all recommendations, taking into account the needs of the investor. An exemption is granted to generally circulated research reports. We are considering whether to extend this exemption to other types of advice that are similarly meant for general dissemination and not targeted at specified persons as it may be unnecessary to require FAs to conduct a full fact-find and needs-based analysis in these circumstances.
Class of investors
16 We have reviewed the regulatory framework for non-retail investors in the SFA and FAA and will be rationalizing the categories and regulatory treatment of such investors. We are proposing to remove the term 'sophisticated investor' and to incorporate it into the new test for accredited investors.
17 We are also proposing that FAs be exempted from the bulk of the business conduct provisions of the FAA when they service overseas investors to avoid stifling the business development opportunities of FAs. We do not intend to exclude financial advisory services provided to overseas investors from the scope of the FAA entirely so as to safeguard Singapore's financial sector from potential reputation risks. MAS expects FAs to uphold high standards of ethical conduct and fair dealing when providing financial advisory services to all their clients, in Singapore and overseas.
18 We encourage the industry to consider our proposals and provide us with feedback. The consultation will run for at least a month from the date of release of our paper.
19 We recognize that the financial advisory industry in Singapore is still in an early stage of development, and we appreciate that FAs are making large adjustments to familiarise themselves with the new regulatory environment. However, even in these early stages, the FA industry should strive to develop a good reputation by setting high standards for itself.
20 In recent months we have received a number of complaints alleging aggressive product pushing by financial institutions, some of which you may have read about in local newspapers.
21 MAS takes such complaints and findings seriously. If there have been breaches of the FAA, we will not hesitate to take appropriate regulatory action to ensure FAs comply with the business conduct requirements of the FAA in all their dealings with their customers. MAS will be shortly commencing regular inspections on financial advisers.
22 What is clear however, is mere compliance alone is not enough. Indeed what has perhaps been of more concern is the practice amongst some FAs and exempt FAs of complying with the letter of the FAA, without a full appreciation of its spirit or intent. We continue to hear anecdotes about representatives of financial advisers or exempt financial advisers handing out fact find and needs-based analysis forms as a mere formality, without a genuine interest in enquiring into a customer's level of financial literacy, or financial situation. Too much emphasis in the financial advisory process still appears to be placed on product pushing driven by sales targets, commissions and through the use of gimmicks such as so called free give-aways without an analysis of genuine customer needs.
23 Apart from improving compliance with the standards of the FAA, we encourage the financial advisory industry to examine how it can further improve service standards of its member firms and limit aggressive product pushing. For example, the AFA may wish to codify a set of standards or best practice principles that its member institutions voluntarily subscribe to, over and above the prescribed standards under the FAA. We understand AFA is currently working with Spring Singapore to develop international standards for personal financial planning. AFA is also working with the Life Insurance Association to standardize procedures and forms used by life brokers. These are commendable efforts and we encourage AFA to explore other areas where it can take a lead in setting standards for the financial advisory industry.
24 In addition, I consider that it is important for AFA to work on ensuring that member firms have in place credible internal and external mechanisms for dealing with customer complaints and disputes in a fair, affordable and efficient manner. Industry associations in the banking and insurance sectors have set up schemes that provide their customers with an impartial, third-party avenue for mediating and resolving disputes.
25 There is currently no formalized industry based dispute resolution mechanism for the capital markets, and MAS has brought together associations representing securities firms, fund managers and financial advisers to consider the need to set up an industry based dispute scheme.
26 Setting up such a scheme may introduce additional costs for AFA members. However, these costs must be weighed against the gains from avoiding costly legal avenues for resolving disputes, and the reputation benefits that will accrue to the entire industry. MAS hopes that AFA and other industry associations involved in the study of a dispute resolution mechanism for the capital markets, will have a scheme up and running before the end of next year.
27 Singapore firms can be optimistic about the growth potential for the financial advisory industry here. Financial advisers that offer quality advice and service will be best positioned to compete in this growing market.
28 But FA firms must equip and upgrade themselves with the necessary tools to create an edge in a more competitive business environment. Some firms have started to do this. For example, we have seen some firms upgrading their infrastructure by signing up with distribution platforms to support their sales process and back office functions.
29 MAS, too, will do our part to fine-tune our regulatory framework so that its benefits accrue to both consumers and industry participants. The FAA is a work in progress and we are aware that it must constantly evolve to meet developments in the marketplace. This is part of the reality of regulation today. It is not possible to put in place rules that can encompass all eventualities, although we can build into our regulations some flexibility to accommodate innovation and market change.
30 In our drive towards creating responsive regulation, we depend on industry players and professional associations such as AFA for feedback. We are committed to working closely with you and engaging in regular dialogues to obtain your views and listen to your concerns.
31 While aggressive product pushing not based on an analysis of genuine customer needs may increase sales, commissions and profits in the short term, in the medium term it risks undermining the confidence and trust of the customers in your industry. In order to continue to grow the retail financial sector here in Singapore, it is vital for a vigorous industry commitment to maintaining the trust and confidence of the investing public. Industry bodies, such as AFA, have a very important role to play in actively promoting such a commitment among all your members.