Keynote Address by Mr Goh Chye Boon, Executive Director, Market and Business Conduct Department, Monetary Authority of Singapore, at the Association of Financial Advisers (Singapore) Congress, 4 May 2005
1 I am glad that you have chosen the theme "Doing It Right" for this year's AFA Congress. The Financial Advisers Act or FAA was introduced more than two years ago. Now that we are entering the third year, it is timely for us to take stock and reflect on what the financial advisory industry has achieved, and to consider what it really means for the industry to "do it right" moving forward. The focus on "doing it right" goes beyond complying with the regulations, guidelines and minimum standards. It requires all of us to go the extra mile to uphold the spirit, ethics and professionalism of the financial advisory industry. This is critical to maintaining the integrity and reputation of the industry.
Structural Factors Underpinning Growth
2 We should adopt a long-term view in setting the right direction for the financial advisory industry. We should not be doing it right only for short-term gains and miss the longer-term objectives that will shape and transform what we do. I see two key structural factors underpinning the long-term growth of the FA sector: a rapidly ageing population with longer lifespan, and the importance of retirement planning to remain financially independent in old age. In 1990, about 1 in every 11 Singaporeans was over 60 years of age. This is projected to increase to about 1 in 3 in 2030.
3 As we will live longer than our previous cohorts, retirement planning must take on greater significance in our lives. It is not a good-to-have but a must-have. The liberalisation of CPF rules has given individuals greater autonomy in managing their CPF savings. At the end of March 2005, some $28.6 billion in CPF savings had been invested in various financial instruments including stocks, insurance and unit trusts. However, about $75.5 billion remains un-invested in the CPF. This points towards a sizable untapped market for the financial advisory industry.
4 The good news is that financial planning appears to be catching on among Singaporeans. One recent Straits Times article coined the term "financial planning" as the new buzzword among Singaporeans that displaces the "3 Cs"-country club memberships, cars and condominiums. This is not just about making good investment returns. We are really talking about how financial planning affects the way Singaporeans live their lives, especially in old age, and how it can help consumers achieve a better quality of life.
5 A recent worldwide survey conducted by AXA Group found that 48% of Singaporeans have begun preparing for their retirement. This is a big improvement from where we were 10 years ago, when the 1995 National Survey of Senior Citizens reported that 87.3% of the elderly aged 55 and above did not make any financial provisions for old age. The rising number of community talks, newspaper articles and television programmes on personal financial planning has no doubt played a part in raising awareness among Singaporeans on the importance of financial planning.
6 Meanwhile, product innovation continues apace. You can now find new products such as dual currency deposits, funds with features designed to give a large early payout, and structured notes linked to equities. With so many choices available, the average investor may not have the time or expertise to examine each product and choose one that is appropriate for his needs. This is where your value as a financial adviser comes in: to assess the needs of your clients, recommend suitable products, and monitor your clients' financial plans to ensure that their financial needs are well taken care of.
7 What does "doing it right" mean in an environment of greater product innovation, increased awareness of financial planning, and higher consumer expectations? I will start by sharing with you what we have observed from recent inspections of financial advisers.
8 We have seen varying standards of compliance among our licensed and exempt financial advisers, some of which do not have proper procedures to ensure compliance with the FAA. But we were also impressed by the practices observed in some financial advisers. To share these practices with the industry and to set out our expectations of proper systems and controls, an Information Paper on Good Practices for Licensed and Exempt Financial Advisers was published last November. Let me now highlight some good practices observed during our inspections.
9 First, some financial advisers have put in place a well-structured advisory and sales process to ensure that recommendations made to clients meet their investment objectives, financial situation and particular needs. This has been achieved by first, issuing guidelines to representatives on the information they should gather from clients during the fact-find process; and second, using a standardised methodology to analyse information collected so that suitable products can be identified.
10 Second, financial advisers have also done well to require supervisory review of recommendations made by representatives for the sale of unit trusts and life policies. This is important in ensuring that representatives provide quality advice, comply with FAA business conduct rules, and keep proper documentation.
11 A third commendable effort observed in some financial advisers is the existence of a comprehensive and well-structured training and competency framework. We have seen frameworks that set out procedures to ensure that representatives possess relevant qualifications, undergo continuing education, receive proper coaching, and have their competence assessed and training needs identified. Proper training records were also maintained. This facilitates continuity and allows financial advisers to track and monitor their representatives' competency.
12 There are also challenges that need to be overcome. For example, we observed a lack of proper systems and controls to monitor switching of investment products among some financial advisers. Such monitoring is important to deter commission-driven representatives from engaging in improper switching or churning of investment products, which is detrimental to the interest of clients. To provide guidance to financial advisers on the procedures and controls to monitor switching, the Guidelines on Switching of Designated Investment Products was published in October 2004. We recently conducted a survey among financial advisers to ascertain the degree of compliance with the Guidelines, and will be conducting an inspection of selected financial advisers later this year.
Industry Par Excellence
13 But "doing it right" needs to go beyond putting in place systems and processes and mere compliance with regulations and guidelines. We also need to look at the basic values and the spirit behind the FAA. This entails the industry striving for high ethical standards, where financial advisers and their representatives uphold their responsibilities to treat clients fairly and take care of their long-term financial interests. Simply put, it boils down to the industry having a genuine concern for the financial needs of consumers. This is especially important because your relationship with your clients is a very personal one that is built upon trust and confidence.
14 To achieve this vision of an industry par excellence, MAS refines our regulatory framework to respond to market developments and keep up with international best practices. We will continue with our supervision of financial advisers and take enforcement actions to address breaches. We will also issue further guidelines and information papers to provide guidance to the industry. Consumer education is vital to MAS' disclosure-based regime, and we will continue our efforts to empower consumers under the MoneySENSE programme so that they can make informed decisions.
15 But there is only so much MAS can do. Regulations and guidelines can only help shape and sometimes force behaviours. Ultimately, achieving excellence in the financial advisory industry hinges on industry practitioners taking the lead to "do things right". We depend on you to firmly establish and promulgate the right value system of honesty, integrity and good reputation so that the industry may excel and earn the confidence of consumers. I would like to suggest 3 areas where this value system may be manifested and improved upon.
Strong Compliance Culture
16 First, a strong compliance culture. Our inspections have shown that the standard of compliance varies among financial advisers. Some have put in place comprehensive systems and processes described earlier, but others have fallen short and need to improve. This is attributable to the differences in compliance culture among financial advisers.
17 We have seen some financial advisers promoting a strong compliance culture by structuring the remuneration package of their representatives to uphold their responsibility to comply with the FAA and provide quality advice. For instance, in addition to production targets, the remuneration structure takes into account qualitative factors such as the number of complaints received against representatives, persistency ratios for sales of life policies, proportion of transactions conducted with full fact-find, and compliance records. I would say this is a step in the right direction but by no means the only way to sustain a strong compliance culture. A strong compliance culture must ultimately be anchored by the commitment of top management to walk the talk. Otherwise, it would be reduced to the task of setting written procedures and guidelines that no one follows.
Comprehensive Financial Planning
18 Second, comprehensive financial planning. We have observed a low percentage of full fact-find among financial advisers, despite financial advisers having established advisory and sales processes that allow them to conduct comprehensive financial planning for clients. We encourage the industry to strive for a higher proportion of full fact-find in their advisory and sales process as this is in the long-term interest of consumers.
19 The low percentage of full fact-find has often been attributed to the reluctance of Singaporeans to provide details of their personal finances to their advisers. However, the key responsibility lies with financial advisers, as consistently high percentages of full fact-find have been observed in some financial advisers once management makes a conscious effort to do so. We recognise that the percentage of full fact-find is at best a flawed indicator for the quality of advice as it would be easy for forms to be filled just to improve this statistic. It is far more important for a higher percentage of full fact-find to be achieved in the right spirit of facilitating comprehensive financial planning for the benefit of consumers. This should be the aim of all those who hold themselves out as professional financial advisers.
Getting the Right People
20 Third, getting the right people for the job. At the heart of establishing the right value system is the need to recruit the right kind of people and invest in them. At MAS, we term these as "fit and proper" persons - those who are competent, efficient, honest, have sound financial standing and are persons of integrity. These are also likely to be people who are genuinely concerned about the financial health of their clients.
21 While a good sales track record can be one of your recruitment criteria, qualitative factors such as the prospective employee's history of compliance, conduct, integrity, and competency in advising clients, should also play an important role in determining whether you employ that person to represent your firm.
22 To facilitate employment reference checks, especially for representatives moving across sectors, we urge industry and professional associations to work towards facilitating such employment reference checks across the different sectors of the industry.
23 In conclusion, while the growth potential of the financial advisory industry is bright, the industry will have to rise to the challenge of meeting higher consumer expectations. MAS will continue to play our part, but the central tenet of achieving excellence in the industry lies with a value system of honesty, integrity and good reputation - values which we are confident industry associations and individual financial advisers will continue to establish and promulgate in the journey towards an industry of excellence.
24 In closing, let me wish you a successful and fruitful Congress.