Speech by Mr Low Kwok Mun, Executive Director (Insurance), Monetary Authority of Singapore, at the 28th IFPAS National Congress, on 7 March 2006
Good morning, ladies and gentlemen.
2 I would like to thank IFPAS for inviting me to address you this morning. It is indeed my pleasure to be here, speaking to professionals from across the financial industries.
3 Prospects for the financial advisory industry in Singapore look bright. Several economic and demographic trends point towards continued growth for the financial advisory industry. The Singapore economy grew by a healthy 6.4% in 2005 and the growth momentum is expected to continue this year. The robust growth was partly attributed to strong performance in the financial services sector. In 2005, total new business premiums for the life insurance industry grew by about 19% to S$1.3 billion, spurred mainly by growth in single premium products.
4 The proportion of the Singapore population aged 65 years or more is projected to grow from the current 8.4% to 18.7% by 2030. With this ageing population, we can expect increased demand for retirement and healthcare services. These include retirement savings plans, annuities and long-term health insurance. The financial advisory industry has an important role to play in offering professional advice to Singaporeans as they plan for retirement.
5 The operating environment has also changed significantly. Convergence in financial services has blurred the boundaries between insurance, banking and capital market activities. The introduction of the Financial Advisers Act or FA Act mirrored the convergence by streamlining the regulatory framework for the distribution of investment products such as securities, futures and insurance plans across the financial sector. This has facilitated the creation of multiple distribution channels for such investment products. The FA Act also formalised requirements for structured needs-based advisory and sales processes.
6 Besides changes to the regulatory landscape, the profile of the average consumer has also changed. Consumers are now generally better educated and have higher disposable incomes. They are also more disposed to ask questions about the products being marketed in order to have a better understanding of the risks and returns before making their investment decisions.
7 In 2005, we conducted the first National Financial Literacy Survey to assess what actions Singaporeans have taken to manage their finances and how much they know about common financial products and services. The survey revealed that Singaporeans generally have healthy attitudes towards money matters. It is heartening to note that the majority of Singaporeans save, monitor their spending and are generally responsible in the use of credit.
8 Most Singaporeans recognize the importance of financial planning and have taken some basic steps. Among those who invested, many considered the risks before doing so and monitored their investments. While these findings are encouraging, the survey also highlighted areas of concern. In general, Singaporeans recognise the importance of taking responsibility for their own financial security and saving early for their retirement but many have yet to translate these positive attitudes into concrete actions. Many Singaporeans do not have a clear idea of how much they would need for their retirement. In addition, many did not set aside sufficient cash savings for emergencies. The majority are also not aware of the key features of common financial products such as life insurance policies and unit trusts. Not surprisingly, those with lower educational qualifications and lower household incomes are less knowledgeable about financial matters.
9 The trends and changes in the environment that I have just outlined present opportunities for the financial advisory industry. But I believe that only those who have the right mindset and the necessary skill-sets will succeed in reaping the rewards. Let me share with you three key areas where I think the financial advisory industry should pay particular attention to achieve long-term success.
10 First, practitioners in the financial advisory industry have to adopt a new mindset of service. In the past, some entered the industry thinking that it was a profession where it was easy to make money. Entry requirements were easy to meet. As long as you are prepared to make cold calls and meet people after office hours, you can sell insurance. I recall a number of my peers becoming insurance agents upon graduation because that was the quickest job they could land while waiting for more "permanent" employment in their preferred sectors. During those times, insurance sales were concluded rather casually as most working adults were easily persuaded that they needed insurance.
11 That was almost two decades ago. The situation has since changed significantly. With the FA Act, various regulatory requirements have been introduced. There are now requirements for needs-based selling while disclosure requirements have been enhanced. Minimum qualifications for the conduct of financial advisory services, which include the sales of life insurance products, have also been introduced.
12 However, even with the enhanced regulatory requirements, the industry continues to grapple with market conduct issues such as churning, and complaints about mis-selling of financial products. Recently, we received a complaint about a 59 year-old housewife who was sold an insurance product that required her to pay premiums for the next 30 years. Whatever the insurance agent's justification is for selling such a product to the housewife, it suggests that there is still much more the industry needs to do to improve the advisory and sales process.
13 Regulations on the needs-based advisory and sales process already require financial adviser representatives or FA reps to give due regard to a client's objectives, financial situation and particular needs when making a recommendation. However, having these regulations alone would not be effective in meeting the intended objectives if it is not accompanied by a mindset change amongst the industry players. This mindset change must occur at two levels.
14 Firstly, the management of financial advisory institutions play a critical role in defining the values and principles that their employees should uphold. This is reflected in their business objectives, targets as well as their guidelines on remuneration and promotion. An institution that values establishing long-term relationships with its clients will place customer retention ahead of the pursuit of higher sales volumes. It will take a tough stance against churning and other undesirable practices that generate sales but not customer loyalty. It will treat customer feedback and complaints seriously and investigate them professionally and objectively.
15 Secondly, FA reps themselves should demonstrate a high level of professionalism and a genuine interest in the welfare of their clients. There will have to be a change in the mindset about the profession - that being a FA rep is a noble, long-term and rewarding profession and not one that is a temporary occupation while waiting for another employment opportunity to come by. Although making a living from fees and commissions will remain important to a FA rep, this should not be at the expense of the long-term interest of the customer. It is therefore necessary to move away from the old mental model of merely seeking the highest sales volume to a new mindset of delivering the right solutions to meet the financial needs of the customer for the various stages of his life. This calls for a significant commitment from the FA rep to build a lasting and fruitful relationship with the customer, educating him on the benefits and risks of the various financial products as and when necessary.
16 What I have described will take time to achieve. But it is encouraging to note that the mindset change has begun. An evidence of this change is the improving quality of the needs-based advisory and sales process. Though not a perfect measure, the percentage of full fact-find is a useful indicator of the extent to which FA reps have engaged in comprehensive financial planning rather than merely pushing products. We have seen good progress over the past few years for life insurance sales. The percentage of full fact-find for life insurance has nearly doubled from 11% in 2003 to 20% in 2005. This is commendable, but hopefully the improvement is real and not the result of attempts at merely filling the forms just to improve the statistics.
17 Besides a change in the mindset by both the management of financial advisory institutions and their FA reps, it is also important for financial practitioners to keep abreast of new products as well as industry and regulatory developments. That is why MAS has been emphasising the importance of continuing education and training for financial sector professionals. We are encouraged to note that some financial advisory institutions have put in place well-structured training and competency programmes, setting out the training needs of their employees and the minimum training hours required per year. As stated in the Information Paper on Good Practices for Financial Advisers, MAS considers it good practice for all FA reps to undergo at least 30 hours of training per year, which is the current norm in the life insurance industry for continuous professional development (CPD).
18 Some may question the need for continuing education if they have already made the cut and passed the relevant qualifying examinations. We should recognise that the minimum entry and examination requirements are set at a basic level. Those who satisfy these basic requirements have demonstrated that they have basic knowledge of financial matters. But this does not ensure that they possess the necessary knowledge and skills to move up the value chain to handle the more sophisticated financial products.
19 As consumers become more affluent and sophisticated, they demand more complex financial products to meet their needs. FA reps therefore need to continually upgrade their knowledge and skills if they wish to remain relevant. In other words, being committed to training and competency upgrading is no longer a luxury but a necessity. FA reps should therefore consider the requirement for minimum CPD hours as a positive nudge by the regulator rather than an unnecessary burden placed upon them. They should take training and skills upgrading seriously and not go through the motion just to clock the minimum CPD hours.
20 Those of you who have been through the changes in the FA regulatory regime over the last few years will appreciate the need for a greater level of competence to deliver advice on an expanded product range under the FA Act. At the same time, the industry itself continues to innovate and offer new products such as traded endowments, universal life policies and takaful products. The trend of product innovation is likely to pick up speed instead of slowing down. Without continually upgrading their skills, FA reps will not be able to keep pace with the increasing complexity of products, much less compete against other distribution channels.
21 In addition to upgrading skills and competencies, the financial advisory industry also needs to raise the level of professionalism of its people. One of IFPAS' objectives is to promote continuous professional and educational development of practitioners engaged in the insurance and financial advisory industries. To this end, IFPAS administers professional designations such as the Life Underwriter Training Council Fellow, Associate Financial Consultant, Fellow Chartered Financial Practitioners and MBA Financial Services. IFPAS also conducts a variety of workshops and seminars. I commend IFPAS for its good work, and encourage it to continue to raise the bar and strive for higher standards of professionalism and competency amongst its members.
22 The industry has introduced two important initiatives, namely the ISO standards on financial planning and the Financial Industry Competency Standards (FICS). The National ISO/TC 222 committee was established by Spring Singapore to develop international standards for personal financial planning. IFPAS is represented in this committee, which monitors developments in the international standardisation process for personal financial planning, articulates Singapore's position on all proposals put up by the international committee, and evaluates the international standards for adoption in Singapore. The committee has completed drafting of local standards, which will be finalised once the international standards are formally adopted.
23 MAS has also been supportive of the Institute of Banking and Finance's FICS initiative. FICS seeks to achieve three main objectives namely, to develop a comprehensive set of competency standards that are aligned with international best practices; to develop a certification framework for competency that allows portability across industries; and to validate accreditation of trainers and training providers. IFPAS' own initiatives, coupled with those undertaken by the broader financial services industry such as the ISO standards on financial planning and FICS, will help to improve overall competency standards and professionalism in the financial advisory industry.
Greater cooperation amongst industry associations
24 While IFPAS has been doing commendable work so far, it should not overlook the importance of enhancing cooperation with other relevant industry associations to raise the overall standards of the financial advisory industry. In a recent meeting between MAS and the various industry associations active in the financial advisory business, all parties recognised the importance of greater co-operation among industry participants. We have seen active industry collaboration in consumer education initiatives under the MoneySENSE national financial education programme, as well as the formation of FIDReC, the one-stop dispute resolution centre for the financial services industry. We encourage IFPAS and the other industry associations to engage in regular dialogues to discuss issues of mutual interests.
25 One possible area where greater collaboration among industry associations would reap benefits for the whole financial advisory industry is in the area of promoting higher standards of professionalism among FA reps. IFPAS can consider working with other industry associations to publish a common code of conduct for the financial advisory industry. It may be worthwhile for IFPAS and the other financial advisory industry associations to join forces to organise a financial planning conference to showcase best practices, educate consumers on the importance of financial planning, and raise the profile of the entire industry.
26 We have received feedback from some financial advisory institutions on the difficulties they face in ascertaining the probity of the staff they intend to employ, as the ex-employers were unwilling to share information or reply to reference checks. We note that insurers have the practice of conducting reference checks when insurance agents move from one company to another. The same level of co-operation is, however, less evident when FA reps move across sectors. As all financial advisory institutions have a duty to ensure that the staff they appoint are fit and proper persons, we strongly encourage IFPAS and the other financial advisory industry associations to work towards greater information sharing arrangements with one another.
27 To conclude, I would like to reiterate that being a FA rep is a worthwhile profession if one takes a long-term view and is committed to building the trust of clients by giving them professional advice to meet their financial needs through the various stages of their lives. To do this, FA reps have to continually upgrade their skills and uphold high standards of professionalism. In other words, they have to remain relevant in the midst of rapid changes in the industry and the growing demands of consumers. Indeed, staying relevant will be your competitive edge.
28 Thank you and I wish you a successful and rewarding conference.