“Bringing the Financial Advisory Industry to Greater Heights” - Speech by Guest-of-Honour Ms Merlyn Ee, Executive Director, Monetary Authority of Singapore, at the Association of Financial Advisers (Singapore)'s 12th Annual Congress, 4 July 2013
Mr Raymond Ng, Congress Chairman
Mr Augustine Lee, AFA President
Distinguished guests, ladies and gentlemen, good morning. Thank you for inviting me to join you at AFA’s 12th Annual Congress.
1 I am glad that you have chosen the theme “We Are Ready” for this year’s AFA Annual Congress. This is indeed fitting given the changing financial landscape which presents both challenges and opportunities.
2 In the financial advisory area, jurisdictions such as the UK and Australia have undertaken a fundamental review and implemented changes to their regulatory regime for the provision of financial advice. Singapore is no exception. MAS recently embarked on a financial advisory industry review or FAIR, which culminated in a wide-ranging set of proposals that were consulted on in March. Given that FAIR is on the minds of everyone in this room, I will be speaking about how the FAIR proposals and other initiatives can enhance the standards and professionalism of financial advisers in Singapore.
3 One of the key challenges we face today is the state of underinsurance and lack of retirement planning among Singaporeans. A study carried out by HSBC in 2012 entitled “The Future of Retirement – A New Reality” found that 44% of Singaporeans who are not fully retired think that they are not preparing adequately for a comfortable retirement. A further 12% have not started preparing at all. While the 2011 Protection Gap Study commissioned by the Life Insurance Association found that the average protection gap of a working adult has narrowed from 7.6 times of his annual income in 2006 to 3.7 times in 2011, there is still room for improvement especially against the backdrop of an ageing population.
4 Another challenge is that Singaporeans are not always receiving quality advice or being recommended products that are suitable for them. This was demonstrated starkly by the mystery shopping exercise conducted by MAS in 2011 which found that 30% of the products recommended were unsuitable. MAS continues to receive complaints about inappropriate advice. Many representatives still focus on pushing products and closing the next deal.
5 We need to do more to help Singaporeans better prepare for life’s unexpected events and to set aside adequate savings for their golden years. Financial advisory firms can help Singaporeans realise these goals.
6 My vision for the financial advisory industry in Singapore is for financial advisers to be viewed as professionals, just like lawyers, engineers and accountants, with their own code of conduct and high standards of practice. We are not there yet.
7 But let’s not lose heart. I believe the financial advisory industry can rise to the challenge. This would require financial advisory firms to focus on three key areas:
a) first, the Board and senior management need to set the right tone and culture to promote fair dealing with customers;
b) second, representatives have to adopt a long-term view of the business and build trust with their customers; and
c) third, financial advisory firms need to invest resources to build robust systems and processes to support their business.
Role of Board and Senior Management
8 Let me begin with the role of the Board and senior management. The Board and senior management play a crucial role in setting the right tone and culture at the top.
9 During a recent meeting with a financial institution, I was troubled to hear the management team repeatedly refer to their representatives as “sales representatives”. The financial institution emphasised the meeting of sales targets and how they trained their representatives on ways to close more sales. While some of you may argue that this is just semantics, I hold a different view. Such attitudes trickle down to the ground and send the message to representatives that they should focus purely on sales instead of acting in the best interests of their customers.
10 The Board and senior management must take responsibility for embedding a culture of fair dealing in their organisations that goes beyond meeting business goals and mere compliance with regulatory requirements. They should inculcate a corporate culture where customers’ interests are placed first. After all, customers are the heart of the business and there is no better way to grow a business than having satisfied customers.
11 Let me share an example to illustrate this. In 2008, MAS required a number of financial institutions to investigate customer complaints on the sale of structured notes linked to Lehman Brothers. I recall one case where the management of a financial institution decided to award full compensation to a long-standing customer even though that customer did not fully meet the criteria for a full payout. The management gave the customer the benefit of the doubt and did not take an overly legalistic approach to her complaint. The customer was so grateful that she not only continued to invest with the financial institution but also introduced her family and friends to open accounts there.
12 MAS will increasingly look to the Board and senior management of financial institutions to be accountable for how they treat their customers. To strengthen the accountability of the Board and senior management in promoting a culture of fair dealing, the FAIR panel has recommended that MAS incorporate such assessment in our regulatory review and risk assessment of financial advisory firms. The FAIR panel has also proposed that financial advisory firms adopt a balanced scorecard framework for remunerating their representatives, which incorporates non-sales KPIs. MAS is likely to adopt both these proposals.
Role of Representatives
13 The second area relates to the role of representatives. Financial advisory representatives play an important role in delivering the right solutions to meet the financial goals of consumers at their different life stages. Representatives should only enter the industry if they have a genuine interest in helping Singaporeans meet their financial goals and view the profession as a long-term career.
14 There are professional and dedicated representatives in the industry who build lasting and meaningful relationships with their customers. A colleague of mine shared with me a positive experience he had with a representative last year. That colleague visited a financial advisory firm to enquire about a product for retirement and told the representative that he was prepared to put aside a certain sum of money each month for that product. To his pleasant surprise, the representative advised him not to over-commit at the onset and to instead start small and slowly build up his savings over time.
15 There are indeed good, professional representatives out there, certainly amongst you, who are able to achieve success in their careers while continuing to deal fairly with their customers. I urge financial advisory firms to reward such representatives as they are valuable assets to your organisations.
16 I recognise that financial advisory can be a tough business to be in, especially in a representative’s initial years when he is still trying to establish himself and build a sustainable customer base. This is where I would like to encourage financial advisory firms to provide training and support for new entrants and equip them with the tools and technology to do their jobs well. We must also not forget that even experienced representatives need to continually upgrade themselves. In this area, the FAIR panel has recommended ways to raise the competence of financial advisory representatives, such as requiring representatives to undergo at least 30 hours of structured CPD training annually, including four hours of training on Ethics and eight hours on Rules and Regulations. These are recommendations that MAS finds sensible.
17 Financial institutions often lament the high costs of staff turnover. By demonstrating a commitment to developing their representatives as professional advisers rather than salespeople, financial advisory firms can better retain representatives who take a long-term view of the profession. This will in turn provide financial advisory firms with a steady pool of high-quality representatives who are able to uphold the firm’s reputation and give it a competitive edge.
Role of Systems and Processes
18 Let me now turn to the third area - the role of systems and processes. Systems and processes play a critical part in strengthening a financial advisory firm's value proposition. They help ensure that the firm’s vision and culture cascade down to the day-to-day operations. In addition, they help identify areas of weakness and facilitate compliance with regulatory requirements and company policies.
19 The quality of systems and processes vary widely among financial advisory firms. Some firms have put in place comprehensive and well-structured training and competency processes to ensure that their representatives receive proper coaching and undergo continuing education. Some firms have carried out mystery shopping and client call backs to ensure that representatives provide suitable recommendations. We have also come across firms with poor systems and controls. These include not having independent compliance staff and inadequate compliance programmes to review key operations of the firm. We have directed these firms to strengthen their systems and controls. A financial advisory firm with weak processes and controls will over time lose the trust and confidence of its customers. Financial advisory firms must therefore have good corporate governance in order to protect their reputation and franchise. This is why the FAIR panel recommended that financial advisers should have a compliance function that is independent of their sales and advisory activities.
20 Some financial advisers have provided feedback that putting in place systems and controls add to their business costs. Ultimately, the expectation is for financial advisory firms to have systems and processes commensurate with the size and complexity of their business. We also expect financial advisers to evaluate the adequacy and effectiveness of their systems and controls as their business grow.
Role of Other Stakeholders
21 I have so far touched on the role of the Board and senior management, financial advisory representatives, and systems and processes. Two other groups which have an important role to play are consumers and industry associations.
Well Educated Consumers
22 It is important for consumers to be aware of their needs and to ask the right questions when developing plans for their financial well-being. Financial education that is readily available can help achieve this.
23 MAS started the MoneySENSE programme ten years ago to raise the financial literacy of Singaporeans. Since then, we have worked with various partners to bring financial education to the masses. A key MoneySENSE initiative was the recent launch of the MoneySENSE-Singapore Polytechnic Institute for Financial Literacy to provide free financial education to the public. MoneySENSE also continues to offer the “My Money” seminars to educate consumers on investments and other financial products. The MoneySENSE website is also a useful resource for consumer guides and educational materials on a wide range of financial topics and products.
24 Increasingly, more consumers are recognising the importance of financial education and are becoming more proactive in managing their own finances. Since the launch of the MoneySENSE programme, more than 200,000 consumers have attended talks and road shows organised by MoneySENSE. While this is encouraging, we need to reach more Singaporeans and equip them with the knowledge and skills to take charge of their finances. When seeking financial advice, consumers should be prepared to invest more time during the fact-find process. This will allow advisers to obtain key information to better understand their financial situation, risk tolerance and investment goals. This will in turn enable the advisers to develop an appropriate financial plan and recommend suitable products.
25 Consumers should not be afraid to demand more from their advisers. They should ask questions to better understand the range of products available in the market and compare these with the products recommended to them. It is also important that consumers understand how various products may or may not meet their needs before making a decision on which product to purchase. In this area, the FAIR panel’s recommendation to develop an online web aggregator to allow consumers to more easily compare pricing, benefits and other features of similar insurance products offered by different insurers, will help consumers make a more informed choice. MAS is studying this carefully.
26 Let me now touch briefly on how the industry can play a useful role to improve standards of practice in the financial advisory industry. In recent years, MAS has been actively engaging industry associations in ongoing dialogue to discuss regulatory and industry issues. We have found these engagements useful as we implement regulatory changes. These include the feedback from AFA on the FAIR proposals. MAS is reviewing AFA’s feedback closely, along with other comments we have received from the public consultation.
27 I would like to take this opportunity to encourage industry associations such as AFA to take the lead in coming up with initiatives to address problems identified in the industry. MAS need not intervene if the industry is able to come up with credible solutions. Take the private banking industry as an example. The Private Banking Advisory Group launched the Private Banking Code of Conduct in 2011 to enhance the competency of private banking professionals and to foster high market conduct standards. I am heartened to learn that AFA organises bi-monthly workshops to help representatives of its member firms enhance their knowledge and skills in the areas of unit trusts, life policies, and general insurance. MAS is also grateful to AFA and Mr Augustine Lee for participating in the FAIR panel.
28 At its core, financial advisory is a people-centric business. It is all about trust. Whenever a customer has a poor advisory experience, the trust he has in his adviser is eroded and this impacts the firm’s business and the industry’s reputation adversely. Financial advisory firms have come a long way since the Financial Advisers Act was enacted in 2002. They are now run more professionally, have better qualified representatives, and are investing more heavily in systems and processes. However, more needs to be done.
29 My challenge to all financial advisers is to continue to build customers’ trust and confidence in your products and services. This can be achieved by adopting a more customer-centric approach where customers are dealt with fairly and where the focus is on helping customers meet their financial and life goals. MAS looks forward to working closely with AFA and all other stakeholders to implement the FAIR proposals and bring the financial advisory industry to greater heights.
30 On this note, I wish all of you a successful and fruitful congress. Thank you.