Explanatory Brief: Financial Advisers (Amendment) Bill 2015 and Insurance (Amendment) Bill 2015
1 The Minister for Culture, Community and Youth and Second Minister for Communications and Information, Mr Lawrence Wong, today moved two Bills for First Reading in Parliament, namely:
(a) The Financial Advisers (Amendment) Bill 2015 (“FA(A) Bill”); and
(b) The Insurance (Amendment) Bill 2015 (“I(A) Bill”).
2 On 26 March 2012, MAS launched the Financial Advisory Industry Review (“FAIR”) to raise the standards and professionalism of the financial advisory (“FA”) industry and to enhance market efficiency in the distribution of life insurance and investment products in Singapore. A panel chaired by MAS, with 13 representatives from industry associations, consumer and investor bodies, and other stakeholders, was established to undertake the review. The panel made 28 recommendations on 16 January 2013, most of which were accepted by MAS on 30 September 2013, after a three-month consultation period. The Bills implement the policy proposals from FAIR. In addition, amendments have been made under the FA(A) Bill to facilitate inspections of financial advisers by foreign regulatory authorities.
3 MAS has conducted public consultations on the Bills. Comments received have been incorporated into the Bills, where appropriate.
KEY AMENDMENTS IN THE FA(A) BILL AND I(A) BILL
4 To implement the FAIR proposals, key amendments have been made in five broad areas:
(i) Improving the remuneration structure of the FA industry to promote fair dealing;
(ii) Raising the professionalism of representatives of financial advisers (“FA representatives”) and making the provision of FA services a dedicated profession;
(iii) Enhancing the standards of registered insurance brokers which carry on a business of providing FA services;
(iv) Facilitating the comparison of life insurance products; and
(v) Providing cheaper access to simple life insurance products.
(I) Improving the remuneration structure of the FA industry to promote fair dealing
5 The amendments will vest MAS with powers to regulate the remuneration of financial advisers, FA representatives and supervisors of FA representatives (“supervisors”), so as to better align the interests of the FA industry with those of its clients. These include the following proposals:
(a) Implementing a balanced scorecard remuneration framework for FA representatives and supervisors (Sections 38 and 39 of FA(A) Bill)
6 FA representatives and their supervisors are today largely remunerated based on sales performance. Such remuneration structures create risks of product pushing and aggressive selling which could compromise the interests of consumers. To motivate FA representatives to provide quality advice and suitable recommendations to their clients, MAS will require financial advisers to put in place a balanced scorecard (“BSC”) framework for remunerating their FA representatives and supervisors. The BSC framework will prescribe minimum standards on non-sales key performance indicators that measure the quality of the advisory and sales process and suitability of recommendations made to clients. FA representatives and supervisors who are assessed to have poor grades under the BSC framework will not be entitled to a specified percentage of their remuneration over a specified period. In addition, MAS will be empowered to require financial advisers to set up an independent sales audit (“ISA”) unit and to prescribe the processes, criteria and methods which the ISA unit must apply when conducting audits on the quality of the FA services provided by their FA representatives.
(b) Regulation of payment and receipt of remuneration (Section 26 of I(A) Bill; Section 22A of the FA(A) Bill)
7 The commissions paid to financial advisers and their FA representatives for the sale of life insurance policies are often heavily front-loaded, with the bulk of total commissions being paid to FA representatives in the first year of the duration of life insurance policies. As an FA representative would have received most of his total commissions upfront, he may not be incentivised to provide quality after-sale services to his clients. He may also not bear any consequence if it is discovered after several years that he had recommended unsuitable products to his clients.
8 To address these concerns, MAS will require the commissions payable within the first year to be capped at a specified percentage. The total commissions for the sale of regular premium life insurance policies must also be spread over a minimum specified period.
9 It is also common practice for product providers to offer additional incentives which are over and above the commissions typically received by FA firms and FA representatives for the sale of certain investment products. Such incentives create a misalignment of interests for financial advisers and their FA representatives with their clients. They also create a bias towards the sale of products that pay out a higher remuneration, notwithstanding that another product may be more suitable to meet the needs of a client. To mitigate such conflicts of interest, MAS will be empowered to make regulations prohibiting the payment and receipt of these product-related incentives.
10 In addition, any financial adviser, FA representative and supervisor, in complying with the BSC framework and the requirements on payment and receipt of remuneration, will not be treated as being in breach of any existing contracts or law.
(II) Raising the professionalism of FA representatives and making the provision of FA services a dedicated profession (Section 23B and Section 55A to 55C of FA(A) Bill)
11 Some licensed financial advisers and FA representatives are also engaged in businesses other than the provision of FA services. These businesses may affect the quality of FA services received by clients, particularly in situations where such businesses conflict with their business of providing FA services. The proposed amendments will vest MAS with powers to prescribe restrictions and conditions on the types of businesses that financial advisers and their FA representatives are allowed to carry on.
(III) Enhancing the standards of registered insurance brokers which carry on a business of providing FA services (Section 23AA of FA(A) Bill)
12 There has been an increase in the number of registered insurance brokers branching into the provision of FA services. However, some of these registered insurance brokers do not have adequate financial resources to support their carrying on a business of providing FA services. To address these risks, the proposed amendments will empower MAS to prescribe or vary the financial requirements or the limit and deductible requirements of a professional indemnity insurance policy, for registered insurance brokers which carry on a business of providing FA services. These requirements are similar to that currently imposed on licensed financial advisers.
(IV) Facilitating the comparison of life insurance products (Section 33A and 33B of I(A) Bill)
13 To facilitate the comparison of life insurance products, MAS has collaborated with the Consumers Association of Singapore, the Life Insurance Association, Singapore and MoneySENSE to launch a web aggregator for life insurance products called compareFIRST. compareFIRST is an interactive web portal that allows consumers to easily compare the premiums and other key features of similar life insurance products offered by different life insurance companies. The amendments will empower MAS to prescribe requirements for life insurance companies participating in the web aggregator to (i) submit information on their life insurance products to MAS, or to a vendor appointed by MAS, for publication on the web aggregator; and (ii) pay a fee for the development, operation and maintenance of the web aggregator and for their usage of the web aggregator.
(V) Providing cheaper access to simple life insurance products (Section 33C of I(A) Bill)
14 To provide consumers who do not require financial advice with cheaper access to life insurance products, life insurance companies that serve the retail market are required to offer Direct Purchase Insurance products (“DPI”). DPI are simple life insurance products which consumers can purchase directly from life insurance companies without incurring commissions. The features of DPI are broadly standardised so that they are easier for consumers to understand and purchase without the need for financial advice. Life insurance companies must also provide consumers with a DPI factsheet and checklist that set out important information that consumers should consider when buying DPI.
OTHER MISCELLANEOUS AMENDMENTS TO THE FA(A) BILL
(VI) Powers to specify different requirements (Section 9 of FA(A) Bill)
15 The amendments to section 9 will extend MAS’ powers to vary the financial requirements or the limit and deductible requirements of a professional indemnity insurance policy for applicants of a financial adviser’s licence, in place of those prescribed under the FAA. This is to provide MAS with the flexibility to deal with unique circumstances of any particular applicant.
(VII) Facilitating inspections of financial advisers by foreign regulatory authorities (Section 70B to 70E of FA(A) Bill)
16 The amendments will allow MAS to grant permission to foreign regulatory authorities (“FRAs”) or their appointed agents to conduct inspections of financial advisers in Singapore. This will align the supervisory cooperation powers relating to inspections under the FAA with those in other Acts under MAS’ purview. Such inspections are intended for FRAs from the parent jurisdictions that have regulatory oversight of the financial advisers in Singapore, to carry out effective group supervision, subject to conditions as MAS may impose.