“Working Together to Raise the Bar” - Keynote Address by Ms Merlyn Ee, Executive Director, Monetary Authority of Singapore, at the Association of Financial Advisers (Singapore) 15th Annual Conference on 14 July 2016
1 Mr Raymond Ng, members of the Association of Financial Advisers (Singapore) (AFA), ladies and gentlemen. It is my pleasure to speak at AFA’s annual conference once again.
2 Singapore is experiencing what some might call a ‘new normal’. We are living longer and having fewer children. Consequently, our citizen population is shrinking and our workforce is aging. These trends have implications for the individual and household finances, and financial planning for ourselves and our families has become even more crucial. However, planning for our financial future can be a daunting task. We must think of our future selves and what we will likely need financially. We must think about risks and returns that typically only materialise much later in our lives. And we must understand the wealth of information out there, and assess the steps to take that can help us reach our financial goals. This is where financial advisory (FA) services come in to help individuals navigate the uncertainties that lie ahead and put in place financial plans to help them meet their financial needs and goals.
3 Last year, I spoke about culture, competence, and customer-centricity. These remain the cornerstone of quality financial advice. Building and maintaining these fundamental pillars is a shared responsibility between the regulator, industry, and consumers. We have already embarked on this journey and made good progress. Today, I would like to reflect on key developments, share MAS’ observations of some industry trends, and suggest how we can work together to raise the bar.
Where are we now? State of the industry
4 Let me talk about the state of the industry. In 2000, an industry-led Committee for the Efficient Distribution of Life Insurance (CEDLI) was appointed by MAS to consider ways to enhance transparency, competitiveness, and efficiency in the distribution of life insurance products. The recommendations of the committee were far-reaching and helped raise the standards of the advisory process and the competency of insurance agents. Two years later, MAS introduced the Financial Advisers Act, which we commonly refer to as the FAA, to build upon the work of CEDLI. The FAA was a key milestone in our regulatory framework. It provided consistency in the regulation and supervision of FA firms across sectors and across products. In 2009, we issued the Fair Dealing Guidelines to promote fair dealing by financial institutions when they conduct business with their customers. And more recently, we embarked on the Financial Advisory Industry Review, also known as FAIR. This review culminated in close to thirty recommendations, most of which have been implemented.
5 Over the past few years, the industry has made positive strides in a number of areas. Let me share a few examples with you.
- First, advisers are gathering more information to help them provide better financial advice. In a mystery shopping exercise conducted by MAS several years ago, we found that the extent of information collected during the fact-finding process was inadequate as it often did not extend beyond asking for basic personal information. FA firms have taken action to address this shortcoming and subsequent mystery shopping exercises conducted by the industry found improvements as advisers were obtaining more information on the financial objectives and investment horizon of customers.
- Second, many FA firms have put in place enhanced measures to safeguard the interests of vulnerable customers such as the elderly and those with low income. These include requiring supervisors to be present during the advisory and sales process, or calling these customers after the sale to ensure they understand the features and risks of the products recommended.
- Third, many FA firms have made concerted efforts to put fair dealing at the centre of what they do. In the course of MAS’ inspections to assess the implementation of the Fair Dealing Guidelines, we observed that many firms had reviewed their policies and procedures as well as identified gaps in their business practices against the fair dealing outcomes. It is also heartening to note that there has been heightened awareness of the importance of fair dealing at the Board and Senior Management level. We found that some CEOs were bringing fair dealing to the forefront by personally championing the incorporation of fair dealing within their firms’ practices and communicating its importance to advisers and staff. Some firms have also established dedicated committees, comprising their CEOs and other senior management staff, to discuss issues and track the implementation of initiatives related to fair dealing. All these efforts are positive for consumers and bode well for the industry.
6 But there remains important gaps to fill. I would like to take this opportunity to share some recent trends we have observed from the Balanced Scorecard (BSC) statistics, misconduct reports and other returns submitted to MAS, as well as our inspections of FA firms and complaints received from consumers.
7 First, there is still room for improvement in the fact-finding process. While advisers are now asking for more information on the financial objectives and investment horizon of customers, a recent industry mystery shopping exercise found that some advisers did not ask for all information on the financial situation of customers such as their cash flow and net worth. The mystery shopping exercise also found that some advisers did not ask for information on the income and existing financial portfolios of customers before recommending a product. MAS has found similar lapses in our inspections and review of the BSC statistics. To minimise the occurrence of such lapses, a number of FA firms are enhancing or have enhanced their electronic advisory and sales systems to incorporate built-in controls to ensure important information is obtained from customers. If the information is not obtained, the adviser must provide justification before the advisory and sales process can proceed in the system. While we recognise that some customers may be reluctant to provide details of their finances, it is important that advisers encourage their customers to furnish complete information and explain to them that failure to do so can compromise the ability of advisers to make suitable recommendations.
Failure to provide sales documents
8 Second, we have observed inadequacies in the provision of key sales documents such as the Product Highlights Sheet. Another mystery shopping exercise conducted by the industry found that a number of advisers failed to provide customers with such documents during the sales process. Similar lapses in which advisers either failed or were late in providing sales documents to customers have also been reported in misconduct reports submitted to MAS. In a disclosure-based regime such as ours, financial advisers play an important levelling role to reduce information asymmetries between consumers and product issuers. Without receiving disclosure documents, consumers may not be equipped with the necessary information to make informed decisions. To address this issue, a number of FA firms have digitised or are exploring the option of digitising their disclosure documents. This digitisation can minimise human lapses in a number of ways. For example, with the option of providing disclosure documents to customers through electronic mail, advisers will not need to print and bring along documents to meetings with customers which sometimes take place outside of the office. The importance of providing such disclosure documents has also been reinforced through enhanced training programmes for advisers. But many of these lapses I just spoke about on fact-finding and disclosure could have been mitigated by proper supervisory review, which brings me to the third observation.
Weak supervisory oversight
9 Supervisors are appointed by FA firms for a reason. They play a key role in checking that the adviser has collected complete information on the customer, documented his basis of recommendation properly, and made a suitable recommendation that meets the needs of the customer. However, we observed that supervisory oversight is not up to mark in a number of FA firms. For example, we have seen supervisors approving recommendations although there was inadequate information on whether the customer can afford the product. We have also come across instances where inconsistencies in the fact-find form were not picked up by supervisors. All these examples could lead to unsuitable recommendations being made to customers. It is important for supervisors to be vigilant and exercise care when reviewing the sales conducted by advisers under their supervision. Some FA firms have implemented structured training programmes for their supervisors while others have developed checklists to guide supervisors on the areas they should look out for when reviewing the sales submitted by their advisers.
10 Such efforts by FA firms to strengthen their systems and processes are steps in the right direction. MAS will continue to engage firms on gaps identified in their controls. But efforts to safeguard the interests of consumers must go beyond firm-specific controls and measures. To address the industry-wide weaknesses I just spoke about, we need to assess common practices across the board and put in place measures that collectively raise the standards of the FA industry.
Continuing to raise the bar
11 In March 2012, MAS built on the foundations laid by CEDLI and the FAA and launched FAIR. FAIR was an important and ambitious undertaking. Multiple and diverse stakeholders were brought together to conduct a fundamental review of practices in the FA industry. Deliberations were robust and discussions were spirited. The FAIR panel, which AFA was a valued member of, put forth a wide range of recommendations that covered different aspects of the FA industry. To date, most recommendations under FAIR have been implemented, including compareFIRST, the BSC remuneration framework, and the prohibition on advisers conducting non-FA activities such as moneylending and marketing investments not regulated under the FAA. MAS is finalising the legislation to implement the remaining FAIR initiatives by 2016.
12 The scope of FAIR has been far-reaching, but we need to look beyond FAIR and continue raising the bar for the FA industry. I would like to expand on two ongoing initiatives that seek to do just that.
Enhancing education and training
13 First, education and training. Today, advisers operate in an environment where markets are constantly evolving and consumers are becoming more demanding. It is important for advisers to stay relevant and be equipped with the right knowledge, skills, and values. With this outcome in mind, MAS is reviewing the Capital Markets and Financial Advisory Services Examinations, also known as CMFAS. Our review covers a number of areas but I will just focus on our plans to introduce content on skills. CMFAS has provided advisers with better knowledge of regulations and products. There is, however, scope to enhance content on the softer side of the advisory and sales process. The process is not a mechanical one merely to sell products. It is a two-way dialogue where advisers seek to understand their customers’ needs, develop plans to help them achieve their financial goals, and explain how the financial plans or products meet their goals and objectives. By strengthening their competencies in these areas, advisers will be able to avoid situations of incomplete fact-finding I talked about earlier. MAS will be consulting on these proposals at a later date and welcomes feedback and suggestions from AFA and other stakeholders.
14 But the need to be trained does not just apply to advisers who are in the initial stages of their careers. Earlier, I spoke about the weak supervisory oversight observed in some FA firms. Supervisors play a vital role, as the first line of defence, in ensuring advisers conduct the advisory and sales process with rigor and professionalism. Advisers who are in supervisory positions will need to upskill themselves to enhance their capabilities to provide supervisory oversight of their colleagues. The recently-launched Institute of Banking and Finance Standards for Financial Planning is a comprehensive skills roadmap that enables advisers to chart their own training journey. It includes a training pathway for supervisors to acquire the core competencies they need to be effective in their roles. I encourage all supervisors to pursue those competencies and actively seek training opportunities beyond those provided by the FA firms they represent.
Co-creating key principles for a well-designed advisory and sales form
15 Besides raising the competencies of advisers, we must also look at the advisory and sales process itself. An integral part of the process is the advisory and sales form, which is used to facilitate the dialogue between advisers and their customers. The form helps to guide the dialogue – from fact-finding, to needs analysis, to providing a recommendation and explaining its basis. It is important that forms are designed to help advisers and customers have a more efficient and effective advisory and sales process.
16 MAS is currently working with the industry to identify the features of a well-designed form. Such a form has many elements but I will focus on two principles today. First, using clear and concise language. This includes the use of plain English instead of legal or technical jargon. For example, most of us in this room would understand terms such as “capital appreciation” or “free look”. But let us for a moment put ourselves in the shoes of a consumer with little or no exposure to financial markets. They may not understand what these terms mean if advisers do not make the effort to explain their meanings. I am glad to note that some FA firms are beginning to simplify the language in their advisory and sales forms. Instead of using “capital appreciation”, they would use “an increase in the value of your investment”. And instead of “free look”, they would explain that the consumer has 14 days to review the policy and a full refund of premiums excluding any expenses incurred will be made if he decides that the policy is not right for him.
17 Another principle that should guide the design of forms is the presentation of information in a reader-friendly manner. This includes the use of visual emphasis to highlight important information and disclosures. This principle, however, is not currently practised by all FA firms. There have been instances where important information, such as the possibility that the consumer could lose all or some of his investment, was embedded as a footnote in the form.
18 We all recognise that consumers have different starting points, with varying degrees of financial knowledge and experience, and will have different capacities to process the information disclosed. Financial advice should be helping to bridge, and not add to, information asymmetries between consumers and product issuers. A well-trained and competent adviser, complemented with a well-designed advisory and sales form, will be able to fill in the gaps for less knowledgeable consumers. We are working with the industry to co-create the key principles that guide the design of a good advisory and sales form by the end of this year.
Raising the financial literacy of consumers
19 Before I conclude my remarks, I would like to touch on another key part of the equation – the consumer. Consumers have a role to play in ensuring that they receive quality financial advice. We need to take charge of our financial future and ask the right questions when engaging our advisers. But financial planning is not inherently easy to understand as it typically involves complex numeracy and risks and returns that materialise a while after the financial decision is made. As with many things, we need to continually educate ourselves.
20 In 2003, MAS launched MoneySENSE, a national financial education programme to raise the financial literacy of Singaporeans. Since then, our strategy has evolved - from one that caters to the general population to one that also includes targeted initiatives that educate consumers at key life events. The MyMoney series of seminars epitomises this well. This series was launched in 2009 and has been conducted every quarter since. Each seminar brings together different partners to provide consumers with views on various products, as well as highlight the risk-return trade-offs and key issues consumers should consider when deciding whether to take up a product. Building on the success of these seminars, was launched last year to meet the financial literacy needs of tertiary students. They are at a critical juncture in their lives, transitioning from studying to working. As they begin to earn a regular income, it is important for them to learn how to manage their financial resources and get started on financial planning.
21 MoneySENSE has also incorporated a life-cycle approach into our financial education programme. The integrated ad campaign, “I Save and Invest for Our Future”, encouraged Singaporeans to take a life-cycle approach to investing, and highlighted the benefits of saving and investing from young. The seven-month-long campaign which ran from August 2015 to February 2016 also covered product education on simple, low-cost investment products such as Singapore Savings Bonds, retail corporate bonds, and exchange-traded funds.
22 The campaign was complemented by a series of articles in The Sunday Times. Launched at the start of this year, the “Save and Invest Portfolio Series” is a collaboration between MoneySENSE, SGX, and CFA Society which features simulated savings and investment portfolios of three Singaporean individuals and families at different life stages. Building on the success of this initiative, we are currently exploring another series of articles that will feature case studies of common consumer disputes with financial institutions. This will highlight things consumers should watch out for when purchasing a financial product.
23 The financial services industry stands to benefit from more financially literate consumers. Greater participation from more informed consumers will increase demand for financial products, build competitiveness, and promote market transparency. A useful starting point for consumers is the MoneySENSE website, where they can get tips on a wide range of personal finance topics including key questions they should ask their advisers.
24 To sum up, raising standards in the FA industry requires a balance between regulation, active industry initiative, and consumer responsibility. We have achieved much over the years but more can be done.
25 The road ahead may appear challenging but it is also a time of opportunity. Singaporeans are becoming more affluent. Coupled with an increasing awareness of the importance of financial planning, demand for FA services is set to rise. To seize the opportunities that lie ahead, advisers should adopt a long-term view and upgrade their knowledge and skills. FA firms should also promote the right corporate culture that put the interests of their customers first. To build and maintain trust and confidence among consumers, raising the bar of FA services has to be a continuous and sustained effort.
26 MAS has collaborated with AFA over the years in various regulatory reviews including FAIR. We look forward to partnering AFA in consumer education initiatives and receiving AFA’s constructive views on future regulatory reviews.
27 I wish you a fruitful conference ahead. Thank you.