In response to two forum letters in the Straits Times on digital banks, MAS said it agrees that it is important that the public understands the differences between the new digital banks and existing banks in Singapore. MAS said digital banks need to meet the same regulatory standards as existing banks.
"Improving Culture and Conduct in the Financial Advisory Industry” - Keynote Address by Ms Merlyn Ee, Executive Director, Monetary Authority of Singapore, at the Association of Financial Advisers (Singapore) 18th Annual Conference on 11 July 2019
Mr Raymond Ng, Conference Chairman
Mr David Choo, AFA President
Distinguished guests, ladies and gentlemen
A very good morning.
Thank you for inviting me to speak at AFA’s annual conference once again.
For the financial advisory industry to thrive, it must be seen as trustworthy. Trust takes years to build and can be eroded quickly when large scale misconduct or scandals occur. Poor culture and conduct is widely accepted as one of the key root causes of major conduct failings in the financial services industry.
We have seen this happening in other markets, most recently in Australia.
- The Australian Royal Commission’s inquiry found that the root causes of the malpractices in Australia were conflicted remuneration structures, lack of effective oversight of sales representatives by boards and senior management, and poor culture in financial institutions.
- Closer to home, MAS’ inaugural Enforcement Report published in March 2019 showed that over 50% of the financial services misconduct cases under investigation as at 31 December 2018 involved mis-selling. Many of these cases were due to representatives prioritising their own interests over that of their customers and ineffective oversight of representatives.
- Many financial institutions are studying the Australian experience. So is MAS. There are important lessons we can learn, especially in respect of the drivers of misconduct.
Globally, there has been increasing attention on culture and conduct. Like many other regulators, MAS is intensifying our supervisory focus in this area.
Today, I will touch on three aspects that can improve culture and conduct in the financial advisory industry.
i. Shaping the right behaviour through incentives;
ii. Enhancing surveillance of representatives; and
iii. Building a customer-centric culture.
Shaping the right behaviour through incentives
Many of you are familiar with the Financial Advisory Industry Review (or FAIR), which was conducted in 2012 and 2013. As part of the review, we studied conflicted remuneration structures.
- At that time, commissions for regular premium insurance products were heavily front-loaded and sales-driven. We were concerned that such an incentive structure may lead representatives to engage in product pushing and aggressive selling. In addition, non-sales key performance indicators (KPIs) played a minimal role in determining remuneration.
- Following from FAIR, we implemented two key measures to address the misalignment of interests between financial advisers and their customers:
- First, requiring the payment of commissions for life policies to be spread out over a minimum period of 6 years and capping commissions to 55% in the first year; and
- Second, putting in place the balanced scorecard (or BSC) framework, where variable remuneration of representatives is clawed back if product recommendations are not suitable or disclosures are found to be misleading.
Post FAIR, we have observed some quarters in the industry continuing to structure the remuneration frameworks for their representatives in ways that do not support fair dealing towards customers.
- About two years ago, you would have read in the press about some financial advisory (FA) firms offering hefty sign-on incentives with high sales targets to grow their sales force.
- Such recruitment practices can lead to escalating costs, and even detriment to consumers if policyholders are advised to switch their insurance policies for no good reason.
- MAS addressed this issue by developing a set of measures aimed at promoting responsible recruitment practices in the financial advisory industry. These will be effected later this year. Members of the Life Insurance Association (LIA) have in the meantime committed to fully adopting the measures.
We have come across other instances of aggressive incentive structures driving poor conduct.
- Recently, one FA firm terminated about 20 representatives for premium financing activities. These representatives had paid for their customers’ first year insurance premiums in order to meet sales targets, qualify for incentive trips or enjoy additional commissions. After the first year, these customers would need to service the premiums on their own. While some customers continued to hold on to the policies, those who could not afford the premiums allowed their policies to lapse, or placed their policies on premium holiday.
- If customers allow their policies to lapse, this suggests that the policies were not suitable for them in the first place. It is also possible that the information documented by the representative in the fact-find form, such as the income and occupation of the customer, was false or inaccurate.
- Such tactics call into question the honesty and integrity of the representatives concerned and do not reflect well on the financial advisory profession.
FA firms can secure a niche for themselves as trusted advisers, by implementing incentive structures that help align the behaviour of their representatives with their desired values.
- One FA firm pays its relationship managers (or RMs) a fixed salary. The RMs do not need to prospect for customers; instead, they focus their efforts on providing advisory and sales services at the firm’s physical premise. The entire conversation between the customer and the representative is video and audio-recorded so that the firm can exercise greater oversight of the RM’s advisory process.
- Another firm offers financial advisory services to retail customers through a hybrid approach, which fuses robo-advisory technology with a human touch. This “bionic” approach allows the company to serve more customers, while ensuring that its human advisers are able to value-add by understanding its customers’ needs, providing clarifications and even coaching them on the right investor behaviours to meet their financial objectives. All representatives are paid a fixed, monthly salary, and not on how much they sell.
These developments are encouraging as it shows that FA firms are placing more focus on improving outcomes for their customers. With the emergence of such new business models, consumers have more options to select the type of financial advisory service that best serves their needs.
MAS is working with FA firms to address aspects of their remuneration frameworks that pose conflicts of interest.
- We have been undertaking fact-finding exercises to deepen our understanding of current incentive structures in the financial advisory industry. This includes studying how sales targets are set by FA firms and how such targets influence sales behaviour.
- We are also reviewing the BSC framework, to ensure that it continues to be fit for purpose. The review includes assessing if we should include non-monetary incentives in the BSC framework and whether supervisors’ remuneration is adequately taken into account under the framework.
- We have started engaging some of you, and will continue to do so in the next few months.
Enhancing surveillance of representatives
Last year, I talked about the measures that some FA firms have implemented to enhance surveillance of their representatives’ sales and advisory conduct.
- These firms have made use of analytical tools to identify red flags such as representatives with a high concentration of sales in products that pay higher commissions, spikes in sales to vulnerable customers, and branches or agency units with recurring complaints and misconduct. This information is shared with their senior management and business heads through dashboards with data visualisation tools.
- Since then, more firms have joined the fray, with some firms making use of digital tools to identify representatives with a higher propensity to commit misconduct and potential improper switching transactions.
As the financial advisory industry hires more representatives, surveillance of their activities should continue to be a priority for FA firms.
Recently, we have seen representatives taking to social media sites such as Carousell and Facebook to market their firms’ products and services. While we recognise this is a channel to reach out to a wider audience, there have been cases where representatives advertised products and services in a misleading way.
- For example, marketing endowment policies as fixed deposits, and using language such as “call me if you have spare cash for fixed deposit”.
- There were also instances of representatives advertising anonymously, unbeknown to their firms. When we referred these cases to the firms concerned, these were found to be in breach of the firm’s marketing policies. Such cases also skirt the firm’s oversight and controls, and any improper practices will ultimately impact the firm’s reputation.
- Across the industry, the level of oversight applied by FA firms is uneven. Only a handful of firms monitor their representatives’ online marketing activities and content on an ongoing basis. Even for firms which employ monitoring tools to trawl the social media space, coverage could be broadened to include multiple platforms.
- MAS expects FA firms to ensure that their representatives’ social media activities are conducted in a responsible and professional manner. In particular, the firm and representative must be clearly identifiable, and the product and service accurately represented, in marketing materials.
- Financial institutions and MAS share a common goal in ensuring appropriate use of social media to market financial products and services, to uphold the industry’s reputation and safeguard consumers’ interests. Given what we have seen in the social media space, MAS is taking a closer look at this area, including how other jurisdictions are addressing the issue.
To effectively supervise representatives, we should not forget the role of supervisors within the firm. Supervisors play an important role in imparting the right values to representatives. They should be held to high standards as they function as role models and set the tone for their teams.
Conversely, when supervisors fall short of the standards expected of them, problems can arise. Lapses from sales conducted by representatives under their supervision may not get detected, and this can result in poor customer outcomes. Let me share an example.
- Supervisors are expected to perform call-backs to vulnerable customers to ensure that these customers understand the product they are purchasing and the fact-find has been properly conducted.
- During a recent on-site inspection of an FA firm, we found instances where supervisors failed to identify some customers as being vulnerable, resulting in no call-backs being performed. We have required the firm to tighten its controls, and take disciplinary action against the supervisors for not properly discharging their duties.
Boards and senior management are responsible for ensuring that their firms have a robust consequence management framework to prevent and deter bad behaviour among their representatives and supervisors. With the emphasis now on individual accountability and conduct, Boards and senior management should also ensure that when representatives commit misconduct, their supervisors are held to account. MAS will hold Boards and senior management accountable if such processes are lacking.
Building a Customer-Centric Culture
Last but not least, the financial advisory industry needs to build a culture where customers are at the forefront. We all know how technology companies have revolutionised the way of doing business to win the loyalty and trust of customers. Putting customers at the centre of what they do and creating a customer-centric culture has been their formula for success.
Some FA firms have already embarked on this journey.
- A few firms have set up dedicated Board committees to focus on ethics and conduct matters. This has allowed the Board to be kept apprised of consumer complaints, misconduct committed by representatives, and how senior management is addressing these issues. It also ensures that the firm’s core values continue to anchor the way it conducts its business and deal with customers.
- Some firms take into account behavioural competencies and cultural fit in their hiring process, beyond the usual assessments of technical competencies. They include scenario-based questions that seek interviewees’ responses to case studies presenting moral dilemmas. Some others require interviewees to describe actual situations where they have demonstrated the firm’s values or where these values were challenged.
- Some FA firms have increased the frequency of their townhall sessions with representatives to share regulatory issues and misconduct trends, so that their representatives are mindful of pitfalls to avoid. Many of these sessions are helmed by the CEO and other senior management staff.
From MAS’ stocktake of practices across FA firms, we noticed that most firms have embedded conduct and culture initiatives at the level of corporate staff, but stopped short of their representatives or agency units. Following MAS’ feedback and engagement, these firms are beginning to cascade their culture and conduct efforts to the whole agency force.
MAS has also observed that FA firms have different thresholds for dealing with misconduct. Some firms take a more lenient approach towards representatives who breach company policies or engage in unethical practices.
- For instance, an FA firm allowed one of its representatives to attend an overseas incentive trip even though he was under investigation for poor conduct.
- In another firm, a representative recommended a vulnerable customer to switch her investment-linked policies without informing her of the switching costs. The representative also made false declarations in the policy application forms to avoid scrutiny from the firm. The customer did not benefit from the switches but instead incurred more than $10,000 in costs. When the matter came to light, the FA firm only suspended the representative from conducting financial advisory activities for a few months. MAS, on the other hand, issued a four-year prohibition order against the representative for the misconduct.
I mentioned earlier how it is imperative for FA firms to incentivise good behaviour through their remuneration frameworks. Equally, firms should pay attention to how they mete out disciplinary actions against their representatives for breaches of regulations or internal policies. These are important elements in creating a strong culture within an FA firm.
- FA firms should adopt a holistic approach when assessing disciplinary actions, by taking into account factors such as severity of the misconduct, whether it is a repeated breach, duration of the misconduct, impact on the customer, and type of clientele affected (for example, whether it is a vulnerable customer).
- Given uneven standards in this area, MAS has commenced a review of the disciplinary frameworks of FA firms. We have started by collecting information on existing practices, and will be identifying gaps and areas for improvement. Our intention is to eventually share best practices and develop guidance to raise standards across the industry.
Let me now conclude.
Some of you may have watched the movie “Back to the Future”, which is the theme of today’s conference. If you are a fan of this movie series, you may remember the words of Dr Emmett Brown, the scientist in the movie “Back to the Future III”, who said, “Your future is whatever you make it. So make it a good one.”
This is indeed applicable to the financial advisory industry. If all of you serve your customers well and put their interests before your own, we can collectively raise industry standards and take this profession to greater heights.
With that, I wish all of you a fruitful and engaging conference ahead.