At the Life Insurance Association (LIA) 50th anniversary gala dinner yesterday, Ravi Menon, Managing Director of Monetary Authority of Singapore, made a few observations regarding the state of our financial advisory services.
There is currently a large protection gap in the life coverage of the average Singaporean. Typically, they are covered for only a third of what their dependents need.
There is a need to enhance the current framework to ensure that the needs of the consumers are better met.
This will be done via a Financial Advisory Industry Review (FAIR) to ensure that more steps will be taken to put the interests of the customers first. Based on what was said, we could be looking many steps forward in the not too distant future.
Raise the competence of financial advisory representative
This will involve raising both the product knowledge of representatives and raising entry requirements. The current entry requirement for FA representatives is four GCE “O” level passes. The norm for other jurisdictions are at least tertiary level (Diploma and above).
Raise the quality of financial advisory firms
MAS will review the management expertise and financial resources of financial advisory firms, to ensure they are well managed and financially sound.
Make financial advice a dedicated service
Financial advice will be made a dedicated and professional vocation. There will be a list of activities that financial adviser representatives will not be allowed to engage in. This includes:
- money lending;
- promoting junkets for casinos;
- selling real estate; and
- marketing investment products which do not accord safeguards to customers under the Financial Advisers Act.
Lower distribution costs of insurance products
Currently, there is a multi-tier structure where commissions are paid out. The total commissions and overrides earned by the representative and his supervisors could be as much as 160% of the policy’s annual premium. A lot of these commissions is also earned during the initial years.
FAIR will examine whether this commission structure aligns the interest of representatives with the long term interest of consumers, whether these representatives have the adverse incentive to sell products that pay them higher commissions, and whether the tier structure provides value for the customer or merely adds cost.
There will be greater transparency in distribution costs and sale of simple life insurance products (like term insurance) directly through the internet will be strongly encouraged.
I strongly support this move to go from a heavy front loaded commission structure to one that is more spread out over the years. This will mitigate the current situation where a lot of people have insurance policies but no one serving them because the original agent that sold them the policy had already left the industry.
There will usually be a replacement agent appointed but often, he has no incentive to service the client as he would not be earning anything from it. Instead, he is more likely to recommend the client to top up with a new plan.
Promote a culture of fair dealing
Insurers are expected to treat their customers with fairness and honesty. Product transparency in simple language is important.
To implement all these, a review panel will be formed and public consultations will be conducted.
The full speech can be found here.
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