Martin Lee @ Sg
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Consultation Paper on Proposed Amendments to the Financial Advisers Regulations

MAS is currently inviting comments to some proposed changes to the Financial Advisers Act.

Comments can be sent to [email protected] or 6225-4063 (Fax) by 26th November 2010.

The two changes include:

1) Prohibiting bank tellers from referring customers to representatives for the purchase of investment products.

2) Requiring all financial advisers (ie the firm) to carry out a due diligence exercise to ascertain whether any new product is suitable for the financial advisers’ targeted clients before offering the new product to any client. This due diligence exercise will have to be formally approved by every member of the senior management of the financial adviser. The financial adviser will have to maintain records of the due diligence exercise and the approval from senior management.

The due diligence process will include:

(a) the type of client the new product is suitable for and whether the new product matches the client base of the financial adviser;
(b) the investment objective of the new product;
(c) the key risks that a client who invests in the new product potentially faces;
(d) the costs and fees to be incurred by a client investing in the new product as compared to other products with similar features offered by the financial adviser;
(e) the processes in place for representatives of the financial adviser to determine whether the new product is suitable for the targeted client, taking into consideration the nature, key risks and features of the new product;
(f) how the new product is intended to be marketed or sold;
(g) whether any additional measures are necessary to mitigate any conflicts of interest between the representatives of the financial adviser and their clients, arising from the remuneration of such representatives as a result of the sale of the new product to those clients;
(h) the minimum qualifications or training required for representatives of the financial adviser before such representatives commence financial advisory services in respect of the new product;
(i) whether the current systems of the financial adviser, including all relevant client sales documents, adequately support the sale of the new product to the targeted clients.

The exact wording of the proposed changes can be found here:

Proposed Changes to Financial Advisers Act

These changes are no doubt a reaction to the huge debacle caused by the Minibond incident.

Prohibiting referring by bank tellers is something new, but shouldn’t every product that is sold by a financial institution gone through some due diligence process by the firm in the first place?

This new regulation makes it more detailed by spelling out the actual due diligence required and enforces the documentation of such due diligence. This includes a signoff by senior management.

My main concern with these changes is that the process is geared very much towards investment products.

Different investment products will have different features and therefore  a complete evaluation based on these criteria would be fair.

The main problem occurs when a portfolio approach is taken rather than a product approach.

For example, a client might have a conservative profile but has long investment time horizon. An investment portfolio consisting of 80% fixed income and 20% equities might not be unreasonable. However, the equity fund that is being recommended might only be suitable for high risk profile investors as recorded in the product due diligence documentation.

The proposed regulations will not be robust enough to handle this aspect.

Furthermore, for unit trusts, many funds are similar. For example, a Singapore long equity fund would have very similar mandate to another Singapore long equity fund. If a financial adviser distributes a few hundred different funds, it would require a lot of documentation and paper work if they would to document the due diligence for all funds.

Of course, the financial adviser can restrict the distribution to only selected funds.

However, that might still be an issue if a client comes to a financial adviser with an existing portfolio and ask him to help rebalance the portfolio. If he wants to keep the existing funds, then the financial adviser would need to make sure those funds are added to the due diligence process.

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2 comments
The Watchman says 9 years ago

The problem with MAS is they think investments are the only risky products but not traditional insurance products. Traditional products are riskier because they never can meet the consumers’ needs adequately . In other words they are guaranteed to lose. I think MAS’ sense of riskiness is misplaced. The truth is the main cause of mis-selling , conflict of interest and misrepresentation come from these traditional insurance products.
Insurance agents don’t conduct due diligence on these products before they are pitched and sold to any customers regardless of the suitability of needs. Losses from traditional products are far greater than the minibond fiasco if you add the losses from premature surrender and lapses. Losses from premature surrender and lapses are due to mis-selling and overselling and misrepresentation.
MAS is bucking up the wrong tree or is it a distraction to protect the insurance companies.

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Nutcase says 9 years ago

No problemo… RMs and FAs will sell more endowments and bankassurance products. Anything to do with “insurance” is considered safe and halal. Nobody in power will find fault if sell endowment to 80-yr old illiterate grandma, or even if you sell wholelife to 70-yr old grandfather.

I predict anticipated endowments with cashbacks, dividends etc will be the main products to push by banks and FAs.
Firstly, no need to do customer knowledge assessment.
2ndly, not affected by any changes in FAA.
3rdly, damn shiok commissions especially for regular premium endowments.
4thly, can never be wrong with recommending insurance endowments — even the govt considers them as safe and conservative, suitable for retirees even.

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