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:
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.