MAS Mystery Shopping Exposes Gross Deficiency
Back in October 2011 to December 2011, MAS conducted a mystery shopping survey on the financial advisory process of banks and insurers.
In case you are not aware, a mystery survey is an undercover exercise which involves people posing as “fake” customers to test how someone provides a particular service.
For this particular survey, the focus was on the financial industry’s quality and suitability of advice and adequacy of information disclosure.
In total, 126 mystery shoppers made 500 visits to 11 licensed banks and 4 registered insurance companies to seek financial advice from their representatives. The products recommended by the representatives were reviewed for their suitability by a panel of industry practitioners based on the shoppers’ personal profile, their experience during the advisory and sales process, and sales materials obtained from the financial institutions.
The survey findings were shocking but not unexpected.
Only 28% of the products recommended were found to be suitable.
The main reasons why the products were deemed to be unsuitable were as follows (percentage of those found unsuitable):
- The recommended product is not reasonable in view of the lock-in period or time horizon – 54%
- The recommended product is not reasonable in view of the mystery shopper’s investment or savings need – 46%
- Too little fact-find was conducted for any reasonable recommendation to be made – 34%
- The recommended product is of a higher risk than the mystery shopper’s risk profile without a reasonable basis – 30%
It was also revealed in the survey results that the following questions were only asked to some people during the fact finding process:
- Investment experience – 60%
- Financial objectives – 53%
- Risk preferences – 49%
- Financial situation – 38%
If you do not find out a person’s financial objectives, risk tolerance and financial situation, how do you recommend an investment product that is suitable?
Also, the top three categories of products that were recommended during the mystery shopping were endowment insurance policies, unit trusts and investment-linked life policies (ILP). An investment-linked policy and endowment plan usually needs to be held for very long, so I’m not surprised that a long lock-up period came up as one of the reasons why some recommended products were unsuitable.
I suspect also that ILPs with high risk funds were recommended to people who were looking purely for life insurance. This would have lead to a case of a recommended product with a higher risk than a person’s risk profile.
Despite all the regulation advocating a proper conduct of “know your client” and “needs-based selling”, we can see from the survey results that product selling is probably still quite rampant. Pushing “high commission and easier to sell savings” products like investment-linked plans and endowment plans continue to rule the day.
So much for financial needs analysis. Where got the time??
Now you know why Singaporeans are under-insured. It would be interesting to know how many people actually reviewed the medical insurance coverage of the mystery shoppers and recommended integrated shield plans.
No wonder MAS wants to review and overhaul the financial advisory services industry.