Proposals unveiled this week on the sale of financial advice in Singapore are less rigorous than expected, but will still force insurers to review their approach to bundling products.
Standalone financial advisory (FA) firms and banks will be less affected, as expected, but need to take certain recommendations into consideration. For example, it’s proposed that fund managers disclose trailer fees paid to FA firms for collective investment schemes. That said, this was widely expected and is a practice already carried out by many fund houses.
As it signalled late last year, the Monetary Authority of Singapore, under the Financial Advisory Industry Review (Fair) recommendations, confirms it is not seeking to impose an outright ban (like Australia or the UK), nor a hard cap on commissions.
With regard to the rejection of a hard cap, Lee Chuan-Teck, assistant managing director for capital markets at the MAS, says this would not be effective, as commissions tend to gravitate towards the cap and stay there.
As for banning commissions altogether and switching to fees, it is “not clear that fees would necessarily be cheaper than commissions”, he noted in a speech this week as the recommendations were announced. In fact, it was more likely that customers with smaller investments ended up paying more.
Moreover, the MAS said the results of a survey carried out at the start of the review indicated that 80% of Singaporeans were not prepared to pay an upfront fee for advice. “A premature switch may again result in Singaporeans being under-served,” says Lee.
However, the MAS has proposed banning remuneration structures for introducers tied to volume of sales or transactions.
One area where MAS has been stringent, say sources, is in raising costs needed for FAs to operate. It is proposed that the minimum capital base for pure research houses be S$250,000 and for other licensed FA firms S$500,000. The recommendations also propose significantly raising the level of professional indemnity insurance that FAs must take out.
Another key proposal concerns a move towards greater transparency. The recommendation is that insurance and investment-linked products should be unbundled so that consumers can more easily make comparisons.
For example, if an insurance product is linked to a fund, the distributor must disclose what the returns would be from the two components separately. That will presumably also require fund managers to provide more details to the distributor about their products.
“Insurers [and FAs] will have to have a hard look at what they are selling to the market – particularly in the case of bundled products,” says Kwok Wui-San, a Singapore-based partner in the financial services industry group, which was involved in advising MAS on Fair.
“Overall, the recommendations seem balanced in the context of Singapore,” says Kwok. “I wouldn’t say there is anything there that the industry wouldn't agree with.”
Be that as it may, some still believe that MAS has missed an opportunity to lay down some tougher laws. For example, advisers are still permitted to make gross revenue from “non-advisory activities” of up to 5% of their annual total FA revenue.
Other countries are a lot more stringent in this regard, notes one source, with many totally banning other activities.
However, Lee says: “Inherently there is nothing wrong with financial advisers doing non-FA activities and some, arguably, may be synergistic to financial advising. But there are three risks we should be mindful of: conflict of interest, tarnishing the image of the industry, and dilution of focus.”
Nevertheless, it is worth bearing in mind that the Fair proposals are only recommendations; MAS still has to consult on whether and how to implement them. Final regulations are some months off.