Consider tightening regulations on financial advisers

THE problem of unethical behaviour by financial advisers (FAs) surfaced in Parliament this month, when Member of Parliament Desmond Choo asked about the impact of undesirable marketing tactics for financial products – such as ambush-style marketing – on less financially-literate consumers.

Asked what recourse consumers have, Minister of State for Trade and Industry Alvin Tan replied that they could file a complaint with the financial institution, or approach financial-dispute institution FIDReC if they get an unsatisfactory response.

Such misconduct would only become more prevalent as the pool of FAs grows. Yet current measures are mostly reactive and do not guarantee that victims will be compensated. It might be time to reconsider Singapore’s regulations surrounding the role.

FA status: easy to gain…

To become authorised to give financial advice and sell insurance products, a person has to be at least 21 years old, and pass four Capital Markets and Financial Advisory Services (CMFAS) exams.

The exam requirement came into effect in 2002, “to ensure that they have the requisite competency to provide financial advisory services”, a Monetary Authority of Singapore (MAS) spokesperson said in response to queries from The Business Times (BT).

Yet these exams involve only multiple-choice questions and are relatively easy to pass, say FAs.

Dylan Sim, a former FA, took only a week to study for them. “I think if you really sit down and study for one or two days, and do the exam papers again and again, you can pass,” he said.

These exams may give an FA enough knowledge to sell simple plans, but may not equip them to appropriately advise on riskier ones, such as investment-linked products, said Ben Charoenwong, assistant professor in finance at the NUS Business School.

“Insurance agents make the most commission on investment-linked products. For those products, even though we can call it protection, it’s effectively an investment in the financial markets,” he said.

“It would be hard to believe that four modules are sufficient to do financial planning when it comes to right investments in the financial markets.”

The CMFAS papers test basic knowledge needed to sell plans, such as relevant laws and technical jargon, but do not guarantee an understanding of financial mechanisms, said FAs.

“To me, I don’t even think CMFAS papers are anything to do with finance,” said Joel Ng, an FA working for Great Eastern. “It’s more preparing you for a job.”

Sim said: “​​I hate using the term ‘financial adviser’, because it really inflates your responsibility to a lot more than what it ought to be, or a lot more than what you’re prepared to do, which is just being an agent.”

Beyond the CMFAS exams, MAS guidelines require anyone carrying out a regulated activity – including selling insurance – to meet a set of “fit and proper” criteria, These are “honesty, integrity and reputation”; “competence and capability”; and “financial soundness”.

Insurance companies such as AIA and Great Eastern said they do assess prospective FAs on these. Great Eastern, for instance, does so via applicants’ responses to questionnaires and face-to-face interviews.

…and hard to lose

Not only is it relatively easy to get on the register of representatives, errant individuals may not necessarily be removed. FAs who breach guidelines can remain registered if their mistake is deemed not “serious” or not “relevant”, or if too much time has elapsed since it happened.

Instead of removing FAs, the MAS has previously issued prohibition orders to bar mis-sellers from the industry for a specified period of time, a spokesperson told BT.

But perhaps less leniency should be shown. The central problem is that the commission-based nature of the FA role provides an incentive to boost sales figures by mis-selling.

Such mis-selling could take the form of not disclosing fully the risks of certain products, or over-insuring by selling too many policies to an individual, said Charoenwong.

The commission system means that FAs’ interests are “inherently misaligned with doing the best thing for the customers”, he added.

“For insurance agencies where what people bring home is purely based on commission, some of them might get a bit unethical in order to earn more of the commission,” said Terence Ng, a former FA.

“If you haven’t had a good month, you are basically taking almost no money, so you’ve got no salary. It makes you desperate to want to sell stuff that is not helpful, because you just want to survive.”

Sim said this conflict is why he left the industry: “It was my career, (against) your personal finance. That’s why I left; I couldn’t do it. How can I call myself an adviser if I’m worried about the profits I make and about managing to collect my accolades?”

What can be done

One way to improve the situation is by having all products attract the same commission, suggested Charoenwong.

Commissions could also be structured differently, to be paid out over a longer time period, he added. This would lessen the pressure on FAs to make sales and keep them in the market for longer, letting them gain more experience.

Ultimately, the only real way to solve the problem would be to remove the commission motive. In an ideal world, insurance companies would be barred from giving financial advice – which is likely to be self-serving – and other companies would provide financial education without selling related policies.

Yet realistically, separating these two functions is not viable. The general public is unlikely to want to pay for a separate financial advisory service before purchasing insurance.

What Singapore can do is institute stricter prerequisites to becoming an FA and lower the threshold for revoking this status, to keep FAs on their toes when it comes to ethical standards.