MAS accepts pro-consumer plans on financial advisory sector

[SINGAPORE] The Monetary Authority of Singapore (MAS) has come out on the side of the retail customer after accepting most of the recommendations of a panel it appointed last year to shake up the financial advisory industry.

One pro-consumer change to come next year is the launch of a free website for them to compare life insurance and endowment products across providers; another will require insurers to make basic life insurance products available directly to customers instead of through agents.

Following a public consultation, the MAS accepted 19 out of 28 recommendations made in January by the Financial Advisory Industry Review (FAIR) panel. Eight were modified and one, dropped.

Lee Chuan Teck, MAS's assistant managing director for capital markets, said: "This set of initiatives will transform the financial advisory industry by creating an environment in which firms compete on the quality and value of their products and services, rather than on the aggressiveness of their sales force."

Ultimately, the review was aimed at lowering the costs of insurance and financial products and raising the quality of advice given to retail customers.

One change targeted to take effect in January 2015, known as the balanced scorecard remuneration framework, will set non-sales key performance indicators (KPIs) for financial advisers. These include selling suitable products and providing sufficient material information.

MAS will require financial advisory firms to set up independent sales audit departments to sample 5 per cent of the transactions of each sales representative every quarter. The results will be reported to MAS. The experience of mystery shoppers and substantiated customer complaints will also be taken into account.

If representatives are found to fall short in these KPIs, their transactions will come under more scrutiny; they could also lose their variable pay for serious infractions or if they run up several minor ones. A notable concession made by MAS was not to cap first year commissions payable to life insurance agents at 40 per cent of total commissions payable. This recommendation was unpopular with industry players, who argued that the income of financial advisers would be unduly affected, which would then create recruitment and talent retention problems.

MAS raised the cap to 55 per cent, a proportion that is current industry practice. The issue could be revisited in the future if the various measures are not effective at reining in errant advisers.

The review began in April last year. The panel announced its recommendations in January this year, and the public consultation took place from March to June.

Among other changes, educational requirements for financial advisers will be raised; some firms will have to cough up more capital.

"The outcome is reasonable and fair," said Leong Sow Hoe, who chairs the Insurance and Financial Practitioners Association of Singapore (IFPAS) Alliance Fair Committee, a group representing 15,000 insurance agents and financial services practitioners on the review.

Mr Leong, also Prudential's senior financial services director, said that the recommendations will heavily penalise errant financial advisors, and not the entire industry.

The Life Insurance Association (LIA) said that it supports the intent of MAS to raise the quality of financial advisory. LIA president Annette King said that this will enhance practices in the industry, which will in turn boost consumer confidence.

But LIA urged caution on the balanced scorecard framework.

The direct channel for basic insurance products, to be sold for a nominal administration fee, is targeted to be launched in the middle of next year. Some industry players have expressed concerns that whole life insurance policies are too complicated to be sold off the shelf without the help of an adviser. But MAS said that Singaporeans prefer whole life policies, which cover an individual for life and have a surrender value in the event of early termination. Such products meet Singaporeans' basic protection needs and should thus be classified as "basic insurance products" that can be sold directly to the consumer.

However, MAS said that life insurance products with a higher investment or savings component, such as investment-linked plans (ILPs) and endowment products, will not be offered via the direct channel.

Meanwhile, the Web aggregator that MAS and LIA will set up by end-2014 will allow customers to compare the prices and features of a wider variety of products - term, whole life, endowment and even ILPs eventually. Standalone critical illness products will not be included, though critical illness riders (add-ons) to life insurance policies can also be compared.

The website will ask customers to put in details such as the amount of coverage needed, duration, their age, gender and smoking habits, from which it will generate, for example, premiums, death benefits, surrender values, break-even period and the historical annual investment returns of participating funds.

Mr Leong said that both the website and the direct channel will not have a major impact on the profitability of industry players.

"Most of the business we handle today deals with comprehensive needs. In one interview, an agent can do a comprehensive needs analysis which you can't get from a direct channel," he said.

"Even self-directed people still prefer to sit down face to face with a rep . . . especially if you're buying not just for yourself, but for your wife and kids, and have to factor in inflation and investment. It's not as easy as just choosing A, B, C or D."