On 24 August 2023, the Monetary Authority of Singapore ("MAS") published its response to feedback received on its consultation paper to enhance pre and post -transaction safeguards for retail clients served by financial advisory representatives . To this end, MAS will be implementing a series of regulatory measures to enhance protection for certain vulnerable clients and clients who purchase investment products from selected representatives.
This note summarises the key measures that MAS will be implementing .
MAS had introduced the Balanced Scorecard Framework on 1 January 2016. Under the Balanced Scorecard Framework, financial advisers that are licensed or exempt under the Financial Advisers Act 2001 ("FAA") are generally required to have an independent sales audit unit that carries out post-transaction checks and samples transactions. Through such measures, the unit would assess the quality of the financial advisory services provided by representatives against non-sales key performance indicators, which are meant to protect the interests of clients. Representatives would then be given a rating based on the number and type of infractions they commit, which could lead to closer supervision and a reduction in their commissions.
Following MAS' review of the Balanced Scorecard Framework and findings from a mystery shopping exercise conducted in 2018/2019, MAS had identified weaknesses in the implementation of safeguards for certain vulnerable clients who meet two or more of the following criteria: (a) they are 62 years old or older; (b) not proficient in spoken or written English; (c) they have below GCE "O" or "N" level certifications or equivalent academic qualifications ("Vulnerable Clients"). MAS will therefore be implementing additional regulatory measures to improve protection for Vulnerable Clients in the provision of financial advisory services to them.
MAS will also be implementing additional regulatory measures in cases where the financial advisory representative is considered to have a weaker compliance record based on assessments under the Balanced Scorecard Framework.
2. Additional regulatory measures
a. Enhanced requirements to check for and document whether a client is a Vulnerable Client
Currently, a financial adviser is required to carry out pre-transaction checks, which include having supervisors review all documentation and conduct client call-backs with Vulnerable Clients.
MAS will be implementing the following measures:
- Migration of the requirements for pre-transaction checks that are currently contained in MAS Guidelines FAA-G14 to MAS Notice FAA-N16. As a result, these requirements will become mandatory and a breach of them will constitute an offence under the FAA.
- Enhanced requirement in MAS Notice FAA-N16 for financial advisory representatives to check for and document a client's status as a Vulnerable Client and make a declaration that the assessment has been duly performed.
However, digital advisers will, at this time, be exempt from these requirements given the considerably lower risks of clients being subject to undue influence or active solicitation on their investments during a fully-automated advisory process.
b. Trusted individual to be present throughout sales and advisory process
MAS will require financial advisory firms to ask the Vulnerable Client to have a trusted individual to be present for the entire sales and advisory process, unless the Vulnerable Client does not identify one or is unwilling to be accompanied by one. In such situations, the financial advisory firms may make investment recommendations to the Vulnerable Client only if they obtain his or her written acknowledgement that: (a) he or she does not wish to have a trusted individual present; and (b) confirms that he or she is fully able to make decisions on his or her own without a trusted individual.
A trusted individual would need to meet the following criteria:
- be at least 21 years old;
- possess at least GCE "O" or "N" level certifications or equivalent academic qualifications;
- be proficient in spoken and written English; and
- be a person whom the Vulnerable Client trusts to be privy to their personal information and be able to assist the Vulnerable Client in understanding his or her financial decision.
c. Type of information to be covered during pre-transaction client call-backs
A trusted individual should not be the financial advisory representative's supervisor or a beneficiary of the Vulnerable Client's investment decision. Furthermore, MAS expects financial advisory firms to assess whether a person who seeks to act as a trusted individual presents potential conflicts of interests by virtue of their relationship with the Vulnerable Client or other circumstance.
As an additional safeguard for a Vulnerable Client who does not have a trusted individual present during the sales and advisory process, MAS will require financial advisory firms to include a specific question in their pre-transaction call-back to confirm that the Vulnerable Client was offered an opportunity to bring along a trusted individual but had declined and was fully able to make a decision without the trusted individual.
Digital advisers who operate without any representatives who provide recommendations or advice directly to clients would similarly be exempt from this requirement.
MAS will require that pre-transaction client call-backs should minimally cover the following areas:
- Basis of recommendation;
- Main features of the product being recommended (e.g. premium payment term, period and structure of payout, whether the product is capital guaranteed/non-guaranteed, etc);
- Key risks (e.g. market risk, capital risk, etc) and limitations of the product (e.g. early termination of certain policies may result in policyholders receiving a return that is less than the premiums paid);
- Existence of the free-look period; and
- Whether the representative had been professional and ethical in his or her dealings with the client (e.g. offer of unauthorised gifts, premium financing, aggressive selling, etc.).
d. Audio recording of call-backs to Vulnerable Clients and clients of selected representatives
Where a sale was made to a Vulnerable Client without a trusted individual, the financial advisory firm will also be required to ask the additional question to confirm that the Vulnerable Client was offered the opportunity to bring along a trusted individual, as mentioned in the previous section.
MAS will require financial advisory firms to audio record the call-backs to Vulnerable Clients.
The same will be required where the client is being served by what MAS refers to as a selected representative. A selected representative is a representative who is considered to have a weaker compliance record under the Balanced Scorecard Framework (namely a balanced scorecard grade of B or worse consecutively for two calendar quarters immediately preceding the measurement quarter).
MAS has also clarified that face-to-face meetings would be permitted as an alternative to the call-backs. However, MAS will require financial advisory firms to put in place the following controls where there are face-to-face meetings or where the call-back is not recorded:
- The financial advisory firm must ask a trusted individual to be present during the call-back or meeting and document the Vulnerable Client's choice on this matter.
- The financial advisory firm must require the supervisor to document key points discussed during the meeting or call-back in a summary document, which must be signed by the Vulnerable Client and supervisor. The summary document should include: (a) the type of information to be covered in call-backs (mentioned under section (c)); (b) the reason(s) why the call-back or meeting was not recorded; and (c) where the Vulnerable Client does not identify a trusted individual, or is unwilling to be accompanied by one for the non-recorded call-back or meeting, the reason(s) for this.
- The financial advisory firm must put in place monitoring controls to ensure that financial advisory representatives and supervisors do not circumvent the proposal for call-backs to be recorded (e.g., monitoring call-back statistics to assess if any supervisor has a high proportion of unrecorded call-backs).
Such call-back recordings and summary documents must also be retained for not less than five years.
In addition, MAS expects financial advisory firms to have policies and procedures to identify higher risk clients and representatives beyond those required by MAS and encourages financial advisory firms to conduct audio-recorded call-backs on such transactions.
e. Providing a copy of audio recordings to Vulnerable Clients and clients of selected representatives
MAS will also require financial advisory firms to provide a copy of any audio recording to Vulnerable Clients and clients of selected representatives, and to clients of transactions deemed to be higher risk. However, financial advisory firms need not provide a copy of the audio recording to such clients proactively and would only need to do so upon the client's request.
Where a recording is available, however, MAS will require the financial advisory firm to provide a copy of the audio recording upon the clients' request, regardless of the client's status as a Vulnerable Client or a client of a selected representative.
MAS has suggested that financial advisory firms may wish to first offer clients the option of listening to the audio recording at their premises, and thereafter provide clients with a copy of the audio recording should the client request for one.
f. Independent sales audit unit to review all product recommendations made to Vulnerable Clients
MAS had originally proposed that financial advisory firms set up an independent panel to review all product recommendations made to Vulnerable Clients. However, after receiving feedback on the potentially duplicative efforts with the independent sales audit unit and additional resources required to set up an independent panel, MAS has decided that it will instead require the independent sales audit unit to review product recommendations made to Vulnerable Clients on a post-transaction basis.
MAS will be consulting on the proposed sampling requirements for Vulnerable Client transactions separately.
MAS had also intended to require the independent sales audit unit to sample and review a minimum of 10% of transactions involving higher risk clients who meet at least one Vulnerable Client criterion. However, MAS has decided not to proceed with this proposal and will instead continue to monitor and review the need to do so.
The above regulatory measures demonstrate MAS' commitment to enhancing protection for Vulnerable Clients against any undue influence or unfair practices by financial advisory representatives. While MAS had not extended these new requirements more broadly to all retail clients, financial advisory firms are still encouraged to have policies and procedures in place to identify higher risk clients and representatives beyond those required by MAS.
There will be a transitional period of 9 months for the proposals that MAS will be implementing.
MAS has strongly encouraged financial advisory firms to consider early implementation of such proposals. It would therefore be timely for financial advisory firms to review and consider the changes that may be required to their systems and processes to bring them in line with the above regulatory measures.
A copy of MAS' consultation response can be found here.
Originally published August 30, 2023
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