The Monetary Authority of Singapore has drafted up guidelines in relation to the provision of financial advisory services under the Financial Advisors Act (Cap 110). Financial advisors who operate in Singapore are going to have to do more to understand clients' personal and financial situations, their financial objectives and the extent to which they want to tolerate risks.

It is relatively rare for the contents of an MAS consultative document to change much after the comment period, so the text of the new "guidelines on provision of financial advisory service and design of advisory and sales forms," issued this month, is likely to be an excellent guide to the future.

At some time in the future, the regulator also proposes to issue guidelines that set out some principles that financial advisors should follow when they design the forms that they use to find out facts, to analyse needs and to recommend suitable products.

What is advice?

The decision trees that the MAS provides are revealing. In order to work out whether it is offering anything that is tantamount to financial advice, the firm in question ought to ask itself whether it is propagating any form of communication orally, electronically, or in print, that is factual but presented in a biased manner and intended to persuade the recipient to buy, sell or hold an investment product or class thereof, or a statement of opinion about an investment product or class thereof. If the answer is no, the MAS thinks that it is 'not likely' to be providing financial advice. If yes, the firm must then ask itself if the recipient can reasonably expect the communication to be financial advice to be relied upon in making a decision about investments. If yes, the firm must determine whether it is 'carrying on' a business of providing financial advice, asking itself whether it is providing financial advice systematically and 'with continuity' and whether it is being remunerated for doing so. If yes, it is likely to be providing "financial advisory service."

Before a financial advisor provides advice or recommends any investment product to a client, it ought first to collect pertinent information about the client's personal details, financial objectives, risk tolerance and financial situation. The MAS insists on the use of forms to keep track of the advisory and selling process. It is impatient with advisors who use lengthy and complex sentences on their forms, for example in the disclosures of fees and charges, terms, conditions and 'customer declarations' and who use obfuscating financial and legal jargon. It is especially critical of important information being embedded in footnotes or presented in small type, repetitive questions that ask clients to provide the same information and unclear and/or disjointed sentences.

Principles three

With this in mind, the MAS has evolved three 'principles' that firms ought to keep in mind when configuring their forms with a view to finding out facts and analysing customers' requirements.

The first, as we have seen, is the need for clear and concise language. The MAS exhorts advisors, very sensibly if somewhat hypocritically, to use plain English, to use short sentences, to use the active voice rather than the passive, to write in the positive and to use active verbs. The regulator's obsession with plain English centres on financial or legal jargon that most people do not understand. If simpler terminology is available, advisors ought to use it. On the obvious benefits of short sentences, the regulator offers up a comparison between two sentences.

Sentence A reads: "Save for where Financial advisor A is specifically required to provide advice in connection with the Customer Knowledge Assessment of each joint account holder under the Notice on the Sale of Investment Products (SFA 04N12) and/or the Notice on Recommendations On Investment Products (FAA-N16) (references to these notices include any amendments, variations or supplemental to such notices), Financial advisor A’s obligation to provide Formal Advice would be deemed to have been provided to all joint account holders if provided to any joint account holder."

Sentence B reads: "Do you agree that if advice is provided to any of the joint account holders, Financial advisor A is considered to have provided advice to all joint account holders?"

On the subject of using the active voice, the paper states: "The use of passive voice often makes sentences unclear because it leaves out or hides the party who has acted or is required to act on something." The use of the passive voice often leaves the reader with the impression that "nobody did it." One example that the MAS gives of passivity is: "Financial products purchased based on partial or inaccurate information may not be suitable." Its active counterpart is: "You should provide complete and accurate information in order to purchase suitable financial products."

The MAS is also in favour of advisors using words such as 'we' and 'you' rather than Caesarian third-person references to 'the financial advisor' and 'the client.'

On the subject of 'writing in the positive,' the regulator picks a stammeringly inarticulate sentence for criticism: "Understanding your risk profile is not unimportant to ensure we recommend suitable investments to you." This seems to be an unfairly easy target for its criticism. It suggests a substitute: "We need to understand your risk profile so that we can recommend suitable investments to you."

Form design

Principle 2 concerns reader-friendly layouts. The manner in which a firm organises and presents information on a form affects the way in which clients respond to it. This, in turn, affects the advisory and sales process. A reader-friendly layout helps clients read the forms and grasp information faster and more easily. A layout that takes theories of behavioural science into account, and a layout that the firm has tested on consumers, will help customers understand their options. The manner in which the firm organises and puts information on a form affects the ways in which people are going to respond to it - and consequently affects the advisory and sales process. No firm should use 'a single checkbox' - whatever the regulator might mean by that phrase – to help a client register his receipt of several sales documents.

Detailed orders abound. Financial advisors should also not embed important information in footnotes. They should use readable font types and sizes, especially avoiding font sizes which are too small. For electronic forms, the regulator thinks that financial advisors might like to resort to user interfaces that are friendly to different categories of client, for example elderly clients. The MAS is also keen on tables, graphs, charts, diagrams, and other 'visuals,' as it calls them. Bullet points convey a long list of information more efficiently and clearly than anything else, so the MAS wants to see more of them. It discourages the presentation of information in long and continuous paragraphs and wants advisors to consider replacing prose with bullet points, but with a strangely-worded caveat: "as long as it does not result in different interpretations." On this theme, it also wants them to avoid presenting different information or concepts using a single heading and to use 'visual emphasis' (perhaps colour) to highlight important information.

To follow 'principle 3,' firms should design their forms efficiently. The regulator states, rather ambivalently, that firms 'can consider' using information they obtain in 'earlier sections' to 'populate' subsequent questions - it does not say earlier or subsequent to what, nor does it explain how the 'population' of a question might work. It does, however, say that it dislikes forms that ask the same questions more than once and this obviously has something to do with this vague principle.

Carrying on with its ambivalent theme, the MAS calls on firms to lump similar questions together and use some things that it calls "pre-set system parameters" on their electric forms. It hopes that these will allow customers to skip past irrelevant fields that do not apply. Unnecessary blank pages are another regulatory bugbear.

At the end of the advisory and sales process on an electronic platform, customers can prompt financial advisors automatically to provide them with electronic copies of documents. This can both save time and provide the regulators with a clear audit trail. The regulator also likes the fact that it is 'environmentally friendly.' It is on this ecological note that its copious advice about sales practice ends.

No safe harbours

The MAS's consultative document regarding the design of forms contains no rules; indeed, the word 'rule' does not appear once, whereas examples of 'best practice' abound. The consultative document is therefore asking the public to help the regulator form a private opinion about form design rather than come out with any definite rules.

The document is also full of non-exhaustive lists of suggestions and offers the reader no 'safe harbours.' There are many passages that give the reader the impression that the regulator believes itself to be the final and capricious arbiter of the things that constitute financial advice on a case-by-case basis, rather than a mere setter of rules that the courts must interpret. At one point (3.7) the paper says that "even if these mitigating factors are present, [the] MAS may still deem the communication to amount to provision of financial advice as the entire context of the communication has to be taken into consideration."

Although the paper puts great store by active sentences, it is fond of using passive sentences itself. One reads: "The following examples illustrate how the factors in paragraph 3.6 may be considered..." The ambiguous nature of the regulator's approach to advisory activity in this paper extends even to its spelling, some of which (rigor) is American and some of which (colour) is that used by everyone else in the English-speaking world. Nevertheless, despite the inconsistencies with which the MAS fills its document, its desire to tidy up the form-writing process shines through very clearly.