Singapore's regulators, with parliamentary backing, are proposing to amend many laws to implement FAIR, the jurisdiciton's Financial Advisory Industry Review. Chris Hamblin of Compliance Matters reviews the issues that emerge from the recent consultation paper.

Singapore's regulators, with parliamentary backing, are proposing to amend many laws to implement FAIR, the jurisdiciton's Financial Advisory Industry Review. Chris Hamblin of Compliance Matters reviews the issues that emerge from the recent consultation paper.

Last year, the Monetary Authority of Singapore published sweeping recommendations for reform in the financial advice sector. It had five objectives ('thrusts') in mind: raising the competence of financial advisory representatives; raising the quality of advisory firms; making financial advising a dedicated service (the policy-making panel being of the view that advisory firms should only recruit representatives whose professional focus was primarily on the giving of advice); lowering distribution costs by making the market more efficient; and promoting a culture of fair dealing. Another, less publicised objective, was a considerable extension of the MAS's own powers over firms and people in the industry. The initiative was called FAIR and is seen by many as the Far Eastern version of the UK's Retail Distribution Review. The MAS asked the industry for feedback, received it, and has now published a list of legislative suggestions for comment. It is not known whether or not it will be swayed by responses from the industry. Responses must be in by 3rd November.

The reforms-to-be cut across an amazingly broad swathe of legislation, all of which will require amending by the government, although the MAS declares throughout the paper that it wants to make these changes to legislation itself. Among the first laws it expects to bring into force are amendments to the Notice on Minimum Entry and Examination Requirements for Representatives of Licensed Financial Advisors and Exempt Financial Advisors (notice FAA-N13), the New Notice on Continuing Financial Requirements for Licensed Financial Advisors (FAA-NXXLFAXX) and amendments to the Financial Advisors Regulations. These are not yet in their final form.

The regulator does have powers to allow foreign regulators or people they appoint to go to Singapore to inspect their firms there but these powers do not yet extend to the world of financial advice and the MAS is keen to remedy this in the Financial Advisors (Amendment) Bill 2015.

Making participants more competent with CPD

All financial advisory representatives are already required to undergo 'continuing professional development' or CPD. FAIR is designed, in part, to put this on a more rigorous footing. In the UK, the CPD rules call for 35 hours' worth for independent financial advisors per annum. In Singapore, this is going to be a minimum of 30 for financial advisory representatives, with reps who only give advice about or arrange mortgage reducing term assurance and/or group life insurance policies having to do 16. This however, is where the similarity ends. In the UK, IFAs have been known to spend the entirety of their 35 hours reading the fund section of the London Financial Times, or taking in other information in an unstructured way, in order to obtain or retain their statements of professional standing (SPS).

While most of their English counterparts are treating CPD as a joke, however, Singaporeans are going to have to spend 4 hours studying 'ethics' and 8 hours studying rules and regulations. On top of this, only a training course that has been accredited by the Institute of Banking and Finance or the Singapore College of Insurance will, if the amendment to notice FAA-N13 goes through, be counted towards the whole. Nobody will be expected to do CPD during his first year as an appointed representative.

Keeping firms properly staffed, managed and funded

Licensed financial advisors who only advise others by issuing or promulgating research analyses or research reports concerning investment products are to be required to maintain a minimum base capital of S$250,000 (£122,000). All other LFAs are to be required to maintain a minimum base capital of S$500,000 (£244,000), or a lower base capital of S$300,000 (£146,500) if the LFA purchases an additional Professional Indemnity Insurance or PII coverage of S$500,000. For avoidance of doubt, the additional PII coverage is to sit on top of the minimum PII requirements set out in regulation 17 of the FA Regulations. Licensed financial advisors are required to maintain financial resources that are one- quarter of their relevant annual expenditure of the immediately preceding financial year OR S$150,000 (£73,230), whichever is the higher.

Meanwhile, Licensed financial advisors with annual revenues of up to S$5 million (£2,440,428) are required to obtain minimum PII coverage of S$1 million (£488,000), while LFAs with annual revenue of more than S$5 million are to be required to obtain minimum PII coverage of 20% of their audited gross revenue of the immediately preceding year, subject to a cap of S$10 million (£4,880,000 approx). LFAs who only advise others by issuing or promulgating research analyses or research reports concerning investment products are to be required to obtain minimum PII of S$500,000 (£244,000). The amount deductible for the PII policy will be capped at 10% of the licensed financial advisor’s base capital.

The regulator wants to give existing licensed financial advisors a two-year transitional period in which to meet the new requirements regarding base capital and financial resources and a one-year transitional period to meet the new PII rule. Until the new requirements regarding base capital come into effect, they should compute the cap on the deductibles using paid-up capital, i.e. 10% of the licensed financial advisor's paid-up capital.

Anyone who wants to obtain a licence should have a compliance function that is independent of the advisory and sales function. If the licensed financial advisor has more than 20 advisory representatives or a gross annual revenue of S$5 million (£2,440,428) or more, that compliance function should also be 'dedicated', i.e. its occupants should focus their efforts solely on compliance rather than being part-time advisors or holding other functions that take up substantial amounts of their time. This is going to expand the compliance job-market in Singapore.

New rules for brokers

Registered insurance brokers will, if the MAS's plans come to fruition, be required to meet the same management expertise, financial and compliance requirements that are going to apply to licensed financial advisors; failing which the MAS will 'restrict' their advisory operations. Whenever the regulator uses the word 'restrict' it does so in opposition to the word 'curtail', which (alongside its frequently expressed yearning for new discretionary power) suggests that this is an area in which it might end up making arbitrary decisions. It plans, in any case, to issue new guidelines about the things that registered brokers should do before they are allowed to perform the full range of financial advisory activities.

The quality of advisory firms

Licensed financial advisors often do non-advisory jobs: the MAS says that it will amend the Financial Advisors Act to give itself powers to restrict them. The object here is to ensure that they “remain professional and dedicated to their role as advisory firms.” The proposed amendments are already written into the Financial Advisers (Amendment) Bill 2015, which means that the MAS is not really by-passing Parliament at all. The MAS also proposes to amend the Financial Advisors Regulations to specify that the non-advisory activities of licensed financial advisors will be restricted to:

• acting as introducers or making referrals in respect of non-advisory activities to financial institutions licensed by the regulator;

• training people and consultancy in respect of financial planning or financial literacy aimed at educating and empowering consumers; and

• will-writing, estate planning and tax planning services, this last the most important for high-net-worth customers.

Each licensed financial advisory firm is expected to establish and maintain a register of representatives who carry out various non-advisory activities. The gross revenue generated by licensed financial advisors from their non-FA activities will also be capped at 5% of the total annual revenue that they derive from their advisory business, as revealed in their last audited financial returns.

The MAS agreed, in reply to pleas from the industry during the last consultative exercise, to provide a transition period of one year for advisory firms in which they can review their activities and comply with the new requirements. In preparation for this, the regulator expects them to begin these reviews more or less at once and make appropriate arrangements to unwind any activities that lie beyond the new boundaries. The new requirements are expected to take effect on 1 January 2016.

Making financial advice a dedicated service

The MAS is on a mission to 'professionalise' the sector and also has its eye on 'moonlighting' and potential conflicts of interest. With this in mind, it has a simple doctrine: financial advisory firms should only recruit representatives whose professional focus is primarily on their advisory role. The result, it hopes, will be a slew of regulations to ensure that their non-advisory activities do not conflict with their firms' businesses; they do not tarnish the image of the advisory sector; and no representative will come to neglect his advisory role because of other commitments. It also wants to stop representatives from conducting the following non-advisory activities:

• moneylending business;

• promoting junkets for casinos (see Suvendy Ganguli's comment on page 11);

• acting as real estate agents; and

• marketing products that are not regulated under the Financial Advisors Act.

Full disclosure about other employment

For prospective representatives with other gainful employment, the MAS wants to oblige advisory firms to make them obtain approval from those other employers. For existing representatives with other gainful employment which the advisory firm sees as acceptable, the firm will have to make them disclose their representative status to their other employers. There are to be documentary obligations for firms so that they can show the MAS that they have assessed non-advisory activities conducted by their representatives properly. They will also have to set up processes to ensure that they are informed of any non-advisory activity that their prospective or existing representatives conduct or intend to conduct. Strict policing is to become the name of the game.

Again, there is to be a year's transition period. The requirements are expected to take effect on 1 January 2016 but the MAS wants firms to complete the assessment of the non-advisory activities of their representatives by 30 June 2015. The firms should also keep their representatives informed of the the way their assessments are going and discuss all available options with them.

The use of introducers

To minimise the risk of persons that are not fit and proper acting as introducers, and to enable consumers to ascertain whether they are dealing with an introducer or a financial advisory firm, the MAS is proposing to amend Regulation 31 and FAA-N02 to:

• require advisory firms to institute policies and procedures to satisfy themselves that the appointment of introducers would not give rise to any conflicts of interest that affect them or their customers, and would not tarnish their image or that of the advisory industry;

• stop introducers from informing customers about products;

• stop advisory firms from acting as introducers in respect of investment products for which they are permitted to provide advice, except in the case where a customer makes enquiries about that class of investment products or a specific product within that class; and

• require each advisory firm to compile a Client Acknowledgement Form or CAF that contains all the information that the introducer is required to disclose to the customer, and that the introducer must use as a script when carrying out 'introducing activities'. After the customer has provided his or her acknowledgement and consent on the CAF, the advisory firm will be obliged to see that the introducer gives a him copy. The advisory firm will have to retain records of every customer’s acknowledgement and consent that the introducer has obtained.