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Singapore's new financial advisory regime: the Financial Advisers Act

A staff reporter

30 January 2005

During the past year, most Singaporean investors would have heard about or witnessed the gradual transformation how financial products are distributed. The changes include the introduction of fact-finding and needs analysis by life insurance agents, compulsory disclosure of commissions, and the gradual roll out of alternative distribution channels for unit trusts, insurance and other financial services. The Monetary Authority of Singapore has laid the foundations for increased professionalism and productivity, moving distributors away from product push to needs-based selling. The enactment of the Financial Advisers Act in early 2002 will further push the industry to make its services professional. When introduced to parliament, the objectives of the Act were described as follows: To streamline the regulation of financial advisers, allowing a single licence to authorise advice on a wider spectrum of financial products. To establish a consistent set of regulatory requirements across the financial advisory industry. To create a new class of licensed financial advisers, entitled to provide advice on a wide range of financial products. The Act, and its intended objectives, should lead to a number of developments in Singaporean industry. Financial services players that distribute a wide range of products stand to gain as the single licence requirement should lead to a reduction in administrative and compliance costs. It should also lead to a "level playing field" among different financial service sectors by establishing consistent regulatory obligations for all parts of the industry. Independent financial adviser firms are already beginning to gain a foothold in Singapore. They are owned and operated by experienced professionals, who can to provide investment advice on a wide range of financial products. IFAs will also sell unit trusts and their close substitutes, such as investment-linked products, sales of which were extremely popular in 2001. Another development likely to arrive in Singapore is the introduction of portfolio administration services, involving advisory aids such as master trusts, wrap accounts, and funds supermarkets. PAS is a nascent development in Singapore; there are currently three fund supermarkets in existence (Dollardex, Funds Supermart, FinatiQ) and a few wrap accounts. The FAA will introduce business conduct requirements in respect of the financial advisory process, product information disclosure as well as training and competence requirements. These requirements will apply to all intermediaries providing financial advice on investment products. Financial planners who are licensed advisers may also conduct other activities that are not within the regulatory ambit of the FAA, for example retirement and estate planning. Some critical questions that members of the financial advisory industry will have on the operation of the FAA are: What activities does the Act cover? For example, will general tax or retirement advice be covered? The MAS suggests not, but for some members of the industry it may be unclear whether they need to be licensed or not. What products does the Act cover? As it currently stands, the Act does not apply to the sale of general insurance, deposit-taking, or loan products, but some new products may have features of many types of standard products. How will these be treated? What will be required for independence under the FAA? Although the MAS has made some pronouncements on the requirements of IFAs, it will need to wait until the publication of formal guidelines before the position is clear. These will be of particular interest to institutions that may wish to have a stake in the development of the IFA sector. Consumers should be in a better position to make more informed investment decisions where professional advice is given when the legislation is implemented. Even so, the framework will not ensure that consumers will always make good investment decisions. Consumers will still have to exercise discipline and judgment when considering an investment decision.