Singapore to Review Financial Services Sector
By Marius | Published March 28, 2012
The Monetary Authority of Singapore (MAS) announced this week that it will conduct a major review of the country’s financial advisory industry in a move which could potentially change the way investment, savings and insurance products are sold to consumers in the Asia Pacific nation.
News of this upcoming government examination, titled the Financial Advisory Industry Review (FAIR), first came in the keynote address given by MAS Managing Director Ravi Menon at the Life Insurance Association’s 50th Anniversary Dinner on Monday night. In his speech, Menon explained that the goals of FAIR will be to improve the professionalism and competence of financial advisers and insurance agents in Singapore through the creation of a more competitive and efficient remuneration and distribution system. This should in turn work to raise Singapore’s coverage level by gradually reducing the costs of insurance and investment products and raising the standard of financial advice given by those who sell them locally.
MAS have outlined five broad areas in Singapore’s financial services and insurance sector to be reviewed once the members of the FAIR panel are appointed. According to Mr. Menon these key areas will be: domestic financial advisor and insurance agent qualifications, financial advisory firm standards, making financial advice a dedicated service, reducing the distribution costs for insurance products, and further promoting ‘a culture of fair dealing’ in Singapore.
On the first issue, the competence of Singapore’s financial advisors, the MAS have already taken some notable steps. In his speech, Menon affirmed that new examination modules were now being introduced to ensure that the country’s financial advisors, both new and old, maintain an appropriate level of knowledge about the wide array of investment and insurance products available in the market. “MAS takes the view that a good financial adviser should be able to explain the advantages and disadvantages and the risks of competing products – both simple and complex,” Menon said, adding that Singapore’s consumers are themselves becoming more educated and will need agents to handle ever-more complex financial instruments. The new examinations are industry-certified and are supposed to set a common standard for financial advisors so they stay relevant to the needs and expectations of consumers going forward.
As part of FAIR, the MAS will then review the minimum entry requirement of four GCE O level passes to become a licensed financial advisor in Singapore. In his speech, Menon argued that this current standard was too low and had not kept up with the country’s rising education levels. According to government data, one in two Singaporeans now have qualifications exceeding the GCE “O” level, and a further quarter of the population have at least one tertiary degree. Lifting the educational attainment standards would also put Singapore’s financial services standards more in line with competitors in Australia and the United Kingdom, where diploma-equivalent entry requirements have already been set. Menon noted that while many prominent Singaporean firms are already consciously recruiting and investing in better qualified agents, setting higher market-wide norms, should benefit both companies and consumers going forward. “Only then can they provide holistic advice and comprehensive recommendations on what to buy, and – more importantly – what not to buy,” Menon said.
FAIR’s second tenet will be similar to the first, with quality standards being reviewed for the domestic financial companies themselves as opposed to individual agents. While Singapore’s banks and insurance companies are generally quite sound and well resourced, the country’s financial advisory firms vary wildly in size and complexity, and this needs to be addressed. Menon noted that some financial services firms in Singapore are so small that their shareholders and directors often assume multiple positions, including important oversight and compliance roles, which can prove detrimental to their performance and reputation down the line. Under FAIR, MAS plan to conduct a comprehensive examination of the sector’s management practices to ensure that the country’s financial advisory companies remain well managed and financially sound overall. The MAS then plan on using this data to establish fresh industry standards which could be then applied when considering admitting new financial advisory firms into the market.
In addition to raising company and agent entry and retention standards, FAIR will look to make financial advice a ‘dedicated and professional vocation’ to further improve the sector’s customer service standards. According to Mr Menon, this move needs to be made to tackle the growing number of agents now conducting or looking to conduct other activities outside of providing financial advice to their customers in order to claim on multiple commissions. Several of these activities, including money lending, real estate sales, and marketing unlawful investment tools, have been flagged as clear conflicts of interest to both a given agent’s client base and the company that employs them. While many firms already choose not to accept representatives with multiple commitments outside of finance, MAS will use their upcoming review to form a consensus and establish an industry-wide approach on this issue. Under the same purview, FAIR will also review the practice of financial advisors, insurance agents and companies making use of ‘introducers’ to reach out to new customers in Singapore. Introducers are often unlicensed individuals who pull in clients for firms in exchange for cash or a future cut of the commission. As they are not vetted by any financial or government institution, the use of introducers has come under criticism by the MAS for the needless risk their advice may have on customers. Similar scrutiny is also expected to being levied at domestic insurance brokers, many of whom are now advising on group term life insurance to complement their existing product portfolio. “MAS is concerned that insurance brokers may not have sufficient management expertise and compliance capability to oversee and manage the FA portion of their business,” Menon said.
FAIR will look to drive down the cost of buying life insurance policies in Singapore by reviewing the country’s commission-based remuneration and distribution structure. Singapore currently uses a tiered framework whereby customers pay multiple commissions over the life of a policy, which go not only to the insurance agent, but also to their supervisors. Menon noted again that both the United Kingdom and Australian insurance sectors are now moving towards a fee-based model and are banning commissions paid by product manufacturers to financial institutions “except in the case of pure-protection products”. MAS will examine whether Singapore’s current commission structure can better align the interests of agents with the long-term interests of consumers, and whether in fact the current tiered structure provides value for the average customer or merely adds cost. Currently, total commissions and overrides earned by Singapore insurance agents and firms amount to about 160 percent of a policy’s average annual premium over the first six years of a policy. In addition to these added commission expenses, distribution costs were cited by the MAS director as a key impediment to reducing life insurance premiums. As part of the push to lower these distribution costs, FAIR will examine how simple term life products could be sold more effectively to the wider Singapore population through the internet. “We have seen the use of direct sales via the internet for general insurance products such as travel and motor insurance. Why not life insurance?” Menon asked.
The fifth and final FAIR objective will be to promote and improve upon a culture of fair dealing and greater transparency by financial institutions in Singapore. The MAS recognize that enforcing fair trading and greater responsibility goes beyond mere compliance with market rules and instead requires firms to take a longer-term view of their clients rather than focusing solely on certain revenue and commission targets. “It is about a culture that places the consumer first, that is focused on doing what is right for the consumer, and that places a premium on integrity,” Menon remarked.
The decision by MAS to launch this comprehensive review is timely. According to Mr. Menon, Singapore still faces a significant coverage gap, with the average citizen underinsured in terms of life, health and property protection. In his speech, the MAS director cited a 2009 Nanyang Technological University study that found that the amount of life insurance cover of the average Singaporean resident had was only about a third of what their dependents would need in the event of an early death. Furthermore, a 2011 survey conducted by the Nielsen Company, revealed that only 14 percent of Singaporeans would be financially ready for retirement, which was lower than the Asia Pacific and international averages of 22 and 18 percent prepared respectively. Menon concluded that “the insurance industry should reflect on these findings and take up the challenge to narrow the shortfall in protection coverage.”