When the Monetary Authority of Singapore (MAS) first announced the Financial Advisory Industry Review (FAIR) in 2012, the intention was to raise the standards of practice in the financial advisory (FA) industry and improve efficiency in the distribution of life insurance and investment products in Singapore.
An attention-grabbing initial intention of FAIR was to explore the idea of abolishing or banning commissions payment to financial advisers and their representatives altogether. This surely was taking a leaf out of the UK Retail Distribution Review (RDR) and the Australian Future of Financial Advice (FOFA) review.
While the UK has successfully implemented the fee-based model, and Australia has also somewhat limited commissions, Singapore has taken a ‘gentler’ approach. Instead of a fee-based model, the MAS has decided to instead cap commissions for the sale of regular premium life insurance policies in the first year, and redistribute the remaining commissions evenly over the subsequent periods. The stated rationale for this was that the Singapore market was not yet ready for a fee-for-advice model, and that other measures, such as facilitating comparison of products and improving accessibility of basic insurance products through a direct channel, will, in the long term, reduce distribution costs.
Personally, I feel that my competent authority may have missed the point here. While the measures implemented will reduce distribution costs over the long run, some would argue that they do not address the fact that different products pay different commission amounts. Sometimes, product manufacturers even pay different commission rates to different distributors.
Claire Huang’s 10 August 2016 article in The Business Times article entitled ‘FA firms should disclose payments, product mix’ hits the nail on the head. The article claimed that some insurers (product manufacturers) now have payment arrangements with FA firms distributing their products that are over and above the standard commissions and distribution costs. FA firms usually sell products from a multitude of product manufacturers.
In my experience of working as a compliance officer for prominent insurers and FA firms, I have long heard of preferential schemes such as ‘preferred distributor’ or ‘exclusive partnership’. The aim is to entice FA firms to sell more of a certain manufacturer’s insurance or unit trust products. Certain manufacturers also pay annual ‘marketing allowances’ or ‘sponsorship fees’ to distributors. Although no sales target is set for such ‘marketing allowances’, distributors can certainly expect a lower amount paid if the volume sales of the manufacturer is poor the previous year. Although such a ‘soft dollars’ approach is never advocated, neither is it explicitly banned.
The authorities largely rely on the ubiquitous Section 27 of the Financial Advisers Act to overcome any biasness caused by a difference in fees/commissions/benefits. Section 27 states: ’No licensed financial adviser shall make a recommendation with respect to any investment product to a person who may reasonably be expected to rely on the recommendation if the licensed financial adviser does not have a reasonable basis for making the recommendation to the person.’
The question is, does the representative make the most suitable recommendation? Or can the representative make a recommendation that is not unsuitable?
Consider this scenario:
Cosmo Financial Adviser only sells health insurance products from Insurer X and Insurer Y. Today, representative Alfred from Cosmo meets with a client who has stated unequivocally that he wants to buy the cheapest health insurance product in the market, due to a limited budget. It is crystal clear that the client requires a health insurance policy, as he currently has none.
However, Alfred’s firm does not sell health insurance from Insurer Z, which is the current cheapest in the market. For simplicity’s sake, let us assume the health insurance offerings from the different insurers are largely similar in terms of features and benefits. Should Alfred recommend the client to approach someone from Insurer Z, and lose the commission, or should he just sell client the cheaper health insurance product that his firm offers? It seems that Alfred is in a quandary.
Ethics require doing the right thing, even when no law requires it. My view is that as long as commissions, and any fees disguised to entice sales, are still present in this market, there can never be true, unbiased advice.
Notwithstanding, I am glad to know that there are a few pure, fee-based FA firms in the Singapore market now. Their model is to charge an upfront advisory fee based on the level of advice required; any incidental commissions received from manufacturers will be fully refunded to client.
The great jazz musician Wynton Marsalis once said: ‘Ethics are more important than laws’: a wise saying indeed.
The views expressed are the author’s and do not necessarily represent the views of the International Compliance Training Academy and International Compliance Association.
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