In 2015, there will be new laws governing the conduct of financial advisers in Singapore. Despite large number of laws governing the manner which financial advisers must act, majority of these laws could not be enforced.
If you look at the enforcement notices posted on MAS’ websites HERE relating to financial advisory activities, almost none of the enforcement actions were related to actual cases in which an adviser recommended products that are not suitable. Yet, the mystery shopper exercise conducted a couple of years ago by MAS shows that up to 70% of financial advisers’ recommendations were not suitable. This means the majority of the transactions submitted by financial advisers are illegal as far as the Financial Advisers Act is concerned. It also means that the regulator was unable to enforce the law for almost all of these illegal transactions.
The reason why there are hardly any enforcement actions against these illegal transactions is because it is very difficult, if not impossible, for an outsider to gather evidence and enforce laws and uphold professionalism. I consider MAS as an “outsider” because they are not practitioners. Financial advisory is a highly technical subject. For those who have not studied this subject and continue to practice have no way to figure out what is happening.
Therefore, in 2015 new laws will be introduced in which financial advisory companies (i.e. practitioners) must enforce the law on their own people using the Balance Scorecard (BSC) framework. Advisers who fail the Balance Scorecard will be financially penalised and may eventually be terminated. The only problem is that the people who will do the audit – known as the Internal Sales Audited (ISA) – must be independent. Independence is good. But if they need to quit from doing sales in order to be independent – it means they are no longer practitioners. As a result, they too become ineffective.
Examples of illegal sales tactic under the Balance Scorecard framework
The actual details of the Balance Scorecard framework is extremely complicated. In the draft documents, MAS gave many examples of illegal sales tactic which under the Balance Scorecard framework would results in the adviser subject to significant financial penalties. The following are the examples.
- RECOMMENDS BEFORE FACT FINDING: A representative recommended an investment product to a client before collecting pertinent information from the client on his profile, risk appetite and financial objectives. As a result, the investment product recommended by the representative to the client does not meet the risk appetite, financial objectives or particular needs of the client.
- RECOMMENDS BEFORE FACT FINDING: A representative did not conduct the Customer Knowledge Assessment on a client and the client did not have the knowledge and experience to understand the risks and features of a specified investment product (“SIP”), but the SIP was recommended to the client nonetheless.
- INFLUENCE THE CLIENT TO FILL UP THE FORM TO MATCH THE PRODUCT SOLD: A representative influenced a client’s answers to the risk profiling questions so that the client’s risk profile matched the investment product that the representative was trying to sell to the client.
- TRANSACTED THE WRONG PRODUCT: During the fact-find, a client indicated that he wanted bonds with fixed coupon payments. The representative assumed that the client was referring to bond funds (unit trusts) and sold $250,000 of a global bond fund to the client, instead of a pure vanilla bond.
- RECOMMENDS WITHOUT FACT FINDING: A client took up a mortgage loan with the bank. During the presentation, the representative recommended a mortgage reducing term assurance (“MRTA”) policy to the client without finding out from the client if he already has a term insurance policy which can provide adequate coverage for the tenor of the mortgage loan. In actual fact, the client did not need to purchase the MRTA policy.
- RECOMMENDS WITHOUT FACT FINDING: A representative failed to collect information on a client’s source of income in the fact-find form. The representative assumed that the client was currently employed as the client was dressed in business attire. As such, representative ticked “employment” as the client's source of income. The representative sold a monthly investment plan for unit trusts to the client, which required the client to contribute a fixed amount for a minimum of 12 months. In fact, the client is a retiree with no regular source of income.
- RECOMMENDS WITHOUT TAKING INTO ACCOUNT OF CLIENT’S OBJECTIVES: A client requested that a representative recommends an investment product that is capital guaranteed as he did not wish to risk losing his retirement savings. However, the representative recommended and sold a non-capital guaranteed investment product to the client.
- RECOMMENDS WITHOUT TAKING INTO ACCOUNT OF CLIENT’S NEEDS: A representative identified a client’s need for high protection coverage. However, the representative recommended an investment product to the client which did not have any protection coverage. The representative did not provide any justification for recommending an investment product that did not address the client’s need for high protection coverage.
- RECOMMENDS WITHOUT TAKING INTO ACCOUNT OF CLIENT’S FINANCIAL SITUATION: A representative recommended an insurance plan where the monthly premium payment was more than the client’s monthly disposable income. The representative did not provide the client any justification for his recommendation.
- CHURNING / RECOMMENDS WITHOUT REASONABLE BASIS: A representative insisted that a client should cancel an existing investment product to purchase another new investment product without providing any justification. The recommended investment product offered a lower level of benefit at a higher cost to the client and it did not meet the financial objectives of the client.
- CHURNING / RECOMMENDS WITHOUT REASONABLE BASIS: A representative told a client that he could gain higher returns if the client does a partial withdrawal from his existing policy and purchases another new policy. The representative had no basis to suggest that the new policy offered better returns than the existing policy, as the investment returns of the two policies were of different nature. The representative benefitted from the commission from these transactions.
- CHURNING / RECOMMENDS WITHOUT REASONABLE BASIS: A representative recommended a client to do a partial withdrawal from an investment-linked insurance policy to purchase another similar investment linked insurance policy, without providing a reasonable basis. The client had incurred additional transaction cost for the second investment-linked insurance policy which the client could have avoided if he did a fund switch.
- CHURNING / RECOMMENDS WITHOUT REASONABLE BASIS: A representative recommended a client to take up a new policy rather than to reinstate his lapsed policy, which was on premium holiday, without a reasonable basis. The representative was aware that it was a better choice for the client to reinstate the lapsed policy as it has a higher allocation rate than the new policy.
- RECOMMENDS WITHOUT REASONABLE BASIS: A representative recommended a structured note to a client on the basis that the client had understood the product. However, neither the client’s education, employment status, investment background supported this conclusion.
- RECOMMENDS WITH AN INAPPROPRIATE TIME HORIZON: A client has indicated to the representative that he has medium to long term savings needs to accumulate $50,000 in 10 years. However, the representative recommended a 15-year savings plan and insisted that it was suitable for the client’s profile.
- OMISSION OF MATERIAL INFORMATION: A representative recommended a dual currency investment product to a client but failed to inform the client that he may end up holding an alternative currency at maturity of the dual currency investment product, and the client would not have bought the recommended dual currency investment product if the abovementioned information had been provided to him by the representative.
- OMISSION OF MATERIAL INFORMATION: A representative failed to inform a client that the benefits or returns relating to a recommended insurance plan are not guaranteed and subject to the performance of the insurer's participating funds, and the client would not have bought the recommended insurance plan if the abovementioned information had been provided to him by the representative.
- OMISSION OF MATERIAL INFORMATION: A representative failed to inform a client that cancellation fees would apply for the premature withdrawal or termination of a recommended structured product or the capital of a structured product is not guaranteed unless the recommended structured product is held to maturity. The client would not have bought the recommended structured product if the abovementioned information had been provided to him by the representative.
- OMISSION OF MATERIAL INFORMATION: A representative recommended a client to invest using his CPF monies to purchase an investment product but failed to inform the client of the current interest rates payable under the CPF Ordinary Account and Special Account, and the minimum interest rate guaranteed under the CPF Act (Cap.36), and the client would not have bought the investment product if he had known that the potential returns from the investment product may be lower than the interest rates he would earn under his CPF account.
- OMISSION OF MATERIAL INFORMATION: A client has a risk adverse profile and indicated to the representative that he would not want to lock in his monies at all. The representative sold the client a structured product and did not inform him that he would not get back the full invested amount if he terminates the investment earlier than the stipulated period. The client would not have bought the product if this information had been provided to him by the representative.
- MISREPRESENTATION: A client purchased an insurance policy based on a representative’s misrepresentation that it was a savings account that allowed him to deposit or withdraw funds at any point of time without incurring any charges or penalties.
- MISREPRESENTATION: A representative misled a client to believe that a recommended insurance investment-linked product is a unit trust.
- MISREPRESENTATION: A representative guaranteed a client that the client would receive the maturity value or cash value of a recommended investment product in six months’ time but this promise did not materialise. The client had informed the representative before he recommended the investment product that he needed the funds for a property purchase in six months’ time.
- MISREPRESENTATION: A representative documented in the fact-find form that the cashback of the insurance policy would be paid out starting from the second year although he was fully aware that the yearly cashback of the insurance policy is only payable from the third year onwards.
- MISREPRESENTATION: A representative misrepresented that the insurance policy he has recommended also provides terminal illness coverage, when the policy only provides financial protection against death. As a result, the client bought the policy on the understanding that he would receive a payout under the policy if he was diagnosed with a terminal illness.
- MISREPRESENTATION: A client was told that he had made a gain of $1,000 from his investment in an investment-linked insurance policy. When the client surrendered his policy, he had actually made a loss of $20,000.
- MISREPRESENTATION: A representative told the client that the structured note was of very low risk and is a low risk alternative to fixed deposits, which was inconsistent with the prospectus and pricing statement of the structured note.
- MISREPRESENTATION: A representative misrepresented an endowment insurance plan as a savings plan with free insurance for the deposit and the client bought the product thinking that he was opening a fixed deposit account.
- FALSIFICATION OF DOCUMENT: A representative falsified the client’s responses in the fact-find form to place the client into a higher risk bucket so that the client was able to purchase an investment product that was more risky than his actual risk profile.
- FOCUS ON SALES REVENUE INSTEAD OF CLIENT’S INTEREST: A representative failed to execute a transaction for a client based on the client’s instructions without valid cause, as the representative intended to accumulate his sales revenue based on his volume of closed sales for the following quarter, resulting in the client incurring losses.
- FALSIFICATION OF DOCUMENT: A representative asked a client to pre-sign a blank fact-find form without going through the fact-find and the representative completed the fact-find form in the absence of the client.
- HARASSMENT: A representative persistently harassed a client notwithstanding that the client said that he was not interested in purchasing any investment product.
- RUBBER STAMPING / USING RUNNERS: A representative allowed unauthorised persons to meet and provide financial advice to his client on his behalf without him meeting the clients. In this regard, the representative had failed to meet his clients to conduct proper fact-find and explain the basis of recommendation in respect of investment products regulated under the FAA.
- MISREPRESENTATION: A representative misrepresented to a retiree who is illiterate, that an equity fund was a capital-guaranteed product that is similar to a fixed deposit.
After looking through the above examples, I am sure you have been in cheated by your financial advisers before. Can you complain if you have been cheated before? I am afraid no. Under current system, once you sign a document saying you only want to receive product advice, majority of the above illegal sales tactic becomes perfectly legal.
A couple of weeks ago I was at a bank to perform some banking matters. The relationship manager recommended me saving plans without fact find and without asking me about my financial objectives and situation. Although it is so near to 2015, it is obvious that the financial industry is terribly not prepared for it.
2015 will be a terrible year for the financial industry. It is a terrible year for those whose business are mainly sales driven. The good news is that for those who are doing a holistic financial planning for their clients, nothing has changed.
Source: The 34 examples were copied from ANNEX 20 NEW GUIDELINES ON THE BALANCED SCORECARD FRAMEWORK, REFERENCE CHECKS AND PRE-TRANSACTION CHECKS
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