Last Updated on 3, June 2016
Financial adviser representatives or known as advisers and other times also known as insurance agents will no longer be entitled to receive remunerations that are connected to the volume of sales. That is to say sales incentives will no longer be permitted.
For those who are not aware, sweeping changes to the regulations have been made in the financial advisory industry. One of the changes is that if an adviser is not able to meet the non-sales KPIs, up to 60% of commissions will be confiscated. This is known as the “Balanced Score card”. I wrote to the press complaining that people work bests when there is an incentive. There is no other occupation which gives -7.2 months bonuses (not a typo) for not meeting KPIs. Why -7.2 months? Because 60% x 12 months = 7.2 months. You can read my letter of complaint to Straits Times forum at this link: ST forum: Balanced Score Card motivates financial advisers through punishment.
Today, MAS releases the finalised version of the regulations. After reading through, I concluded that sales incentives will also no longer be permitted. That is to say advisers will also not get any incentives if they meet their sales-KPI (or better known as sales quota). This is not new as the industry already knew it but what is different from the common understanding is that sales incentive for pure insurance appeared to be banned too.
The part on remuneration is spell out under two regulations. One is from Insurance (Remuneration) Regulations 2015 and another is from Financial Advisers (Remuneration) Regulations 2015. Both regulations mirrors each other. The former spells out circumstances which an insurer can and cannot pay remunerations to advisers. The latter spells out circumstances which an adviser can and cannot request for remunerations.
I will just focus on the Insurance (Remuneration) Regulations 2015 in this blog.
No restriction on sales incentives for selling policies to high networth
Let’s talk about the good news. The good news (and probably the only good news) is that an adviser will get his remuneration if he sells products to an accredited investor, expert investor or an institution. There appear to be no restriction on the kind of remuneration he can get. Why? Because accredited investors are not entitled to receive any kind of protection. Read this article I wrote: Why accredited investors are in for a raw deal.
Sales incentives tied to volume of sales banned
You have to read the above many times to figure out what it really means. From my layperson interpretation, it means sales incentives for meeting sales quota is banned.
I randomly picked an email I received just 9 days ago which states that I will get $2000 cash (on top of the commission) for selling a specific product if the premium is above $XX,000. Under the new regulation, this is no longer permitted since the remuneration is conditional upon the value of the contract exceeding a certain amount.
What is surprising in this paragraph 4 is that the insurer is also not permitted to reward advisers for selling large number of pure insurance like term insurance. I had actually thought the authority wanted to exempt pure insurance from this banned.
By the way, are overseas incentives considered ‘remuneration’? At this point of writing, one insurer will give 2 tickets to Vienna, Austria & Dubai, UAE with twin sharing accommodation if the adviser hit $200,000 APE. If such overseas trips are classified as ‘remuneration’, it implied that all overseas trips will also be banned because incentive trips are always sales incentives meant as a reward for advisers for surpassing certain sales quota.
Commission clawbacks for short-term advisers
My layman interpretation: 100% of the commission will be clawback if an adviser quits within one year AND he/she was engaged by the insurer to sell one type of product. If he/she was engaged to sell at least two types of products, there is no clawback even if the adviser quits within one year.
In any case, there is no clawback for pure insurance even if the adviser quits within one year.
What should financial advisers do?
I have written many blog posts in the past that the career prospect in the financial industry is bleak. All the new regulations were constructed to discourage advisers from focusing on selling products.
The Balanced Score Card only penalized advisers but do not reward them for doing well even if the quality of their advice surpluses expectations. But if you do not sell products, you will not be subject to the Balanced Score Card (because there is no transaction. Complains will also not come in since there is no such thing as having being sold a lemon product).
The restrictions on remuneration also discourage advisers since there is no point in doing well in sales. Likely, overseas trips are banned and all your CapitaVoucher sales incentives for hitting quotas will also disappear.
To put it in a nutshell, your remuneration has downside but no upside.
What I can suggest financial advisers should do is to move away from selling products to ‘offering’ intellectual skills. Financial planning is definitely one way of ‘offering’ intellectual skills because your focus is in solving customers’ problems. Sales of products may occur but it is purely incidental to the process of financial planning. The good news is that the sales of products can be outsourced so that you do not need to get your ‘hands dirty’. For example, sometimes I outsource insurance purchase to my clients’ own insurance agents (and their agents will be subject to all potential liabilities!). Other times I will outsource to the Direct Purchase Insurance (DPI). Interestingly, there are some serious issues with the Direct Purchase Insurance and I was able to offer my understanding (i.e. intellectual assets) of insurance underwriting to help my clients overcome these issues. See Direct Purchase Insurance nightmare.
Another way is for financial advisers to only offer products to high networth or accredited investors. However, this is not easy because regulation requires the advisers to have proof that these investors are really high networth. This can only be done if the advisers have done a full fact find. But those who focus on selling products do not do full fact find. Only a financial planner does full fact find. Hence, we come back to square one that only financial planning is the only viable alternative for a financial adviser to ‘survive’.
Disclaimer: I am not a lawyer and this blog is not a legal advice. The regulation is very hard to understand. Consult your own lawyer to interpret the hard-to-understand-laws.
PS: Happy New Year!
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Wilfred, where got ban on sales/product incentives? A few insurance companies already can’t wait to offer incentives to their salesmen and FA companies. Is it a mistake? How come MAS dunno? Is MAS’s head still buried in the mud and still stuck in 2015? Or has MAS back tracked and deferred the implementation?
I came into office this morning and my colleagues pointed out to me that all the incentives are still intact. So my blog post must be wrong. I was told that the banned of incentives have been deferred to 2017.
I think many advisers are confused on the meaning of ‘sales incentives’.
There are two main types of sales incentives:
(1) Extra commission based on % of the premium of selected products
(2) Additional remuneration that is conditional upon exceeding a certain sales quota.
It is (2) that has now prohibited under paragraph 4 of the regulation. There is nothing mentioned about stopping (1). In fact, (1) can be viewed as increasing the total commission temporarily. Unfortunately, MAS made a promise not to regulate the total commission because doing so could result in commission to be ‘stuck’ at the upper limit. So I guess the show still continues for (1). This morning, I also received a few mass emails from insurers for (1) type of extra commission. So I guess their compliance departments are well aware they can continue with it.
What has been deferred is the capped in the first year’s commission and the regulation to spread out the commissions payable over 6 years or the coverage period whichever is lower. The products affected are mainly the 101 ILPs which pay commission on day 1 based on indemnity.
So MAS has reneged on the sales and product incentives ban. It looks MAS is fond of not keeping to its words or is it vowing to the pressure of the insurance companies like the spreading and capping of commission which is postponed to 2017?
Put it simply, can MAS be trusted anymore? It happens too often at the expense of the consumers. Meantime the consumers will be left unprotected from the greedy conmen and women from the insurance companies which promise them incentives to embolden them to ‘chion’ with lies and mis-selling and who feel the urgency of making the money while the ban is off. Now the conmen will not hesitate . It is now or never for them.
Poor consumers, the regulator is unreliable as your protector. You better protect yourself. The best protection is NEVER have to do anything with insurance agents by whatever titles they are carrying. Only engage the trusted ones who are qualified and fee based ones and not peddlers of toxic whole life and especailly the endowment products.
Run to where it is safe. Go to http://www.compareFirst.sg and take your time to buy the plans that suit you. I am sure there are ethical advisers who would direct you to this place and who may even give you some advice of what to buy. These are trusted advisers I am talking about.