regulation takes root

Well, apart, perhaps, from an ‘Industry’s Got Talent’ contest scheduled for the end of the evening, which was to feature amateur performers drawn from the ranks of Singapore’s insurers.

By the time they left the venue a few hours later, however, pretty much everyone who had been in that ballroom realised that Singapore’s financial services industry would never be the same.

In a lengthy (3,481-word)  keynote speech, the head of the Monetary Authority of Singapore (MAS) unveiled for the assembled LIA guests detailed plans for what MAS is calling its ‘Financial Advisory Industry Review’ (FAIR). This review, MAS managing director Ravi Menon explained, would be aimed at “enhanc[ing] the professional standing and competence of financial advisers”, while at the same time creat[ing] a more competitive and efficient system for the distribution of life insurance and investment products”.

Advisers would be expected to know more about the products they sold to their clients, and pass new exams aimed at raising their knowledge and skill levels, while measures would be introduced to ensure greater transparency for clients, in terms of how they paid for advice and for investment products and insurance.

“The overriding aim of FAIR is to protect and benefit the consumer,” Menon told his audience.

"Putting the customer first – that must be at the heart of all our efforts."

Regulatory kudzu

“Some of the most senior insurance agents were left reeling by the sweeping changes proposed…last night,” is how the Straits Times reported Menon’s speech the next day.

Many observers of the global financial advisory scene, however, say the bigger surprise is that anyone in the industry could have been genuinely shocked to learn of the review plans.

This is because of the way similar reviews of current advisory industry practices  – typically followed by what are, by now, some fairly predictable changes to the regulations governing advisers – are being undertaken by one after another jurisdiction around the globe, like some sort of fast-spreading regulatory kudzu.

Perhaps the best known advisory practice review, of course, at least to readers of International Adviser, is Britain’s Retail Distribution Review (RDR). Launched in 2006 by the Financial Services Authority, the RDR at this point has become a package of game-changing new regulations set to take effect on 1 Jan, 2013.

FoFA package

In his LIA speech, in fact, Menon mentioned elements of the RDR on a couple of occasions, but in the same breath also made reference to measures currently being taken by Australia, which is much closer to Singapore geographically than Britain, and which therefore is often a greater influence.

Although Menon does not mention it in his speech, he would have been aware that just a few days before, Australia’s legislators had finally voted into law a package of reforms seen as that country’s answer to Britain’s RDR.

The Future of Financial Advice Act (FoFA), as the Australian reform package is called, bans commissions on investment products in a way that mirrors that of the RDR ban, while introducing other changes aimed at boosting client protection and transparency.

One feature UK advisers have not had to take on board, but Australian advisers will, is a so-called ‘opt-in’ rule, which requires advisers to send a renewal (‘opt in’) notice every two years to new clients (those taken on after 30 June, 2012) who are charged an ongoing annual fee.

An annual fee disclosure statement, spelling out the exact dollar amount of the fees being charged, will also be required for all clients.

Globalising industry

What is driving governments and regulators around the globe to introduce such rules is the explosion that has taken place over the last decade or so in the international financial services industry, according to one of the leading experts in financial regulatory matters, Deen Sanders.

Sanders is chief professional officer of the Financial Planning Association of Australia, the country’s main professional body for financial advisers and wealth planners, and an affiliate of the Denver-based, globally-active Financial Planning Standards Board.

“What’s been happening over the last 15 to 20 years is that countries around the globe, including many newly-emerging Asia Pacific financial centres, have found themselves having to deal with very complex financial products being made available to their consumer populations, without any of the sorts of traditional regulation, or even long-evolved sense of market structure and market integrity that, say, New York, London and Australia have had,” Sanders says.

"This is evident when you walk around the major cities in these countries, where you see the logos of all the same internationally-recognised financial services companies on all the tall buildings."

Sharing information

While regulators were beginning to address such concerns prior to 2008, the financial crisis focused attention on the need to act, Sanders points out. And, like the global financial services industry they were taking on, these were regulators who had “long talked to one another and shared information, ideas and even personnel” over the years.

“So just like the financial services industry has a kind of global homogenisation of products, ideas, mindsets and so on, the various regulators are talking and sharing ideas as well.”

The financial advisory industry has been targeted for attention not because it is seen as particularly problematic, but because it is the point at which financial products are joined up with the consumer, Sanders and others say.

The result is far from a homogenised global regulatory framework, at least not yet. Still, Sanders says, “the reality is that almost every country on the planet is following the UK and Australia’s model of regulation for advice, or aspiring to follow it.”

Even US considering change

One possible exception is the US, where historical and other factors, such as the power individual states have to oversee significant elements of financial services delivery, have meant that there has been little appetite or leeway for new federal rules in these areas.

Even there, though, change may be on its way, in the form of a package of new regulations known as the Dodd-Frank Act – which has resisted implementation due to its complexity – and a new insurance commissions disclosure law in New York State, which has prompted a national association of advisers to encourage disclosure when clients ask for it.

Most recently, US lawmakers were revealed last month to be considering new legislation aimed at boosting the standards of advice on offer from the country’s advisory industry – in response, it was said, to a 2011 Securities & Exchange Commission study, which revealed that the SEC lacked the resources to adequately examine America’s nearly 12,000 registered financial advisers.

Unlike the UK’s Retail Distribution Review  – which was a comprehensive regulatory overhaul – however, America’s proposed Investment Adviser Oversight Act of 2012 would do little more than provide for the authorisation of one or more ‘self-regulatory organisations’ to be designated to oversee the US financial advisory industry.

US advisers would have to be registered with an SRO if they wished to deal with retail clients, and financing for the scheme would come from fees paid by industry members.

Hong Kong’s approach

Hong Kong, meanwhile, is going about regulating advisers and intermediaries in its own way, which Glenn Turner, chairman of the Hong Kong Independent Financial Advisors Association, says is “piecemeal” because there is no centralised governing body equivalent to the UK’s FSA.

For this reason, he says, the recent regulatory push has tended to “lack logic in what should be done first, what should be done [next] and so on”, with the result that it is emerging in an “unsystematic way” from the three main regulatory bodies – the Securities & Futures Commission, Insurance Authority and Mandatory Provident Fund Scheme Authority.

The result, he says, is “poor alignment” and such discrepancies as the fact that commission disclosure is compulsory for just some products and some types of sales channels but not others.

What is more, being piecemeal in this way has not meant less regulation, Turner notes: “The pace of regulatory changes from these three bodies is picking up, with the number of new rules introduced increasing with every year that passes by, and regulatory and product arbitrage flourishing”, to the frustration of advisers.

“Sometimes, the regulators are coming up with different rules for similar products.”

Where the regulatory march is leading

Experts are divided over where the rush to regulate will lead the financial advisory industry. Some claim that it is already resulting in less-affluent clients beginning to be neglected, as they are thought to be less willing to pay fees, even if the fee-based system will cost them far less in the long run.

In Hong Kong, where financial advisers may eventually be required to disclose the existence of commissions to their clients, advisers are howling that they will now not be able to compete with the tied agents of insurance companies, who are not required to do likewise.

The FPA’s Sanders says such conflicts in business models are inevitable, and that regulators will therefore need to innovate, experiment and communicate with one another to find the best solutions.

Already, he notes, the UK and Australia have been “leap-frogging” one another, with one jurisdiction experimenting with something that the other improves upon as it adopts it. 

But beyond individual regulations, Sanders sees an overall move towards what he calls “the professionalisation of financial planning”.

To him, this means the creation of professional bodies, such as the FPA, that individuals and companies join by choice, and in so doing agree to abide by specific qualifications and standards. These bodies in turn will actively monitor, investigate and where necessary prosecute those members who fail to maintain the organisation’s required level of conduct.

Striking a balance

“Getting the balance right between government, profession and industry, as to how consumers are protected and who will do what, has been the missing link in the regulatory approach,” Sanders continues. “We are seeing the first signs of this beginning to happen.

“Even though professions generally are losing ground, as governments begin to intervene more, the recent legislation in Australia has the potential to tip the scales, and we think it is a model that can work in other jurisdictions.”

Five life policies

Back in Singapore, Mark Paine, managing director of Meyado Private Wealth Management, describes meeting a Singaporean client, who “had five life insurance policies” and was wondering whether he thought she ought to buy a sixth, recommended to her by an insurance broker.

“I looked at these things, and it was ridiculous what she was paying for the cover she was getting,” Paine says.

Such cases, he argues, reveal a genuine need for some form of regulatory intervention. Yet he is among those who worry that clients at the lower-income end may suffer rather than be helped when commission ends.

Like other advisers and wealth managers in Singapore, he foresees a growing polarisation of the global advisory industry – and possibly within larger companies – as two business models develop: one catering for affluent clients with high quality wealth management services, and a more mainstream, cost-focused model, relying on model portfolios and other types of generic products and advice.

Still early days

Chris Gill, principal officer and general manager of Friends Provident International in Singapore, believes it is still too early to comment in detail on what impact the pending FAIR review will have on the industry.

With its still-strong tied agency channel, Singapore, he notes, has “quite a different [insurance product] distribution profile” than the UK and Australia, where similar reviews have taken place.

“But overall, as with the RDR in the UK and the [similar] initiative in Australia, the intent of the changes must be applauded, as they focus on the right areas in terms of aligning client and adviser interests, raising standards across the industry and focusing on transparency.” 

 * Finance Norway was established in 2010 by the Norwegian Savings Bank Assn and norwegian Financial Services Assn