FINANCIAL ADVISERS BILL

Order for Second Reading read. 2.03 pm

BG Lee Hsien Loong: Mr Speaker, Sir, I beg to move, "That the Bill be now read a Second time."

Overview

The Financial Advisers (FA) Bill proposes to regulate Financial Advisers and their representatives, and to repeal the Insurance Intermediaries Act (Chapter 142A of the 2000 Revised Edition). It will govern all financial advisory activities in respect of investment products, and the marketing of specific investment products, namely, life insurance policies and collective investment schemes across all financial institutions, from banks, life insurance companies and insurance brokers, to independent advisers. As mentioned earlier, corporate finance advisory activities will be regulated under the Securities and Futures Bill.

The current regulatory framework for Financial Advisers is contained in various pieces of statutes, depending on the asset class they advise on. These statutes are the Securities Industry Act, Futures Trading Act and Insurance Intermediaries Act.

Over the past few years, product innovation has resulted in the emergence of new and complex products that have blurred product lines. Financial institutions do not just offer "plain-vanilla" instruments these days. For instance, insurance companies offer investment-linked life insurance products (ILPs), which are similar to unit trusts, except that they have an insurance element attached to them.

Distribution channels for financial products are also no longer confined to traditional boundaries and institutions. Investors may now purchase unit trusts from various sources: directly from fund managers, banks, stockbroking firms or Internet portals. Besides the traditional agency sales force, life insurance companies are relying on external parties, such as life insurance brokers and banks, to market their policies. Financial intermediaries are now expanding beyond traditional lines of business to provide "one-stop" service to meet investors' financial needs.

The present regulatory model of multiple licensing has its merits when financial products are distinct and dealt with by different professions. However, this is no longer the case. Therefore, the FA Bill will introduce a new integrated regulatory and supervisory framework for Financial Advisers.

The new Bill will consolidate the current regulatory regime governing the provision of financial advisory services in respect of securities, futures and life insurance products, which are currently contained in three different Acts, namely, the Securities Industry Act (SIA), Futures Trading Act (FTA) and Insurance Intermediaries Act (IIA), into a single legislation.

There are several benefits from consolidating the legislation regarding the provision of financial advice into one Bill. Firstly, streamlining the regulation of Financial Advisers, allowing a single licence to authorise the giving of advice on a wider spectrum of financial products, will reduce administrative and compliance costs, as compared with holding multiple licences under the securities, futures and insurance laws.

Secondly, it will establish a consistent set of regulatory requirements across the financial advisory industry. This will reduce the scope of regulatory arbitrage, level the playing field and facilitate the maintenance of uniform professional standards across the board.

Thirdly, the Bill will create a new class of licensed financial advisers. These professionals will be able to provide investment advice on a wide array of financial products, and also sell unit trusts and their close substitutes, such as investment-linked products. In some cases, these financial advisers will not be connected to any product providers, such as fund managers or insurance companies, and will act independently of them. Such independent financial advisers will represent the interests of their clients, rather than the interests of specific product providers.

Financial institutions that are already licensed by MAS and also provide similar advisory services, such as banks, fund managers and insurance companies, will be exempt from licensing under the Bill but will have to observe the same business conduct requirements.

In preparing the Financial Advisers Bill, MAS has conducted public consultation on an earlier draft. All comments were carefully considered and where relevant were incorporated into the Bill. I will now highlight some of the key policy initiatives the Bill contains.

A Single Licensing Regime

The FA Bill will introduce a streamlined licensing regime for persons engaging in financial advisory services on securities, futures and life insurance. Clause 6 provides that a person must not act as a financial adviser in respect of any financial advisory service unless he is authorised by a Financial Adviser's licence or is an exempt financial adviser. The Financial Adviser's licence will replace the existing licences required under the SIA, FTA and registration under the IIA.

Clause 7 requires that any individual who acts on behalf of a licensed Financial Adviser be similarly licensed by the Authority. As representatives act on behalf of the licensed Financial Advisers and, in most cases, deal directly with clients, it is important that these individuals are suitably qualified and are subject to regulatory requirements and are under MAS' supervision.

Prudential Requirements for Licensed Financial Advisers

Licensed Financial Advisers must meet certain prudential requirements, such as minimum paid-up capital and financial resources, at all times. These requirements are necessary in order to establish the Financial Adviser's commitment to operate in Singapore and to ensure that it possesses a minimum level of financial resources to discharge its liabilities and obligations as and when they fall due. The capital requirements will be minimal and will be lower than existing ones. To complement them, Licensed Financial Advisers will need to procure a professional indemnity insurance, as is the practice in other professional fields. Clause 10 empowers MAS to take regulatory actions in the event of the Financial Adviser's inability to meet the minimum financial resource requirements or its failure to have in force a professional indemnity insurance. MAS believes that a right mix of financial requirements and insurance cover will result in better utilisation of the Licensed Financial Adviser's financial resources, without compromising investor protection.

Exemption for Financial Institutions Supervised by the Authority under Other Acts

As mentioned earlier, financial institutions which are already supervised by the MAS under other Acts will be exempted from the need for licensing under the Bill. This will minimise regulatory overlap and reduce compliance costs for these institutions, which will be referred to as Exempt Financial Advisers in the Bill. However, to level the playing field and to apply uniform standards to all market participants engaging in the same types of activities, such Exempt Financial Advisers will be required to comply with similar requirements on market conduct and practices as the Licensed Financial Advisers in respect of their financial advisory activities.

Power to Issue Prohibition Orders

Presently, MAS has the power to issue an order to prohibit undesirable persons from engaging in life insurance broking activities in Singapore. This mechanism is also found in other jurisdictions with more developed markets. MAS has found this an effective regulatory tool and proposes to introduce it in the Bill.

Clauses 59 to 62 of the Bill relate to prohibition orders. MAS will have the power to issue an order to forbid a person from providing any or all of the financial advisory services regulated by the Bill, either permanently or for a specified period. MAS may vary or revoke a prohibition order either on the application of the person against whom the order is made, or on its own initiative if the Authority is satisfied that it is inappropriate to continue with the prohibition order because of a change in the circumstances on which the prohibition order was issued. Appointment and Removal of officers

CEOs and directors are the key persons of a company. It is important that such key appointments are held by persons of integrity who are fit and proper. Therefore, MAS will require Licensed Financial Advisers to seek the Authority's prior approval for the appointment of these key personnel (under clause 56). The fit and proper criterion is a continuing requirement. Where MAS is of the view that any officer of the Licensed Financial Adviser does not measure up to this benchmark, it may direct the company to remove such officer from his office if the Authority thinks it necessary in the public interest or for the protection of investors to do so (under clause 57).

Inspection Power of MAS

On-site inspection of intermediaries is an integral part of MAS' supervisory framework. MAS' inspection power will be provided for under clause 70 of the Bill.

Appeals to be made to the Minister

The appeals process in the Bill is similar to that in the Securities and Futures Bill.

Sir, I beg to move.

Question proposed.

Mr Ong Kian Min: Mr Speaker, Sir, I serve as a member of the Executive Committee of the Financial Planning Association of Singapore and while I speak in support of the Financial Advisers Bill in general, I hope certain refinements can be made in the course of implementing this Act. Consultation draft of the Financial Advisers Act (or FAA) has been circulated for some time and some of the points I am raising now are not new, but I think they deserve mention in this debate on the Bill.

The FA Bill serves to consolidate and streamline the regulations found in three separate Acts relating to provision of services in respect of securities, futures and life insurance products. While the intention is commendable, I feel that in the process of consolidating and in coming up with the FA Bill in this present form, we have missed a good opportunity to upgrade the entire industry in the area of financial planning and to promote Singapore as a centre of excellence in this field.

In essence, by virtue of its origin, the FA Bill is product oriented. It regulates financial advisory activities in respect of a range of investment products, and the distribution and marketing of life insurance policies and unit trusts. Any person presently permitted to carry on his activity under the Securities Industry Act, the Futures Trading Act or the Insurance Intermediaries Act will be able to automatically migrate over to be a licensee under the FAA. So, I presume an insurance agency presently operating under the Insurance Act will automatically qualify to be licensed as a financial adviser under the FAA, and each of its insurance agents can be now called "financial adviser representative" simply based on his present qualifications without having to undergo any additional examinations of his skills and competency. If this is not the case, then many people presently working in the insurance industry and financial industry will not be able to carry on what they have been doing once the FA Bill comes into force. This would be a cause of concern as they will add to the number of retrenched and unemployed. I would like to ask DPM whether the passing of this Bill into law will result in any person presently engaged as an insurance agent, financial analyst or investment adviser representative to be disqualified or prohibited from doing what he has been doing.

In this regard, Sir, if everyone in the industry will be migrated over and covered under the term "financial adviser", then this generic term "financial adviser" can potentially be extremely confusing to the public. This, I find, is the big weakness of this Bill. Now, when someone approaches you and represents to you that he is a financial adviser representative licensed by the MAS, what skills and qualifications would you expect him to have? What kind of advice would you think he is competent to give? I think it is reasonable to assume that a financial adviser representative licensed by the MAS is competent to give you advice regarding your financial matters. But, lo and behold, he merely wants to sell you an insurance policy.

There is a big difference between someone who can analyse your financial needs and someone who is knowledgeable only about a particular product. It is analogous to the relationship existing between doctors and pharmacists. One would go to a doctor for diagnosis of what sickness he is suffering from. The doctor does the tests, diagnoses the illness and prescribes the medicine to take. One does not expect the pharmacist to do all that even though the pharmacist may be very knowledgeable about the medical products.

Can the general public make a distinction between a financial planner and a financial adviser? I believe it is hard to change public perception once it is associated with the usage of a certain term; it is easier to change the term to one that is in-line with the public's perception of it.

I would therefore like to ask DPM to consider changing the term "financial adviser" as used in the FA Bill. To avoid confusion, the words "financial adviser", "financial consultant", "financial planner", or words to the effect, should be reserved for someone who is able to properly discover and analyse the financial needs of his client and render more comprehensive financial planning advice in a holistic manner customised to the client's needs. Could DPM consider whether other terms, such as "insurance adviser" and "unit trust adviser", that are more descriptive of the skills set, could be adopted for other specialists in the area of insurance and unit trust respectively?

An alternative would be to split the licence for "financial adviser" into distinct categories, like perhaps Cat 1, Cat 2 and Cat 3, to denote specialty in the respective regulated financial advisory services and investment products.

The danger of putting everyone into a single licence is that people tend to just strive to meet the minimum requirements - enough to be qualified as a "financial adviser representative", enough to sell their products and earn the commission, and will not endeavour to progress further to upgrade their skills and gain competency in financial planning. In legal practice, we are "Senior Counsel". For financial advisers, I would like to ask DPM to consider having another category of licensee who will be required to have a higher level of competency and skills to which the entire profession can strive towards.

I would like to propose that we push the FA Bill to go a little further and differentiate financial advisory and planning activities from the mere selling of investment products. In addition to consolidating existing regulations touching on the selling of insurance and financial products, we should go one step further with this piece of legislation to cover new areas of financial planning so as to bring the entire industry to a higher level of competence and excellence.

On that note, Sir, I support the Bill.

Mrs Lim Hwee Hua: Mr Speaker, Sir, the Financial Advisers Bill answers the need for a legal framework for both the burgeoning range of investment products and distribution channels, and the convergence of various financial products. I support the establishment of this framework which will help ensure, amongst other things, the integrity of our financial markets in general.

Sir, I would like to however briefly raise two issues, one of which will arise as a result of a single licensing concept and the other which concerns the possibility of unwitting discouragement of entrepreneurial efforts.

Firstly, increasing competition. Whilst it makes perfect sense to adopt a consistent approach to the licensing of persons engaging in financial advisory activities, we must be mindful of the implications of such a convergence. As alluded to, opportunities to advise on a wider range of financial products will increase, as will, on the flip side, competition. Sir, this could precipitate a falling out of the less sophisticated advisers who have only very narrow and specific expertise. For example, remisiers who are adept at broking stocks can now extend such expertise into, say, investment-linked insurance policies, which have hitherto been marketed by insurance agents. As such, product specialists could now face even more competition. I would therefore like to ask the Deputy Prime Minister if he envisages this to be a significant dislocation and, if so, whether assistance can be rendered to help interested persons develop other capabilities.

Secondly, capital requirements for independent financial advisers. Sir, in a market where most services are typically offered on a proprietary or an agency basis, the need for independent financial advice will be felt increasingly. Whilst our market does not appear to support such paid services at the moment, it is felt that the Government could help facilitate the sustainability of any entrepreneurial efforts.

The current consolidation within the financial sector may well inspire some experienced professionals to consider providing independent advice, say, on financial planning. If capital and licensing requirements are too stringent or prohibitive, then fledgling efforts would not survive. I would like to ask the Deputy Prime Minister to consider further measures to help nurture such a group of advisers, which, I believe, is performing a very useful role in the USA.

Sir, I support the Bill.

BG Lee Hsien Loong: Mr Speaker, Sir, in response to Mr Ong Kian Min about upgrading the entire industry, the types of services provided by financial planners vary widely. Sometimes, it assesses every aspect of the client's financial profile - savings, investment, insurance, tax, retirement, estate planning - and help them to develop detailed strategy to meet the objectives. Others may call themselves financial planners but may only provide advice on a limited range of products and services. MAS currently regulates all aspects of financial planning relating to securities, futures and insurance. But tax, retirement and estate planning activities will not come under MAS' regulatory ambit, and this is going to continue under the Financial Advisers Act. Hence, only financial planners who conduct activities regulated under the FAA need be licensed as a financial adviser and only in respect of those regulated activities. The financial planner may conduct other activities, such as retirement and tax planning, but this will not be subject to MAS' supervision. This is very much in line with the regulatory framework in other jurisdictions.

MAS will engage the industry bodies representing financial planners, where appropriate, and seek their views on regulatory issues affecting the financial advisory market. As a regulator, MAS will facilitate and encourage healthy market development and work with industry bodies to encourage improved professional standards to promote Singapore as a centre of excellence in this field.

Next, Mr Ong asked about retrenchment and unemployment on the part of insurance agents, financial analysts and people like that, as a result of this Bill. I would like to allay this concern because existing professionals will be able to engage in the existing activities that they have been authorised to do when the Bill is enacted. However, one major objective of introducing this Financial Adviser regulatory regime is to provide an integrated and consistent regulatory framework for market intermediaries engaging in similar activities across a broad spectrum of different investment products. This would facilitate the setting and maintenance of consistent professional standards and business conduct rules for the provision of financial advice. As we introduce progressively new standards to raise the standards of professionalism and knowledge, existing players will also be expected to meet these new standards. And we are already doing it in insurance, for example, with the recommendations of the Committee on Efficient Distribution on Life Insurance.

As for the question of different categories of licences, I think this would defeat the objective of having a single licensing regime. The whole idea of the business conduct requirements is that all individuals should have the necessary professional competence and standards before they can operate as representatives of financial advisers. While MAS could prescribe minimum standards which financial advisers' representatives should possess by setting examinations and continual educational requirements, ultimately it is the responsibility of the financial advisers to ensure that they upgrade their skills to provide value-added services to their clients. Financial advisers who do not strive to upgrade their skills and who are content with meeting only basic requirements can expect to lose clients to more competent advisers who provide better and higher quality services.

I am not keen to control many words, "financial adviser", "financial consultant", "financial planner", or words to that effect. I think what we will do is to restrict the use of the term "financial adviser", one name, to holders of a financial adviser's licence and exempted entities. We are mindful that there are some market participants currently holding themselves out as financial advisers. However, we believe that restriction on the usage of the term "financial adviser" will better enable investors to identify whether they are receiving financial advice from an entity which is licensed by MAS, as opposed to an entity not regulated by MAS.

We do not intend to restrict the use of other titles, like "financial planner", "financial consultant", and such. However, the investing public should be aware that people who use such titles may or may not be regulated by MAS depending on the services that they offer. Financial advisers are permitted to provide advice on investment products, distribute unit trusts and arrange life insurance policies. Financial advisers can choose which of these activities they wish to engage in for which there will be different requirements that must be met, such as passing of relevant competency examinations. It is not the intention of the Bill to license only the class of professionals providing comprehensive financial planning advice.

As for splitting the licence into distinct categories 1, 2 and 3, one objective of the Bill is to respond to the industry trend of product convergence and the emergence of distribution channels which cross-sell investment products. I think if we introduce different sub-categories of licences, we are likely to confuse the public. We propose to deal with the problem by requiring advisers to disclose what products they are qualified or authorised to provide financial advice on before they deal with the investing public.

Mrs Lim expressed concern about competition and whether there will be significant dislocation and, if so, whether we can help intermediaries who will be affected. The impact of globalisation and convergence of financial products and services have affected all financial services sector even before the introduction of this Bill. The life insurance industry, as I told you, has subjected itself to higher standards following the recommendations by the Committee on Efficient Distribution of Life Insurance earlier this year. These recommendations are being implemented and will result in improved knowledge, skills and efficiency of the agents. Life insurance agents will also benefit from a wider range of products for distribution with the introduction of the FA Bill. There will be more competition and perhaps dislocation. There will also be more opportunities, as intermediaries can broaden their activities if they master their skills. So, I do not expect significant dislocation.

As for nurturing a group of independent financial advisers, indeed the introduction of this Bill will help to foster the development of independent financial advisers which, I hope, will provide greater depth to the local industry, alongside the existing players in the market. These IFA firms are likely to be owned and operated by experienced professionals. In licensing such IFA firms, MAS will take into consideration the financial resources of the company as well as the qualifications, integrity and experience of the key officers. The capital requirements for a corporation applying for a Financial Adviser's licence will not be onerous and will be lower than existing requirements. These new capital requirements for financial advisers do not mean that MAS is relaxing its prudential standards; rather, it is another example of MAS' shift away from the one-size-fits-all regulatory approach to a more risk-based supervisory regime.

Question put, and agreed to.

Bill accordingly read a Second time and committed to a Committee of the whole House.

The House immediately resolved itself into a Committee on the Bill. - [BG Lee Hsien Loong].

Bill considered in Committee; reported without amendment; read a Third time and passed.