MAS consults on enhancements to pre- and post-transaction safeguards for retail clients

29 June 2021

On 22 June 2021, the Monetary Authority of Singapore (“MAS”) released a consultation paper seeking feedback on its proposals to enhance pre- and post-transaction safeguards for retail clients. The consultation closes on 3 August 2021.

The consultation follows from MAS’ review of the effectiveness of the Balanced Scorecard (“BSC”) Framework, which included seeking comments from the financial advisory (“FA”) industry and conducting inspections and surveys on the BSC practices of FA firms, as well as a mystery shopping exercise (“MSE”) conducted in 2018/2019 to assess the standards of FA representatives’ advisory and sales process.

Although MAS found that the proportion of suitable product recommendations had improved from an earlier MSE conducted in 2011, weaknesses were identified in the implementation of safeguards for Selected Clients (“SCs”). An SC is defined as a client who meets any two of the following criteria: (1) 62 years of age or older, (2) not proficient in spoken or written English, (3) has below GCE “O” or “N” level certifications or equivalent academic qualifications, other than a client who meets any two of the criteria and has been assessed by the financial adviser to possess adequate investment experience and knowledge to transact in the investment product recommended.

Arising from the review of the effectiveness of the BSC Framework and findings from the MSE, MAS proposes to:

1. Strengthen the requirement to identify SCs;
2. Require a Trusted Individual (“TI”) to be present when investment recommendations are made to SCs;
3. Reinforce the requirement to conduct supervisory call-backs and require FA firms to audio record supervisory call-backs;
4. Require the setting up of an independent panel to review all investment recommendations made to SCs; and
5. Require the Independent Sales Audit Unit (“ISA Unit”) of the FA firm to sample and review transactions involving higher risk clients.

The Association of Banks in Singapore and the Life Insurance Association are also jointly working to develop industry guidelines to improve protection for vulnerable consumers (which include SCs) in the provision of financial advisory services. Together, the enhanced safeguards and industry guidelines seek to raise industry standards and promote greater consumer trust, particularly among SCs, in the FA industry in Singapore.

1. Enhanced requirements to check for and document whether client is SC

The definition of an SC is currently set out in the Guidelines on the Remuneration Framework for Representatives and Supervisors (Balanced Scorecard Framework), Reference Checks and Pre-Transaction Checks (“FAA-G14”).

To prompt greater care from representatives dealing with SCs, MAS proposes to require the following in the Notice on Recommendation of Investment Products (“FAA-N16”):

• FA firms are to determine whether a client is an SC as part of the Know Your Client (“KYC”) process. The requirement to identify whether a client is an SC is currently set out in FAA-G14, which is a guideline. By moving this requirement from a guideline to FAA-N16, which is a Notice, a breach will constitute an offence.
• Representatives are to declare, as part of the KYC process, that the assessment of whether a client is an SC has been duly performed.

2. Requirement for TI to be present when investment recommendations made to SCs

MAS proposes to require FA firms to ask the SC to have a TI present during the sales and advisory process. A TI should not be an SC and should (1) be at least aged 21, (2) possess at least GCE “O” or “N” level certifications or equivalent academic qualifications, (3) be proficient in spoken and written English, and (4) be a person whom the SC trusts to be privy to the SC’s personal information and be able to assist the SC in understanding the SC’s financial decision.

If an SC does not identify a TI, or is unwilling to be accompanied by a TI during the sales and advisory process, FA firms may proceed to make investment recommendations to SCs only if they obtain the SCs’ written acknowledgement that the SCs (1) do not want to have a TI present, and (2) represent that they are fully able to make decisions on their own without a TI.

3. Requirements on pre-transaction client call-backs

MAS proposes to strengthen the requirements on pre-transaction call-backs in the following ways.

Contents of call-back

MAS proposes that call-backs minimally cover (1) basis of recommendation, (2) main features of the product being recommended, (3) key risks and limitations of the product, (4) existence of the free-look period, and (5) whether the representative had been professional and ethical in his or her dealings with the client.

Documentation and quality control

MAS will require FA firms to document the concerns raised by clients during the call-backs, conduct regular checks on the quality of call-backs performed, and take appropriate action when the call-backs are not up to standard.

Audio recording of call-backs

• SCs and clients of SRs: MAS proposes to require FA firms to audio record all call-backs performed on SCs and clients of Selected Representatives (“SRs”). SRs are representatives who have been assigned a BSC grade B or worse for two consecutive calendar quarters immediately preceding the measurement quarter. The audio recording should be maintained in a way which is retrievable for supervisory or investigation purposes, and made available to clients.
• Other retail clients: There is currently no expectation on FA firms to conduct client call-backs to retail clients other than SCs and clients of SRs. MAS is therefore considering whether to require call-backs and for such call-backs to be audio recorded for all other retail clients as well. As the extent of protection for other retail clients can be calibrated differently from that for SCs and clients of SRs, MAS is prepared to allow call-backs for other retail clients to be performed by the representatives (instead of by the representatives’ supervisors or an independent party for SCs and clients of SRs).

Further, MAS is considering that a recap of the sales and advisory process by representatives at the end of the meeting or discussion between the representative and his or her client could be an acceptable alternative to the call-back requirement for these other retail clients. The recap of the sales and advisory process should cover (1) basis of recommendation, (2) main features of the product being recommended, (3) key risks and limitations of the product, and (4) existence of the free-look period. The recap should be audio recorded.

MAS also seeks views on whether FA firms should provide a copy of the audio recording to their clients and whether this should be proactively provided to clients or only on clients’ request, and how this should be operationalised.

4. Independent panel to review all product recommendations made to SCs

MAS proposes that FA firms set up an independent panel to review all investment recommendations made to SCs. The independent panel should comprise persons independent of the financial advisory services unit of the FA firm. Their variable remuneration should not be directly linked to the financial performance of the representatives.

MAS also seeks comments on whether this review by the independent panel should be conducted on a pre- or post-transaction basis.

5. ISA Unit to sample and review transactions involving higher risk clients

Currently, every FA firm is required to establish an ISA Unit to conduct post-transaction checks on sampled transactions in order to review and assess the quality of financial advisory services provided by representatives.

To enhance safeguards for more vulnerable clients and to uncover lapses in the implementation of pre-transaction safeguards for SCs, MAS proposes to additionally require the ISA Unit to sample and review a minimum of 10% of transactions involving clients who fall into at least one of the following criteria: (1) 62 years of age or older, (2) not proficient in spoken or written English, (3) has below GCE “O” or “N” level certifications, or equivalent academic qualifications.

6. Transition period

MAS will consult on the proposed revisions to FAA-N16 after the proposals set out in this consultation paper have been finalised. MAS proposes to grant FA firms a transitional period of six months from the time the revised notice is published, for the revisions to take effect.

Reference materials

The following materials are available on the MAS website www.mas.gov.sg:

• Consultation paper on Enhancing Pre- and Post-transaction Safeguards for Retail Clients
• Media release: MAS releases results of third mystery shopping exercise - Majority of recommended products met customers’ needs
• Annex: Findings of MAS Mystery Shopping Exercise
• Infographic on MAS Mystery Shopping Exercise