MAS responds to feedback from consultation on enhancing pre- and post-transaction safeguards for retail clients

31 August 2023

On 24 August 2023, the Monetary Authority of Singapore (“MAS”) published its response to feedback received from its consultation on enhancing pre- and post-transaction safeguards for retail clients (“Response”).

The public consultation was launched on 22 June 2021 following MAS’ review of the effectiveness of the balanced scorecard framework and findings from a mystery shopping exercise to assess the standards of financial advisory (“FA”) representatives’ sales and advisory processes, which revealed weaknesses 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.

In the Response, MAS said that it has carefully considered the feedback received and will incorporate them where it has agreed with the feedback. Key highlights of the Response are set out below.

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

MAS will proceed with the proposed requirement to:

• require FA representatives to check for and document a client’s SC status and make a formal declaration that the assessment has been duly performed; and
• strengthen the requirements for pre-transaction checks through documentary review and client call-backs, by moving them from the current Guidelines on the Remuneration Framework for Representatives and Supervisors (Balanced Scorecard Framework), Reference Checks and Pre-Transaction Checks (FAA-G14) into the Notice on Recommendation of Investment Products (“FAA-N16”).

MAS said that it will, at this time, exempt digital advisers from the requirements to (1) determine whether a client is an SC, and (2) conduct pre-transaction checks on documentary reviews and client call-backs.

MAS also clarified that for accounts jointly held by an accredited investor (“AI”) and an SC, the requirements for pre-transaction checks will apply as long as one of the account holders did not opt in for the joint account to be designated AI status.

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

MAS will proceed with the proposed requirement for a Trusted Individual (“TI”) to be present for the entire sales and advisory process, unless the SC does not identify a TI, or is unwilling to be accompanied by a TI. In such situations, FA firms may proceed to make investment recommendations to the SC only if they obtain the SC’s written acknowledgement that the SC (1) does not wish to have a TI present, and (2) confirms that he or she is fully able to make decisions on his or her own without a TI.

MAS will proceed with the proposed criteria for qualification as a TI, namely, one who (1) is at least aged 21, (2) possesses at least GCE “O” or “N” level certifications or equivalent academic qualifications, (3) is proficient in spoken and written English, and (4) is a person whom the SC trusts to be privy to the SC’s personal information and is able to assist the SC in understanding the SC’s financial decision.

The TI should not be someone who presents potential conflicts of interests, such as the FA representative’s supervisor, a beneficiary of the SC’s investment decision, or any other relationship or circumstance where a potential conflict of interests could arise.

Following feedback, MAS will exempt from the TI requirement digital advisers that operate without any representatives who provide recommendation or advice directly to clients.

3. Proposed requirements on client call-backs

Type of information to be covered during pre-transaction client call-backs

In the consultation paper, MAS proposed 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. MAS will proceed with these proposals, and also include an additional question for cases where a sale was made to an SC without a TI. Specifically, the call-back should include a question to confirm that the SC was offered an opportunity to bring along a TI, but had confirmed that he or she did not want to have a TI present, and is able to fully make his or her decision without a TI.

Audio recording of call-backs

• SCs and clients of SRs: While FA firms are already expected to conduct call-backs to SCs and clients of Selected Representatives (i.e. representatives who have been assigned a balanced scorecard grade B or worse under the balanced scorecard framework consecutively for two calendar quarters immediately preceding the measurement quarter) (“SRs”), there is currently no requirement for the call-backs to be audio recorded. To ensure better oversight of how supervisors conduct call-backs and to enhance safeguards for higher-risk clients, MAS proposed for FA firms to audio record call-backs to SCs and clients of SRs.

In the Response, MAS said that there are merits to audio-recording the call-backs to SCs and clients of SRs. MAS intends to provide further guidance to FA firms on the conduct of a call-back. MAS will clarify that the call-backs can be done by audio or video format, and that face-to-face meetings are permitted as an alternative to the call-backs. In instances where recording is not possible (e.g. the client does not provide consent for the call-back be recorded, or if a face-to-face meeting was held), FA firms should put in place proper controls to ensure that the interest of clients, particularly SCs, are adequately safeguarded.

• Other retail clients: Following concerns raised by the industry, MAS will not proceed with the proposal to require call-backs and audio-recording of call-backs, or to provide a recap of the sales and advisory process, for retail clients (beyond SCs and clients of SRs). Nevertheless, MAS expects FA firms to have policies and procedures in place to identify higher risk clients and representatives (beyond those required by MAS) and encourages FA firms to also conduct audio-recorded call-backs on such transactions.

Provision of audio recording to clients

MAS sought 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 upon clients’ request, and how this should be operationalised.

In the Response, MAS noted the challenges and concerns faced by FA firms and stated that it will not require FA firms to provide a copy of the audio recording on a proactive basis. However, FA firms will be required to provide a copy of the audio recording upon clients’ request.

In addition, MAS expects FA firms to deal fairly with their clients, and not put in place measures or steps that add friction to the process for clients to listen to the audio recordings. Examples of such measures include charging fees in exchange for providing a copy of the audio recording to the client, and providing access to the recording only at their premises.

4. Proposed requirement to set up independent panel to review all product recommendations made to SCs

MAS proposed for FA firms to set up an independent panel to review all product recommendations made to SCs.

In the Response, MAS acknowledged respondents’ concerns on the duplicative efforts and additional resources required to set up an independent panel. Instead of a separate independent panel, MAS will require the independent sales audit (“ISA”) unit to review product recommendations made to SCs on a post-transaction basis, and will consult on the proposed sampling requirements for SC transactions in a separate consultation paper.

5. Proposed requirement for ISA unit to sample and review transactions involving higher risk clients

MAS sought views on requiring the ISA unit to perform additional sampling and review for transactions involving higher risk clients who meet at least one SC criterion, and on the proposed 10% sampling level for transactions involving such clients.

In the Response, MAS said that it had intended to widen the sampling criteria to enhance safeguards for clients who may be more vulnerable, even though they have not been identified as SCs. Following feedback, MAS will not proceed with the proposal at this time, but will continue to monitor and review the need to do so.

6. Transitional period

In the consultation paper, MAS said that it would consult on the proposed revisions to FAA-N16 after the proposals set out in the consultation paper are finalised. MAS proposed to grant FA firms a transitional period of six months from the time the revised notice is published, for the revisions to take effect.

Following feedback, MAS will extend the transitional period to nine months for all adopted proposals. However, FA firms are strongly encouraged to consider early implementation of the proposed requirements where possible.

Reference materials

The Response is available on the MAS website www.mas.gov.sg.