MAS responds to feedback on proposals to refine tier structure requirements and introduce new remuneration requirements for financial advisory industry

20 August 2024

On 26 July 2024, the Monetary Authority of Singapore (“MAS”) published its response to feedback on its proposals to refine the tier structure requirements and introduce new remuneration requirements for the financial advisory (“FA”) industry (“Response”).

Background

On 12 July 2021, MAS published a consultation paper seeking feedback on proposals to:

• refine and clarify the policy intent of the tier structure requirements;
• consolidate and effect the tier structure requirements under the Financial Advisers Act 2001 (“FAA”) and extend the requirements to all financial advisers, including exempt financial advisers which operate tier structures, for consistency across the FA industry; and
• introduce restrictions on direct payment of remuneration by persons, other than the principal FA firm, to representatives and/or supervisors of the principal FA firm, and acceptance of remuneration by representatives and/or supervisors of the principal FA firm from other persons.

The consultation closed on 13 September 2021.

Tier structure requirements

Maximum tier structure

In the Response, MAS said that it will proceed with the following proposals:

• FA firms that operate a tier structure for the provision of any financial advisory service and/or the sale of any investment product are required to ensure that a tier structure only consists of three tiers.
• FA firms can only pay overriding benefits to a maximum of two supervisors for each First Tier representative.
• A supervisor can only accept overriding benefits from the FA firm in which he is a supervisor.

Overriding benefits and other payments

After taking into consideration feedback, MAS will exclude the following types of payments from the tier structure requirements, provided FA firms have proper governance frameworks and adhere to the relevant conditions for each payment type:

• Breakaway payments: These are payments which occur when a lower-tier representative is promoted to the next tier. In this scenario, the FA firm continues to pay overriding benefits to the newly promoted supervisor’s former supervisor at the previous agency unit based on the sales of the new agency unit formed by the newly promoted supervisor.
• Business allowances: These are payments for representatives and supervisors to defray business costs which are computed based on sales of the representatives.
• Vested commissions: These are residual commissions of investment products previously sold by representatives who have left the FA firm.
• Joint sales: These are commissions and overriding commissions that are shared among representatives and their supervisors from the financial advisory and sales conducted jointly by the representatives.

In respect of the above payments, FA firms are required, at the minimum, to incorporate the following guiding principles (“Guiding Principles”) into their governance frameworks:

• The payments align with MAS’ policy intent of the tier structure requirements, which restrict the maximum number of tiers to three. Payment of overriding benefits should only be made to the Second Tier and Third Tier who are responsible for supervising the lower tiers in their financial advisory and sales activities.
• The FA firm should put in place measures to address market conduct risks specific to these payment arrangements.
• The FA firm should exercise discipline to manage distribution costs to safeguard clients’ interests.

MAS will hold the FA firms and their boards responsible for approving and implementing governance frameworks that are aligned with the Guiding Principles and conditions (where relevant).

The relevant conditions to be met for exclusion from the tier structure requirements include the following:

• Breakaway payments:
  • The payments are governed under a remuneration framework that is approved by the FA firm’s board or board-level committee (e.g. risk committee, remuneration committee) and consistent with the Guiding Principles;
  • The quantum of the payments is computed based only on sales made by those lower-tier representatives who were under the previous supervisor’s charge, and will exclude sales made by new representatives who joined the new agency unit after the breakaway; and
  • In the case of breakaway payments made by direct insurers, the payments are not charged to any insurance fund.
• Business allowances computed based on sales of the representatives:
  • The business allowances are governed under a framework approved by the FA firm’s board or board-level committee. The framework should set out a list of or criteria for eligible expenditures and limits on amounts payable. The framework should also be in line with the Guiding Principles; and
  • Representatives’ and supervisors’ statements of accounts on the expenses incurred are subject to annual reviews and the review outcome is reported to the senior management of the FA firm.
• Vested commissions paid to former representatives:
  • Such payments are governed under a remuneration framework that is approved by the paying FA firm’s board or board-level committee and consistent with the Guiding Principles.
• Overriding benefits arising from joint sales:
  • The payments are in line with the Guiding Principles and subject to proper governance as follows:
    • Joint sales are approved by the FA firm’s senior management (i.e. chief executive officer, executive director, or equivalent); or
    • Joint sales are governed under a senior management-approved framework which sets out clear accountability and responsibilities for all the representatives and supervisors involved, as well as the FA firm’s senior management’s role in performing market conduct oversight of joint sales activities.

MAS clarified that introducers are not part of the tier structure as they are only carrying out introducing activities. As such, introducer fees are not captured within the scope of overriding benefits.

In addition, the tier structure requirements will not be applied to individuals who are not representatives and who are remunerated under the same remuneration framework as other corporate staff (e.g. staff in finance function) in FA firms.

Consolidation of tier structure requirements under FAA and extension to all financial advisors

MAS will proceed with the proposals to consolidate the tier structure requirements under the FAA and extend the requirements to all financial advisers for consistency across the FA industry.

MAS will not apply the tier structure requirements to exempt FA firms who serve only accredited, institutional, and/or expert investors and will make the relevant legislative changes to reflect this position.

Implementation timeline

MAS does not intend to grandfather existing remuneration contracts or arrangements. Instead, MAS will provide a transitional period for changes to be made to comply with the proposed tier structure requirements. MAS will seek feedback on the length of the transitional period in the subsequent consultation on legislative amendments.

Prohibitions on direct payment of remuneration to representatives and supervisors of other FA firms, and acceptance of such remuneration

MAS will proceed with proposals to:

• prohibit persons (such as direct life insurers) other than the principal FA firms from determining, communicating, and paying volume-based incentives (“VBI”) directly to the representatives of the principal FA firms;
• prohibit representatives from receiving VBI for the sale of life business products directly from any person who is not their principal FA firm; and
• amend the spreading and capping of commissions rules in the Financial Advisers (Remuneration) Regulations 2015 and the Insurance (Remuneration) Regulations 2015 to prohibit FA firms from making commission payments for the sale of regular premium life policies to the representatives and supervisors of other FA firms.

Future developments

MAS will conduct a consultation on the legislative amendments to effect the proposals set out in the Response.

Reference materials

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