On 15th June 2021, Monetary Authority of Singapore (MAS) reprimanded several large financial institutions in the insurance and financial advisory sector for breaches relating to risk management arrangements and remuneration of supervisors.
AIA Financial Adviser, Prudential and Aviva Entities have been deemed to have breached the Financial Advisers Act and subsidiary regulations such as the Financial Advisers (Remuneration) Regulations 2015. In particular rules pertaining to “Balance Scorecard requirements (BSC) for the sale of investment products” and “Spreading and Capping of Commission (SCC) requirements” for the sale of regular premium life policies were breached.
Financial advisers are required to put in place a BSC framework for remunerating its representatives and supervisors. Under the BSC framework, representatives are assessed based on 4 non-sales KPIs namely
1. Understanding a client’s needs
2. Suitability of product recommendations
3. Adequacy of information disclosure
4. Standards of professionalism and ethical conduct in relation to provision of financial advisory services
All financial adviser representatives are assigned a BSC grading each quarter and the grades determine the amount of variable remuneration the financial adviser representative is entitled to in each quarter. This is to ensure financial adviser representatives are compensated not just for meeting sales targets but also dependent on meeting non sales driven KPIs as mentioned above. As supervisors play an important role in coaching and monitoring the conduct and performance of their representatives, their BSC grades and variable remuneration will also be affected if representatives under their supervision fail to meet the non-sales KPIs.
The SCC requirements apply to sale of regular premium life policies to individuals. They require insurers and financial advisory firms to cap variable income payable in the first year to representatives and supervisors at 55% of total variable income payable, and spread the remaining 45% over a prescribed period.
The SCC requirements were introduced to ensure financial advisers are providing qualify after-sales services to clients. If most of the variable income was paid upfront, financial advisers may not be incentivised to do so. The obligation to meet SCC requirements lies on both the payors which are the financial institutions and the payees who are individuals acting as representatives or supervisors.
It was noted that all of the four above mentioned financial institutions conducting financial advisory activities had failed to put in place appropriate measures to adhere to BSC requirements which resulted in breaches such as
- Failure to review and assess an individuals’ role as a supervisor and assign BSC grades
- Pay remuneration in accordance to BSC grades assigned to individuals
- Failure to put in place risk mitigation procedures and compliance arrangements to monitor consultants’ activities
- Failure to place customers’ interests first
It is important to for financial advisory companies to put in place appropriate compliance arrangements to ensure all relevant regulations are complied with and monitored on an ongoing basis. As seen from these cases, board of directors and senior management are held responsible for any regulatory lapses conducted by a licensed financial adviser. It is critical for financial advisers to put in place prudent internal control practices such as BSC framework, remuneration policies and procedures to adequately manage all regulatory risks.
Please refer here for more information on the enforcement action.
How can Argus Global Help
Argus is able to assist in the following manner
- Perform gap analysis against MAS risk management guidelines identity gaps and provide recommendations
- Assist to put in place Balance Scorecard Framework
- Provide ongoing compliance support to assist in conducting monitoring of regulatory requirements and adherence to the requirements
- Reviewing and amending current compliance and risk management policies to ensure adherence to all relevant MAS regulations
If you intend to know more, have any queries or need further information on any matters relating to the above mentioned, feel free to reach out to us at email@example.com.