Muhammad bin Ibrahim: Charting new frontiers - financial advisers the
future
Keynote address by Mr Muhammad bin Ibrahim, Deputy Governor of the Central Bank of
Malaysia, at the Inaugural Conference of the Association of Financial Advisers "Charting new
frontiers - financial advisers the future", Kuala Lumpur, 31 October 2012.
* * *
I would like to congratulate the Association and its members for your commitment, which has
resulted in the successful formation of the AFA to champion and promote the interests of all
licensed financial advisers in Malaysia. The formation of AFA is most timely, and marks a
significant milestone in the progressive maturing of the financial advisory industry.
Since the introduction of FAs in 2005, we have seen commendable growth within the
industry, with the number of licensed FAs rising from 2 to 17, and the number of licensed FA
representatives increasing from 17 to 229 today. The formation of the AFA is timely as it
provides a platform to encourage greater collaboration among FAs to instill greater
professionalism among its members and I expect the AFA to play an important role in coming
up with clear strategies to propel the financial advisory sector towards greater progress and
growth.
Developments in the insurance and takaful sectors
There are some broad developments within the economy and the financial sector that will
expand the opportunity for growth in the provision of independent financial advisory services.
First, the insurance and takaful sectors have seen positive and continuous growth over the
last five years, with total insurance premiums transacted and takaful contributions recording
an average annual growth of 4.9%, with annual growth peaking at 13% in 2010. In terms of
insurance penetration, in 2011, 67 out of 100 Malaysians had some form of life insurance or
family takaful coverage as compared to only 59 out of 100 Malaysians in 2006. This means
there remains a large untapped segment of the population with no life insurance or family
takaful protection that the profession can further develop.
Second, in terms of distribution channels, the agency force is still the dominant
intermediation point for the insurance industry. At present, the market share of financial
advisers as a delivery channel is still low and therefore, the prospect of growth is
tremendous.
The prominence of the agency force as a delivery channel of choice for the distribution of life
insurance business is evidenced from the more than 10% growth in the number of life
insurance agents enrolled between 2006 and 2011. Consistent with the increase in the
agency force, the expenditure dedicated to maintain this delivery channel also remained
significant, with commissions and agency remunerations consistently accounting for more
than 70% of the net investment income of the industry.
This trend reflects the attractive payouts a productive agent can potentially earn, although
the industry's commission structure is bound by the limits specified in the operating costs
control guideline (OCC Guideline) issued by the Bank.
Benchmarked against selected countries within the region which do not regulate commission
payment, the commission rate currently earned by Malaysian agents remains relatively high
compared to the benchmarked rates of between 140% to 150%, as seen in other
jurisdictions. This excludes other agency-related benefits which are also allowable under the
OCC guideline.
Some have argued that the current commission levels are too low as the commission
structure has not been revised since the Guidelines were first introduced in 1996. However,
closer scrutiny shows that agency income from commissions had increased in absolute
terms in line with the increase in average premiums size. The average size of new business
grew by 9% per annum over the last decade while in-force premium size recorded a
compounded annual growth rate of 5%. Hence, the commission income of productive agents
has in fact been growing in excess of the consumer price index and national average wage
inflation.
The world is constantly changing, the transformation that is taking place in the financial
sector landscape also warrants a suitable change in the regulatory framework which the
industry must be prepared to embrace and adapt to, going forward. The OCC had served its
objectives well to keep operating costs reasonable to ensure policyholders' interests are
preserved. To enhance greater efficiency and facilitate a more competitive market
environment, the Bank will accord greater operational flexibility to the industry in determining
amongst others, the commission structure for its agents and other intermediaries.
Based on statistics made available to the Bank, commission and agency remuneration have
consistently accounted for approximately 40% of the total net premium income of life insurers
since 1997. With the proposed flexibility, individual insurers will have the ability to determine
the remuneration of its intermediaries but subject to appropriate safeguards being put in
place such as a more robust disclosure framework for greater transparency. These
operational flexibilities will be implemented in a gradual manner, with some measures being
introduced by the end of this year. This is to minimize the risk of adverse impact on the
efficient delivery of insurance products and services to consumers.
With the fundamental changes taking place around us, it is timely for insurers including
intermediaries, to assess how best to improve insurance penetration going forward. There
are some fundamental questions that need to be asked. Would attracting a larger agency
force be the most effective solution in this more liberalized environment? Or, should the
focus perhaps be on expanding the diversity of the intermediaries in general, to ensure
consumers have more alternatives to receive high-quality and suitable advice?
Whatever the response to these questions, what is obvious is that investing in human capital
is an important common denominator, not only to enhance the existing level of expertise of
intermediaries but also to attract the right people to ensure a continuous supply of talents into
the profession.
It is from this perspective that an incentive package is being considered by the Bank to
subsidize the costs related to minimum professional qualifications for FAs. We hope that it
will entice more agents to consider upgrading themselves to become successful FAs.
Growing demand for independent financial advisory services
As our economy continues its track towards high income nation status, and as our society
becomes more affluent and discerning, we envisage an increasing demand and preference
for high-quality, independent and personalized advisory services among financially-savvy
consumers.
Apart from rising levels of disposable income and financial sophistication, Malaysians are
expected to live longer now than ever before. It is projected that by 2040, 17% of the
Malaysian population will live beyond the age of 60 years old compared to about only 8% of
the total population in 2010. This creates the need for more effective long-term financial
planning on the part of consumers to ensure they have sufficient funds to see them through
their golden years. In this respect, as part of the Government's initiative to encourage
savings among Malaysians to better prepare for their retirement, the Government had
announced a tax relief of RM3,000 for individuals who have bought an annuity plan for the
next 10 years commencing in 2012.
An increased competition within the financial sector and evolving demographic structures has
also led to the introduction of new and more complex financial products offered by financial
service providers. While financial consumers now have a greater array of choice, the
challenge is in choosing the most appropriate financial product commensurate to their needs.
Lessons learned from other markets showed that high-profile cases of mis-selling of
investment-linked and pension products extols the importance of ensuring consumers are
properly adviced on the key features, terms, conditions and suitability of a financial product
before they enter into any financial contract.
Assisting consumers to make wise financial choices
As FAs, you have the responsibility to educate consumers on the importance of financial
planning, such as saving for the first home or a child's future education, or buying insurance
protection to safeguard against unexpected losses. FAs can assist consumers in better
understanding their current and future financial needs and circumstances. FAs can provide
independent and impartial advice which is tailored to the consumers risk appetite and
financial needs.
Apart from educating their clients on what they should be investing in, FAs also play an
important role in educating their clients on what they should not be investing in. As you are
the industry's front-liners and are actively meeting with potential customers on a daily basis,
FAs can be relied on as a key source of information to prevent consumers from falling prey to
financial scams.
Broad strategies for effective provision of wealth management
In recognition of the need to further enhance the regulatory framework supporting the
development of the financial advisory sector, the Bank has recommended for further
streamlining of the current dual licensing regime for FAs and financial planners (FPs) in the
Financial Sector Blueprint 2011-2020. A Joint Working Group with the Securities
Commission has been formed to assess the existing legislations and regulatory regime
across both jurisdictions, with the aim of further reducing duplications and related costs of
compliance for the benefit of industry participants.
Some of the measures that have already been introduced include the harmonization of limits
on foreign shareholding and streamlining of professional qualifications and requirements on
continuing professional development. The Bank will be engaging with the AFA at a later
stage as part of the consultative process towards further enhancing the regulatory regime for
FAs and FPs.
In line with our objective of promoting fair and responsible conduct by financial service
providers, the Bank has recently reissued the Guidelines on Proper Advice Practices for Life
Insurance and Family Takaful Business. The Guidelines which was previously applicable to
the sales force and agents of insurers and takaful operators has now been extended to
include all insurance and takaful intermediaries, including financial advisers. The Guidelines
outline the minimum standards for proper advice and ethical selling practices of life insurance
and family takaful products by insurance and takaful intermediaries, with the aim of ensuring
consumers are provided with suitable advice to support informed decision-making.
With these Guidelines in-force, the Board of Directors of respective FAs are now required to
establish the necessary processes to ensure proper monitoring of the quality of the advisory
process conducted by FA representatives, and we expect FAs to deal firmly and expediently
in the event of non-compliance which results in mis-selling or the provision of inappropriate
advice.
I am greatly encouraged to see the continuing growth of the FA industry and today's event
marks a significant milestone for the industry as a whole. The theme of this Conference,
"Charting New Frontiers - Financial Advisers the Future" is well-timed and reflective of the
changes we are now experiencing as our nation progresses towards a high-income
economy. Once again, I would like to congratulate AFA on its official launch and look forward
to meaningful contributions from the Association in driving the financial advisory sector
forward. On this note, I wish you all a successful and productive Conference.