Jessica Chew Cheng Lian: Financial advisers the future - right here,
right now
Keynote address by Ms Jessica Chew Cheng Lian, Assistant Governor of the Central Bank
of Malaysia, at the 3rd Annual Conference of the Association of Financial Advisers "Financial
advisers the future - right here, right now", Kuala Lumpur, 31 October 2014.
* * *
At this Conference last year, I spoke on four key priorities identified by Bank Negara
Malaysia (the Bank) to further develop the financial advisory industry and to enable the
financial advisers to effectively perform their role. Let me first say that these priorities remain
relevant today and our focus has not changed. This morning I would like to share with you
how we have moved some of these priorities forward, and the steps that remain in order to
further strengthen the financial advisory channel. To recap, the key priorities of the Bank are:
• First, to ensure that financial advisers are highly competent and professional when
they provide advice;
• Second, to identify and address the barriers that are preventing qualified parties
from entering the industry, and the constraints that are limiting the ability of financial
advisers to recommend the best solutions to their clients;
• Third, to improve the alignment between the interests of consumers and financial
advisers; and
• Fourth, to intensify our review of the quality of advice provided by financial advisers
to consumers through our supervisory work programme.
In November of 2013, the Bank outlined proposed regulatory reforms for the financial
advisory industry which formed part of the "Life Insurance and Family Takaful Framework" or
in short the LIFE Framework, which we published for consultation. An important aim of the
reforms is to support the Bank's desire to further diversify insurance delivery channels as one
- although not the only - way to improve the quality of advice, and enhance choice and value
for consumers based on their specific needs and circumstances. This in turn would
contribute towards increasing the insurance and takaful penetration rate to 75 percent by
2020 as targeted under the Government's Economic Transformation Programme (ETP).
We received positive feedback from the financial advisory industry on the proposed reforms
and while specific elements of the LIFE Framework remain under review to take into account
the comments that were received, we have moved ahead to implement several changes
proposed which concern the financial advisory industry.
The Bank has lowered the minimum capital requirement for financial advisers to RM50,000
which will take effect from 1 January 2015 to encourage more advisers to enter the industry.
This follows an increased focus on professionalism, innovation and quality of advice as the
hallmark of those who are admitted to the industry. It also reflects the Bank's desire to
accelerate the development of the industry and promote its continuous renewal by making it
easier for qualified individuals to offer their expertise and services, thereby expanding access
for the public to financial advice while continuously raising the bar in innovative solutions for
those seeking advice. We believe the new capital requirement strikes a better balance
between the traits that we want to nurture within the industry and the financial commitment
that remains important to ensure that those who we license are invested in the development
and success of their firms.
The Bank, in close consultation with AFA as well as the Malaysian Financial Planning Council
(MFPC) and Financial Planning Association of Malaysia (FPAM), has also reviewed and
agreed to an expanded list of minimum qualifications to become a financial adviser's
representative. The review identified four core areas of knowledge - namely financial
planning, risk management, insurance planning and investment planning - which are
considered essential to equip a financial adviser's representative to provide proper advice on
insurance or takaful solutions. These areas have been preserved under the expanded list of
minimum qualifications, while allowing greater flexibility for other qualifications to be included.
This change has halved the cost and time required for individuals to attain the qualification
requirements. In addition, an individual that possesses a qualification from a higher learning
institution which covers the core areas of knowledge and which is recognised by the
Malaysian Financial Planning Council (MFPC) and Financial Planning Association of Malaysia
(FPAM) can be a financial adviser's representative without the need to take additional
examinations. These new requirements have been implemented since 1 September 2014.
The changes present new opportunities for AFA and its members to reach out to a broader
talent pool of potential financial advisers, including young graduates, who can contribute to
the growth and development of the industry.
It is important to emphasise that these minimum qualifications are only a means, and not an
end, to the provision of sound financial advice. At best, it is a starting point. The Bank
expects both at the industry and firm levels that financial advisers are committed to
maintaining an adequate level of general and specific knowledge and skills required to
deliver sound financial advice. This means having in place arrangements and processes to
ensure that new financial adviser representatives are properly supervised, and all
representatives are committed to a programme of continuous learning and professional
development. It also means subscribing to a strong code of professional ethics and conduct.
This is the focus of the Financial Services Professional Board (FSPB) which was established
recently with the support of the Bank and the Securities Commission. The FSPB's objective
is to drive the development as well as the advocacy of professional standards, ethics and
continuous professional development across the financial services industry. I would strongly
urge the AFA to work together with the FSPB to develop and implement industry codes of
conduct and ethics for its member firms and representatives which should express in very
clear terms the professional responsibilities that a financial adviser must demonstrate
towards its clients. This should be accompanied by an effective mechanism for investigating
and addressing complaints on a breach of these responsibilities, and the ability to act against
errant members in order to preserve the integrity of the profession.
In line with efforts to ensure a high level of professional competence among financial
advisers, the Bank also intends to require qualifying and continuing professional
development programs for financial advisers to be formally accredited by the Finance
Accreditation Agency (FAA). As you may already know, the FAA is an independent quality
assurance and accreditation body for the financial services industry that was established by
the Bank and the Securities Commission in 2012. It provides programme accreditation,
individual accreditation and institutional accreditation services for learning initiatives within
the financial services industry locally and internationally. Since its inception, FAA has
registered 28 training providers and accredited 18 professional and academic learning
programmes offered in Malaysia, the Middle East, Asia, and the United Kingdom, including
those offered and recognised by highly reputable and established international professional
bodies. FAA has also developed Continuous Professional Development Guidelines for the
financial services industry. The recent launch of the FAA Learning Standards and the
Finance Qualification Structure will facilitate the harmonisation and wider recognition of
accredited professional learning programmes which will also be important for this industry to
promote consistent standards in the professional development and mobility of its workforce.
We have started to engage FAA, the industry and education providers on this initiative and
are working towards the accreditation of mandatory core financial advisory training and
examination modules in 2015, and continuing professional development programs
progressively thereafter.
To improve the alignment between the interests of consumers and financial advisers, we will
be requiring all life insurers and family takaful operators to implement a balanced scorecard
framework for the remuneration of agents and advisers, beginning with investment-linked
products in the initial phase. We believe it is also important that such a framework is
cascaded through to how financial advisory firms are rewarding their representatives.
Incentives for individual representatives should be structured to promote impartial product
advice, and investments in building enduring relationships with clients by providing the
highest standards of professional service. The AFA will be expected to play an important role
in driving this initiative through its guidance to firms on the operationalisation of the
framework in the context of financial advisers.
In the medium term, the Bank will examine the issue of the balance between fee-based and
commission-based compensation for financial advisers more closely. Clearly, there is scope
to augment the share of fee-based compensation of financial advisers which could help to
achieve greater transparency in adviser compensation, and better alignment between the
interests of financial advisers and their clients. Some countries have imposed a blanket ban
on commission-based compensations for financial advisers on the premise that they induce
mis-selling practices. Others have opted to draw a clearer distinction between "independent"
advisers which can only receive fee-based compensations, while allowing other financial
advisers to continue to receive commission-based compensations but who cannot call
themselves independent financial advisers. Our work so far suggests that there are likely to
be advantages and disadvantages to both fee-based and commission-based systems. More
importantly, we do not believe that eliminating conflicts that are associated with
commissionbased compensations will in itself automatically improve the quality of advice. Other factors
that have an important bearing on getting better outcomes from financial advice include the
financial literacy of consumers, the level of transparency that is provided to consumers, the
competence of advisors and internal incentive systems which I have just discussed.
A further area that the Bank will pursue as part of efforts to address constraints faced by
financial advisers in being able to recommend the best solutions to their clients is the
expansion of the range of products that a financial adviser can represent to clients. To this
end, a specific proposal was included under the LIFE Framework to allow, without restriction,
financial advisers to represent any product offered by any insurer or takaful operator.
Effectively, this would mean that an insurer or takaful operator cannot refuse to show an
adviser its range of products which has been a strategy used by some companies to protect
their investments in the training of their own agents and discourage them from abandoning
exclusive arrangements with the company. Of course, having access to the broadest range
of products would not mean very much if advisers do not build the capacity to understand
their features and effectively compare and contrast them against the specific needs of a
client. This requires greater investments by financial advisers in the training of your
representatives, information systems and in building relationships with a broader network of
product providers.
Let me now touch for a moment on some observations from our recently concluded fieldwork
which examined the effectiveness of current mandatory disclosures in providing financial
consumers with the information that they need to make financial decisions. The study which
we conducted focused on the Product Disclosure Sheet (or PDS) which financial service
providers are required to provide to all consumers before they enter into a financial contract,
and covered life insurance and investment-linked products, structured investments and
mortgages.
We surveyed over 400 respondents and found that while the PDS provided by financial
service providers is covering the type of information that consumers believe are important for
making informed decisions, key product information is obscured in lengthy narratives,
excessive information and technical or legal jargon that is difficult to understand. Half of the
respondents surveyed were not aware of the PDS while the majority of those that are aware
claimed that they were given the PDS only after they had already decided to enter into a
financial contract. Many of them were not informed of its purpose. The study also revealed a
bias towards highlighting the benefits of a product in explanations given by sales agents or
advisers on the product, while risks and costs were not adequately explained. It should
therefore not be surprising that 75% of respondents make financial decisions without
adequately considering risk factors associated with a financial product, while almost half did
not understand the costs involved. These findings are obviously a concern to the Bank as
they undermine informed judgments by financial consumers. I raise these observations today
because financial advisers clearly have a key role in addressing these concerns. Indeed, you
have a professional obligation to your clients to present clear, unbiased and objective
information to help your clients make informed decisions. The Bank intends to address these
issues aggressively, through regulatory improvements, education, more intensive reviews of
sales practices and continued enforcement actions.
With effect from the second half of 2015, financial advisers and insurance and takaful
brokers will also be brought within the scope of the Financial Ombudsman Scheme that will
be approved under the Financial Services Act, providing an avenue for consumers to
address complaints against advisers for non-disclosures or misrepresentations. As I have
already alluded to earlier, this is an area in which the Association and its members can and
must do more to put in place mechanisms at the firm and industry level for handling
complaints against services provided by financial advisory representatives, well before a
dispute is escalated to the Ombudsman.
To help consumers navigate and compare financial products more efficiently, we are looking
into the establishment of an online product aggregator to provide financial consumers with
the ability to gather reliable information on a wide range of insurance products and make
comparisons on simple products on a single website. A number of issues will need to be
addressed to support such an initiative and ensure that meaningful comparisons can be
achieved. Over the coming months we will be meeting with stakeholders to obtain further
views on our aggregator proposals and examine options to move this initiative forward.
I have spoken at length this morning about our plans for the industry. In the years ahead, this
industry will have an important strategic role in the ongoing transformation agenda that is
being pursued for the insurance and takaful sectors. The Bank is committed to providing a
well-balanced regulatory environment that adequately protects consumers, while
encouraging advisers to realise their full potential. We will continue to set a high bar on
professional integrity and quality of advice, and we welcome your ideas and input on how we
can continue to encourage firms to grow within the industry and bring financial advisory
services to a wider spectrum of the public. The Association of Financial Advisers has a very
important role in this process and has been a focal point for the Bank's engagements with
the industry. I look forward to your continued cooperation in achieving our shared goal of
developing a financial advisory industry in Malaysia that truly serves to improve the
well-being of financial consumers in this more challenging environment, and one that we can
all be proud of.
Thank you very much for your attention.