Ravi Menon: Financial advisory services - putting the customer first
Keynote address by Mr Ravi Menon, Managing Director of the Monetary Authority of
Singapore, at the Life Insurance Association 50th Anniversary Gala Dinner, Singapore,
26 March 2012.
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LIA President, Mr Tan Hak Leh
Distinguished guests, ladies and gentlemen, good evening.
Role of life insurance and financial advisory services
Saving for the future, investing for returns, and protecting against risk - these are the
fundamentals of managing our finances. Yet so few of us do it well. We are far better at
earning an income than investing it and protecting against risk.
To make matters worse, many life insurance and investment products are often not easy to
understand. Many people are not financially savvy. And many of those who are, do not have
the time to review the range of insurance and investment products available, and understand
what is best suited for their needs. This is where financial advisory service comes in.
Financial advisers can help people identify their insurance and financial planning needs and
recommend suitable products.
The roles of insurers and financial advisers are intimately intertwined. It must be so.
Insurance protects dependants. Investments grow savings and wealth. How can we buy
insurance without regard to our broader investment portfolio? Likewise, how can we invest
without considering how well we are protected against death or disease? Life insurance and
financial advisory services go hand in hand.
This was why MAS introduced the Financial Advisers Act, or FAA, ten years ago. The FAA
was a landmark regulatory reform, providing for consistency in the regulation of persons
engaged in advisory activities:
 across sectors: in insurance companies, banks, stockbrokers, and financial advisory
firms; and
 across products: life insurance, securities, futures, and unit trusts.
Two years before the FA Act, an industry-led committee, the Committee for the Efficient
Distribution of Life Insurance, or CEDLI, made far-reaching recommendations on minimum
standards for the advisory process, and the competency of insurance agents.
The FAA and CEDLI together helped transform the landscape for financial advisory services
in Singapore. They have contributed to greater consistency and better quality in the advisory
services provided on both life insurance and investment products. Disclosure practices have
also improved.
Life insurance coverage and financial investments among Singaporeans have grown over
the last decade.
 Life insurance as a percentage of the total assets of Singaporeans has nearly
doubled from about 4% in 2000 to 7% in 2011.
 Financial investments as a percentage of the total assets of Singaporeans has
increased from about 14% in 2000 to 17% in 2011.
But there are important gaps to fill.
We need to do better
We have a large protection gap. The average Singaporean is still grossly underinsured.
A 2009 study by the Nanyang Technological University found that the existing life
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cover of the average Singaporean is only about a third of what his dependants will
need in the event of his early death.
The insurance industry should reflect on these findings and take up the challenge to narrow
the shortfall in protection coverage.
Likewise, there is room to do more within the financial advisory industry.
 According to a study by the Nielsen Company, which issued the Global Ageing
Report in February 2011, only 14% of Singapore consumers surveyed felt that they
were financially ready for retirement. This is lower than the Asia Pacific and global
averages of 22% and 18% respectively.
Financial planning has to go beyond advising on investment products to evaluating the life
cycle needs of an individual, including for retirement.
Putting the customer first
We must build the customer's trust and confidence in life insurance and financial advisory
services. MAS has been working closely with the industry to help bring this about. The key
thrusts of our approach are as follows:
 Raise the competence of financial advisory representatives
 Raise the quality of financial advisory firms
 Make financial advice a dedicated service
 Lower distribution costs of insurance products
 Promote a culture of fair dealing
Let me share with you the actions we have taken to-date in each of these areas. I will also
announce the steps MAS intends to take, as part of a comprehensive review of the financial
advisory industry that we are launching. We call this new effort, "FAIR", or the Financial
Advisory Industry Review.
FAIR will essentially build on the foundations laid by CEDLI and the FA Act ten years ago. It
has two main objectives:
 first, to enhance the professional standing and competence of financial advisers;
and
 second, to create a more competitive and efficient system for the distribution of life
insurance and investment products.
The overriding aim of FAIR is to protect and benefit the consumer. Putting the customer first
- that must be at the heart of all our efforts.
Raising the competence of FA representatives
Let me begin with the competence of financial advisory representatives. MAS has been
working with the FA industry to raise the skills, knowledge and expertise of representatives to
serve customers better. The two aspects of this effort are:
 improving the product knowledge of FA representatives; and
 raising the entry requirements for FA representatives
Product knowledge of FA representatives
We have introduced new examination modules to ensure that FA representatives have
sufficient knowledge of the wide and complex range of investment and insurance products
currently available in the market. Most firms and FA representatives understand and support
the need to raise knowledge and skill levels through a set of common examinations.
Some representatives have questioned why they need to pass these new exams when all
they sell are simple products. MAS takes the view that a good financial adviser should be
able to explain the advantages and disadvantages and the risks of competing
products - both simple and complex.
The reality is that consumers today are faced with a wide range of choices. For example, a
consumer wishing to invest and buy insurance protection has a few options. He may
consider a participating policy or a regular premium investment-linked policy or simply
purchase an insurance term policy and invest separately. He could build a portfolio of just
plain vanilla stocks and bonds or include ETFs and futures or simply buy unit trusts. Each
option has its own set of risk-return and cost considerations. The increasingly educated
consumer will expect his representative to help him make sense of the complexity of the
products and their suitability, even if he eventually settles on simple life insurance and
investment products.
Some other FA representatives feel that their academic qualifications are sufficient and
should allow them an exemption from the exams. But consumers should have some
assurance that the qualifications of the FA representatives meet a common standard. The
examinations are industry-certified, and set a common standard and benchmark for
FA representatives.
It is important that all representatives, even those who have been in the industry for many
years, stay abreast of latest market developments and products. Only then can they provide
holistic advice and comprehensive recommendations on what to buy, and - more importantly
- what not to buy.
But we understand the concerns that some representatives have raised. MAS is prepared to
adjust its requirements subject to the companies putting in place proper controls to ensure
that only simple products are sold by the selected FA representatives who do not take the
new examinations.
Entry requirements for FA representatives
Next, as part of FAIR, MAS will review the minimum level of qualifications that we expect of
our FA representatives, to ensure they stay relevant to the needs and expectations of
consumers.
The current entry requirement for FA representatives is four GCE "O" level passes. It is
clearly not in keeping with Singapore's rising educational levels, the increasing complexity of
products, and higher expectations from a more literate and sophisticated public.
 One out of two Singaporeans has above GCE "O" level qualifications, compared to
one out of three, ten years ago.
 One out of four Singaporeans has a degree; this is double the proportion ten years
ago.
Our current requirements do not stack up well against major jurisdictions. They have been
raising the quality and professionalism of their financial advisers.
 In the UK, the minimum requirement for representatives serving retail customers will
be raised by end 2012 to tertiary level qualification, defined as at least a Diploma.
 In Australia, the current educational entry level is a Diploma-equivalent.
Let us not short-change the consumers of life insurance and investment products in
Singapore. I am heartened to note that some insurers are already consciously recruiting
better qualified individuals who can provide value-added advice to their customers. These
agents are better able to explain the intricacies of financial planning, and recommend
solutions to meet the financial needs of busy professionals or less savvy customers. But we
must level the playing field and make this the industry norm.
Raising the quality of financial advisory firms
Management expertise and financial resources of financial advisory firms
The second thrust of our approach is to raise the quality of financial advisory firms. While
banks and insurers are generally well resourced, financial advisory firms vary in size. Some
firms are so small that shareholders or directors double up as representatives, CEO, CFO,
and compliance personnel. Under FAIR, we will review the management expertise and
financial resources of financial advisory firms, to ensure they are well managed and
financially sound. We will take this review into consideration when admitting new financial
advisory firms.
Making financial advice a dedicated service
Besides raising the quality of FA representatives and financial advisory firms, we must make
financial advice a dedicated and professional vocation. Customers looking for financial
advice deserve to be served by representatives whose primary focus is to provide quality
advice on regulated financial products.
Unregulated activities of FA representatives
We want an industry where providing financial advisory services is the primary focus of FA
representatives.
But of late, we have noticed a worrying trend of FA representatives conducting or wanting to
conduct other activities alongside providing financial advice. Let me give a few examples.
We have received queries from insurance agents who also want to be real estate

agents. They want to be allowed to market and earn commissions from property
transactions, often to the same customers they provide financial advice to.
 Some FA representatives have even applied to the Casino Regulatory Authority for
a junket promoter license!
 MAS has received complaints against FA representatives who used their regulatory
status to market questionable schemes in gold bullion. Some of these activities are
clearly in conflict with FA activities. They risk undermining the interests of
consumers.
We will review the activities that FA representatives can conduct outside their advisory role,
to ensure that representatives continue to put their customers first. Specifically, we will work
with the industry on a list of activities that FA representatives should not engage in. To my
mind, the activities with clear conflicts include:
 money lending;
promoting junkets for casinos;

 selling real estate; and
 marketing investment products which do not accord safeguards to customers under
the Financial Advisers Act.
We will also review other activities that FA representatives engage in that are not in conflict
but which may distract representatives from their professional focus. Several insurers and FA
firms recognise the risks of associating with representatives who may be distracted by other
commitments and remuneration opportunities outside the realm of financial advisory
services. These companies accept only representatives who are fully dedicated and
committed to providing quality financial advice to their customers. This is how it should be.
But practices vary across financial institutions, and it may not be practical to ban
representatives from undertaking other activities that earn an income. MAS will work with the
industry to push for a consistent industry-wide approach to representatives who engage in
multiple activities.
Role of introducers
FAIR will also review the current practice of FA firms and their representatives making use of
"introducers" to reach out to customers. An introducer may be another representative, but
may also be any man-on-the-street. Introducers are typically paid a fee to refer customers to
financial advisers, or they get a cut of the commissions generated from sales to the
customers. The use of introducers means customers risk dealing with individuals whose
credentials have not been vouched for by any financial institution. It also means that
customers may not receive proper advice when introducers go beyond introducing and
pressure customers to buy products.
Financial advisory activities in insurance broking firms
Making sure that the financial advisory role is the primary focus of FA representatives is only
one side of the coin. The other aspect to ensure, is that firms whose primary activity is not
financial advisory services, are fully capable of managing this part of their business.
In this regard, FAIR will review the scope of financial advisory activities currently carried out
in insurance brokers. Some insurance brokers advise on group term life insurance to
complement the suite of general insurance products offered to their corporate customers.
However, over the years, we have noticed that for some insurance brokers, FA activities and
revenue from the advisory business have eclipsed that of their core insurance broking
business. MAS is concerned that insurance brokers may not have sufficient management
expertise and compliance capability to oversee and manage the FA portion of their business.
Lowering distribution costs
Our fourth key thrust is to lower the cost of distribution, so that we can keep the overall cost
of life insurance products affordable for Singaporeans.
Direct sales of simple products
The online channel is one of the ways in which we can lower distribution costs. We have
seen the use of direct sales via the internet for the distribution of general insurance products
such as travel insurance and motor insurance. Why not life insurance? The industry could
explore the use of the internet as an alternative distribution channel to offer life insurance to
consumers at competitive prices.
Online distribution will also mean that products will have to be simplified. Simple term life
insurance via the internet could be a good way to help lower cost and make affordable
insurance protection more readily available to a wider population. And simple term life
insurance is sometimes all that a person needs to protect against risk. MAS would like to see
the sale of simple term life insurance products through the internet.
Commission-based remuneration and distribution structure
But customised financial advice is still required for the more complicated insurance plans,
tailored to suit individual and family needs and circumstances, and for those who want to
supplement their term life insurance. To lower costs for such products, we must address
some of the underlying inefficiencies in our remuneration and distribution structure. FAIR will
fundamentally review the commission-based remuneration and distribution structure.
In Singapore, insurance products are distributed through insurance agencies, banks, and
financial advisory firms. The premiums for these insurance products include charges that
cover mortality risk, as well as various expenses incurred by the insurer, such as distribution
and management expenses. A substantial proportion of the premium in the earlier years
goes to paying for distribution expenses. Over the life of a policy, this cost can account for as
much as 8% of the total premiums paid. A key driver of this cost is the multi-tier distribution
structure that is common in Singapore's insurance companies and large FA firms.
The commission-based, multi-tier distribution structure involves representatives in the upper
tiers having a share of the commissions earned by lower-tier representatives who provide
insurance and financial advice to the consumer.
 Take for example a whole life insurance policy. An FA representative could earn a
basic commission of 50% of the policy's annual premium in the first year, and
another 40% of the annual premium during the following five years.
 His supervisor would in turn earn overriding commissions throughout the first six
years. There is typically a third tier comprising the agency managers who also get
overrides.
 Total overrides during the first six years can amount to 70% of the policy's annual
premium.
 Together, the total commissions and overrides earned by the representative and his
supervisors would be equivalent to about 160% of the policy's annual premium.
FAIR will examine whether this commission structure aligns the interest of representatives
with the long term interest of consumers, whether these representatives have the adverse
incentive to sell products that pay them higher commissions, and whether the tier structure
provides value for the customer or merely adds cost.
Most major jurisdictions have long moved away from the tiered structure. The United
Kingdom and Australia are moving towards a fee-based model. They have, in fact, banned
commission payments from product manufacturers to financial institutions except in the case
of pure-protection products.
Enhance transparency of distribution and other costs
A third way in which we can lower distribution and related costs is to enhance the
transparency of these costs. Presently, benefit illustrations show the total distribution costs
but hide the direct payout to a representative. Customers should know what they are paying
for. With greater transparency, a customer can decide if he is getting his money's worth for
the service and advice provided by his FA representative.
Benefit illustrations also do not include a detailed breakdown of the split between the
protection and investment components in an investment-linked insurance product.
Customers often assume that the insurance policy they bought covers only insurance to their
dependants, when in fact the product may contain a substantial savings element. Insurers
should strive to provide greater disclosure on how the premium is split between protection
and investment on bundled insurance products to enable customers to better understand
what they are buying.
Promoting a culture of fair dealing
The fifth thrust in our approach to instilling customer trust in life insurance and financial
advisory services is through promoting a culture of fair dealing by financial institutions.
Dealing fairly with customers goes beyond mere compliance with regulatory requirements. It
is an attitude that springs from the ethos and values of the institution. It is about a culture that
places the consumer first, that is focused on doing what is right for the consumer, and that
places a premium on integrity.
It is the responsibility of the Board and Senior Management to forge this culture of fair
dealing throughout the organisation. The Board and Senior Management must set a clear
strategy to achieve the fair dealing outcomes, monitor its implementation, and train their staff
and representatives to treat customers fairly. Most of all, they must - by word and
deed - make clear to their staff that meeting revenue targets must never be at the expense
of treating their customers with fairness and honesty.
Enhance transparency of products
A key aspect of fair dealing is to make insurance and investment products more transparent.
MAS has enhanced safeguards for consumers who buy investment and insurance products
that are complex. For example, for consumers investing into unit trusts via their
investment-linked life insurance policies, we now require insurers to provide a Product
Highlights Sheet or "PHS" on the underlying funds. The PHS should be written in plain
language, in a "Question & Answer" format prescribed by the MAS. It describes the profile of
customers the fund is suitable for, what the fund invests in, and what the risk areas are that
could cause a customer to incur a loss.
We also require FA representatives to conduct a Customer Knowledge Assessment to
assess whether a customer has the relevant knowledge or experience to understand the
risks of products which are more complex or have innovative features which customers might
not understand.
FAIR - the next steps
MAS recognises that FAIR will have a significant impact on the industry and on the public.
We will take a consultative approach and engage all stakeholders. A review panel will be
formed, with representation from industry associations, the investment community,
academia, media and consumer bodies, to review and propose recommendations on the five
areas I have outlined. MAS will shortly announce the members of the panel. We will solicit
feedback from the public before the panel begins its deliberations and after it has made its
recommendations.
I appreciate that some of the proposals will impact businesses and representatives. I urge
the industry to take a long term view from the customer's perspective. The aim of FAIR is to
bring about a higher quality of financial advisory services and better outcomes for customers,
and by enhancing customer trust, promote sustained growth of the financial advisory
industry. MAS will work to ease the transition for those most affected by the changes.
Conclusion
Since its inception in 1962, LIA's key objectives have always been to promote high standards
and best practices in the life insurance industry, ensuring quality financial advisory services
and raising public awareness and understanding of life insurance. We see LIA as a key
partner in facilitating the FAIR process and developing the insurance industry.
I congratulate LIA on your golden anniversary and wish you many more fruitful years ahead.
Thank you.