CMFAS M5 Study Notes

Chapter 1: The Regulatory Bodies and Associations

Monetary Authority of Singapore (MAS)

Objectives of MAS

• Conduct monetary policy; manage the official foreign reserves and the issuance of government securities
• Supervise and develop the financial sector

Acts Administered by MAS:

• Financial Advisers Act (Cap. 110)
• Insurance Act (Cap. 142)
• Banking Act (Cap. 19)
• Exchange (Demutualisation and Mergers) Act (Cap. 99B)
• The Currency Act (Cap.69)
• Government Securities Act (Cap.121A)
• Local Treasury Bills Act (Cap. 167)

Singapore Exchange Limited (SGX)

Regulatory Functions of SGX:

• Issuer Regulation
• Member Supervision
• Market Surveillance
• Enforcement
• Risk Management

Investment Mgmt Association of Singapore (IMAS)

Objectives of IMAS. To:

• promote professionalism in investment management;
• provide a forum for members to discuss issues or matters relating to the investment management industry;
• represent members’ interests and acts as voice for members;
• promote the education of the investing public on investments generally and the investment management industry;
• improve professionalism and standards of research and fund management expertise in Singapore; and
• promote the investment and fund management industry.

IMAS members are governed by a Code of Ethics

Life Insurance Association of Singapore (LIA) is a trade association comprising direct insurers and reinsurers.

Mission of LIA - to promote the growth and development of the Singapore life insurance industry in consultation with the MAS and to protect the interests of life insurers and life insurance policy-owners.

Objectives Of LIA

• development of the life insurance business in consultation with the supervisory authority, the Monetary Authority of Singapore;
• development of industry practices; and
• promotion of public awareness of life insurance.

Chapter 2: Financial Advisers Act and Financial Advisers Regulation

Financial Advisers Act (FAA)

• governs financial advisory activities in respect of investment products, and the distribution or marketing of life policies and collective investment schemes, such as unit trusts
• consolidates various Acts into a single legislation
• provides a consistent set of requirements and regulations for intermediaries engaging in similar activities across investment products
• provides an integrated regulatory framework and ensures consistency in requirements and uniform standards across institutions providing financial advice

Financial Advisers Regulations (FAR)

• is a subsidiary legislation to give effect to the provisions of the FAA and sets out the rules on the application of the FAA
• provides for exemptions from the requirements relating to licensing, approval or registration requirements, the application of the provisions under the FAA

Financial Advisers (Amendment) Act

• principally comprises minor policy changes and technical modifications to clarify the Authority’s administration of the FAA
• improved the language of the FAA for the better administration of the FAA, and the consistency of requirements in the FAA with those in the SFA

Key Principles of FAA and FAR

• Customers’ Interest
• Consistency
• Accountability
• Independence

Changes Made by FAA:

• a single licensing regime for persons engaging in financial advisory activities
• raising the standards of financial advisers and representatives - impose business conduct requirements and minimum entry and examination requirements on them respectively
• the use of the term “financial adviser” and “life insurance broker” are restricted to persons who hold a financial adviser’s licence or are exempt financial advisers
• licences granted to financial advisers and their representatives are valid for a period of three years
• obligation to disclose product information on investment products and to have a reasonable basis for any recommendation made with respect to any investment product

Financial Adviser vs Financial Planner:

• MAS regulates all financial planning activities relating to securities, futures and insurance
• Tax, retirement and estate planning activities do not come under MAS’ supervision

Types of “financial advisory service” regulated under FAA include:

• advising others, either directly or through publications or writings, and whether in electronic, print or other form, concerning any investment product;
• advising others by issuing or promulgating research analyses or research reports, whether in electronic, print or other form, concerning any investment product;
• marketing of any collective investment scheme; and
• arranging of any contract of insurance in respect of life policies, other than a contract of reinsurance.

Investment products mean:

• any capital markets product as defined in Section 2(1) of the Securities and Futures Act;
• any life policy; or
• any other product as may be prescribed. Note: With effect from 2 December 2005, MAS has prescribed structured deposits as an investment product.

Exclusions

• General Insurance policies
• Life Reinsurance
• Banks Deposits
• Loans and Mortgages

Requirements for Granting Financial Adviser’s Licence
The financial adviser’s licence will be granted only to a corporation. Applicants for the licence will have to satisfy licensing criteria, relating to:

• financial resources;
• competence and expertise; and
• must satisfy MAS that it would discharge its duties efficiently, honestly and fairly.

Exempt Financial Advisers:
Section 23 of the FAA provides that the following persons shall be exempted from holding a financial adviser’s licence:

• banks licensed under Banking Act;
• merchant banks approved as financial institution and approved to carry on a business of providing any financial advisory service under the Monetary Authority of Singapore Act;
• companies/societies registered under the Insurance Act;
• holders of a capital markets services licence under the Securities and Futures Act;
• a finance company which has been granted an exemption from Section 25(2) of the Finance Companies Act to carry on a business of providing any financial advisory service;
• a securities exchange, a futures exchange, a recognised market operator, or an approved holding company, in respect of the provision of any financial advisory service that is solely incidental to its operation of a securities market, a futures market, or to its performance as an approved holding company, as the case may be; and
• such other persons or classes of persons as may be prescribed.

Representatives of Financial Advisers

A representative’s licence will only be granted to a natural person who satisfy the following requirements:

• be at least 21 years old;
• satisfy the minimum academic qualification of at least 4 GCE ‘O’ level credit passes;
• satisfy the fit and proper criteria;
• satisfy the prescribed minimum examination requirements; and
• satisfy any other criteria stipulated by MAS.

Opportunity To Be Heard applies to the 3 situations:

• Requirements For Grant Or Renewal Of Representative’s Licence
• Lapsing, Revocation, Suspension And Expiry Of Licence
• On Application For Approval To Be CEO Or Director

The Authority may refuse to grant or renew the representative’s licence on the following grounds WITHOUT giving the applicant an opportunity to be heard:

1. the applicant is an undischarged bankrupt, whether in Singapore or elsewhere;
2. a prohibition order under Section 59 has been made by the Authority, and remains in force against the applicant;
3. the applicant has been convicted, whether in Singapore or elsewhere, of an offence:

• involving fraud or dishonesty or the conviction for which involved a finding that he had acted fraudulently or dishonestly;
• punishable with imprisonment for a term of three months or more.

Return Of Licence Upon Cessation - Within 14 Days

Duration of Licence – 3 Years

One Representative One Principal Rule

No licensed representative shall at any one time, be a representative of more than one financial adviser. The objectives of this prohibition are two-fold:

1. secure clarity for investors ; and
2. ensure that the principal monitors and supervises their representatives at all times.

However, a licensed representative may be a representative of more than one financial adviser if the financial advisers are related corporations.

CEO and Directors of Licensed Financial Advisers

• MAS’ approval is required prior to their appointment
• MAS may direct the company to remove such an officer from his office if the MAS thinks it necessary in the public interest or for the protection of investors to do so

Receipt of Clients' Money or Property

• “Client’s money or property” means money received or retained by, or property deposited with, a licensee for which he is liable to account to another person
• Money received must be given to the right party
• Money must be handed over not later than the next business day unless the licensee has client’s prior written consent to hand over after the specified date
• Financial Adviser shall not receive client’s money or property in the form of cash or cheque made payable to any person (other than a person referred to in 15.2 (a), (b) or (c),) except where the cash or cheque is for services rendered by the financial adviser.

Insurance Broking Premium Accounts
Financial advisers which receive any insurance monies are required to establish and maintain a separate account with a bank licensed under the Banking Act for its life insurance broking premiums.

• A financial adviser which receives any payment which is due to the insurer is required to pay the amount to the insurer within the credit period.
• Interest earned during the credit period may be retained by the financial adviser for its own benefit with the insurer’s prior consent.
• Interest earned after the credit period shall not be retained by the financial adviser for its own benefit and shall immediately be paid to the insurer to whom such payment is due.
• Interest earned, which is due to an insurer under a contract of insurance (including a contract of insurance that has been cancelled) where cover commences before the appointed day, may be retained by the financial adviser for its own benefit.

Restriction on Granting Unsecured Loans. Section 24(3) provides that no financial adviser shall grant unsecured advance, unsecured loan or unsecured credit facility to:

• a director of the licensed financial adviser, other than a director who is its employee; or
• any other officer or an employee of the licensed financial adviser (including a director who is its employee) or any of its representatives which, in the aggregate and outstanding at any one time, exceeds $3,000 or such other amount as may be prescribed.

Obligation to Furnish Information to MAS:

• A licensed financial adviser is required to prepare and lodge statements of accounts in accordance with the provisions of the Companies Act
• Exempt financial advisers have to lodge returns such as a notice of commencement of business as a financial adviser or a notice of change of particulars

Placement of Risk with Unregistered Insurers

• No licensed or exempt financial adviser shall negotiate any contract of insurance, whether directly or indirectly and placement of risk with unregistered insurers except where specifically permitted by MAS.
• It does not apply to reinsurance, businesses relating to risk outside Singapore or such other risks as may be prescribed.
• Individuals are not prohibited from purchasing life policies from unregistered overseas insurers. However, financial advisers are required to seek MAS’ approval should they wish to place their clients’ life insurance risks with unregistered overseas insurers.
• This is to ensure that no financial adviser is being used by unregistered overseas insurers to assist them to write domestic Singapore risks, since unregistered overseas insurers are not allowed to write domestic Singapore risks.

Representations by Licensees:

• FAA deals with representations by a financial adviser in relation to a proposed contract of insurance with the insurer.
• It sets out the code of conduct that the financial adviser has to operate.
• With respect to proposed contract/claim of insurance, the financial adviser cannot provide false or misleading information, or omit to disclose any matter that is material to the insurer.
• A financial adviser shall not engage in any professional conduct involving fraud or dishonesty, trustworthiness or compromises its integrity.

Disclosure of Certain Interests in Securities

• The financial adviser has a duty to disclose potential and actual conflict of interest to his clients or prospects. Prior to establishing a client relationship, a financial adviser should:

1. disclose all material information or facts that might compromise its objectivity or independence or impair its ability to make unbiased and objective recommendations; and
2. fully disclose to the clients its relationship with the financial institutions whose products it is providing advice on or recommending

• Where such conflict of interest situations cannot be avoided, the financial adviser should ensure that its clients are treated fairly and equitably
• Enter change in interest in securities within 7 days from date of change

Offences:

• Any officer, auditor, employee or agent of a licensed financial adviser or an exempt financial adviser who wilfully omits, makes a false entry or alters document or statement of the business of the financial adviser shall be guilty of an offence and be liable on conviction to a fine not exceeding $100,000 or to imprisonment for a term not more than two years or to both.
• Throughout the FAA, various provisions have stipulated the penalty to the body corporate.
• In less serious offences, these offences may be compoundable under FAA.

Chapter 3: Written Directions

The Financial Advisers Act (FAA) (Cap.110) sets out the general principles for the regulation of financial advisers and their representatives.
Regulations are considered subsidiary legislations. Sets out rules for the application of the FAA.
Notices (also known as written directions) are issued under Section 58 of the FAA and are legally enforceable.
The difference between Notices and Regulations is that Notices specify in more detail the standards expected of financial advisers in the conduct of their business.
A contravention of any requirement specified in the FAA, Regulations and Notices is an offence under the Act.
While representatives of exempt financial advisers are not required to hold a representative’s licence, the business conduct rules of the FAA apply to them. Section 58 empowers the MAS to issue written directions to representatives of exempt financial advisers.
The MAS may, if it thinks necessary or expedient in the public interest, issue written directions.

The MAS is empowered to issue written directions on the standards with respect to qualifications, experience and training of representatives, and the reporting of misconduct.

Guidelines are issued under Section 64 of the FAA. They are intended to provide general guidance and are meant to be good practice which would apply generally across the financial advisory industry. Because Guidelines set out general guidance and good practice, they do not create any legally enforceable obligations or duties.

Obligations to be Complied when Recommending an Investment Product

The principle underlying the following obligations as set out in the “Notice On Recommendation On Investment Products” is to ensure that the prospective client makes an informed choice before he makes a purchase.

The obligations set out below shall not apply:
to any recommendation made with respect to simple life policies sold as an ancillary product to loans with a simple payment basis for the insurance cover; and
in circumstances where no recommendation is made or where only factual information is provided with respect to any investment product

Recommendations On Investment Products
Section 27 of the FAA requires licensees to have a reasonable basis for any recommendation made with respect to any investment product to a person who may reasonably be expected to rely on the recommendation.
In particular, the licensee should give due consideration to the person’s investment objectives, financial situation and particular needs.

A financial adviser who is involved in making recommendations on investment products to clients shall comply with the requirements set out in the “Notice On Recommendations On Investment Products” in relation to the following aspects:
know your client;
needs analysis; and
documentation and record keeping.

Know Your Client
The following information should be collected from the client:
financial objectives of the client;
risk tolerance of the client;
employment status of the client;
financial situation of the client, including assets, liabilities, cash flow and income;
current investment portfolio of the client, including any life policy; and
for any recommendation made in respect of life policies, the number of dependants of the client and the extent and duration of financial support required for each of the dependants.

A financial adviser should highlight the following in writing to its client:
the information provided by the client will be the basis on which the recommendation will be made; and
any inaccurate or incomplete information provided by the client may affect the suitability of the recommendation.

Needs Analysis
should explain to its client the basis for recommendation & the basis should be documented
Where the financial adviser is unable to identify a suitable product, it should inform the client accordingly
Where a client chooses not to receive any recommendation from a financial adviser, the financial adviser should ensure that there is proper documentation to demonstrate that this is so.

Documentation And Record Keeping
A financial adviser is required to furnish the following documents to a client when making a recommendation :
in the case of a collective investment scheme, a copy of the prospectus or profile statement (if applicable) issued and/or any other offer document as may be prescribed by the relevant laws
in the case of a life policy, a copy of the Product Summary and Benefit Illustration in respect of that policy.

A financial adviser should furnish to its client a document containing the following when making a recommendation in respect of a designated investment product to the client:
a summary of the information gathered by the financial adviser;
any recommendation made to the client by the financial adviser and the basis for the recommendation, and where applicable, a statement that the client does not want to:
provide any information requested by the financial adviser in accordance with Section 2.1.1 of this chapter;
accept the recommendation of the financial adviser and has chosen to purchase another designated investment product which is not recommended by the financial adviser; or
receive any recommendation from the financial adviser, before the client signs on the application form for the purchase of a designated investment product or gives his consent to dispose of a designated investment product.

Switching Of Designated Investment Products
A financial adviser should not make a recommendation to a client to switch from one designated investment product (referred to as “original product”) to another designated investment product (referred to as “replacement product”) in a manner that would be detrimental to the client.

Information to Clients And Product Information Disclosure
The “Notice On Information to Clients And Product Information Disclosure” sets out the disclosure and information obligations of a financial adviser and its representatives to clients, including when they must provide the client with investment product information.

This Notice sets out the general principles that apply to all disclosure by a financial adviser to its client. It also sets out specific requirements as to the form and manner of disclosure that financial advisers have to comply with in relation to Sections 25 and 26 of the Act, as well as to the following matters:
a. general information about the financial adviser and status of a representative;
b. remuneration of the financial adviser;
c. conflict of interest;
d. designated investment products;
e. illustration of past and future performance of designated investment products; and
marketing materials.

In addition to the obligations under Section 25 of the FAA, a financial adviser shall ensure that any statement or representation made to its clients is not false or misleading. It shall also ensure that it does not omit to disclose any matter that is material to the statement or representation made.
The general standards which a financial adviser is expected to meet in all product information disclosures and information given to clients are as follows:
Clear
Adequate
Not False or Misleading

General Information About The Financial Adviser And Status Of A Representative
A financial adviser shall disclose the following, in writing, to a client:
i. its business name, business address and telephone number;
ii. the type or types of financial advisory service that it is authorised to provide under the FAA;
iii. the type or types of investment product in respect of which it is authorised to provide financial advisory service;
iv. any other type of activity carried out by the financial adviser which is not regulated by the MAS, if any; and
v. the product providers whose products the financial adviser:
procures on behalf of its clients;
recommends or markets to its clients; or
markets to its clients on behalf of the product providers.

A licensed representative shall disclose the following, in writing, to the client:
i. his name;
ii. the financial adviser(s) for which he acts;
the type or types of financial advisory service that he is authorised to provide under the FAA; and
the type or types of investment products in respect of which he is authorised to provide financial advisory service.

Remuneration Of The Financial Adviser
a. A financial adviser is required to disclose, in writing, to a client all remuneration, including any commission, fee and other benefit that it has received or will receive that is directly related to the making of any recommendation in respect of an investment product, or executing a purchase or sale contract relating to an investment product on the client’s behalf.
b. If a financial adviser charges a fee, it should disclose to the client details of the charges at the outset.
c. If a financial adviser receives commissions from a product provider on investment products sold on behalf of the product provider, it should disclose to the client the amount of commissions it receives on the investment products it recommends.
d. Where a financial adviser receives trailer commission, soft commission or such other benefit from a product provider, it should disclose to the client the amount of such commission and benefit.
e. Where the amount of remuneration, commission fee or benefit is not quantifiable, a financial adviser should furnish its client with a description of how it will be remunerated.
f. If the precise rate of remuneration or value of commission is not known in advance, the financial adviser should estimate the rate likely to apply in such description.
g. In the case of a life policy, a financial adviser should disclose to its client the “distribution cost” item in the Benefit Illustration (where a Benefit Illustration is available in respect of the life policy)

Conflict Of Interest
A financial adviser should disclose, in writing, to its clients any actual or potential conflict of interest arising from any connection to or association with any product provider, including any material information or facts that may compromise its objectivity or independence in its provision of financial advisory services.

Designated Investment Products
When making a recommendation on any designated investment product to a client, a financial adviser is required to disclose the following information to the client in a form and manner that is clear, adequate and not false or misleading:
Nature and Objective of the Product
Details of the Product Provider
Contractual Rights
Client Profile
Commitment Required From the Client
Benefits of the Product
Risks of the Product
Pricing of the Product
Fees and Charges to be Borne by the Client
Reports to the Client
Free-Look for Life Policies
Cancellation Period for Unit Trust
Withdrawal, Surrender or Claim
Warnings, Exclusions and Disclaimers

Illustration Of Past And Future Performance Of Designated Investment Products
A financial adviser shall comply with the following with respect to any illustration of past and future performance of any designated investment product:
the financial adviser shall not disclose (whether orally or in writing) any matter in respect of the future performance of a collective investment scheme, unless that matter is disclosed in the registered prospectus of the scheme;
when using any forecast on the economy, stock market, bond market and economic trends of the markets, it shall advise the client that such forecast is not necessarily indicative of the future or likely performance of the product;
when using past performance of the product to illustrate possible returns for that product, it should advise the client that past performance is not necessarily indicative of future performance. The source of data used in the illustration should be provided by the product provider or an independent agency, and be made known to the client;
iv. when advising on a life policy, it should make reference to the Benefit Illustration in respect of that life policy (where a Benefit Illustration is available in respect of that life policy); and
v. when advising on a collective investment scheme, it should not make any prediction, projection or forecast on the future or the likely performance of the collective investment scheme, except to the extent permitted under Clause 1 of Appendix 3B of the text.

When advising on a collective investment scheme, a financial adviser may disclose orally to a client any information on past or future performance contained in the registered prospectus of the scheme if and only if such disclosure is made at the same time as a copy of the prospectus is given to the client, and the financial adviser:
draws the attention of the client to all assumptions, warning statements and other information relating to the past or future performance that are contained in the prospectus; and
ii. where the last day of the period to which the past performance relates is more than three months prior to the date of disclosure, informs the client of this fact

Marketing Materials
A financial adviser shall ensure that all its marketing materials comply with the relevant guidelines issued by the MAS and/or industry association
A representative shall only use marketing materials approved by the financial adviser for which he acts
Where a financial adviser engages in the marketing of designated investment products using direct response advertising communications, it shall include, in all its marketing materials, prominent warning that:
a. the client may wish to seek advice from a financial adviser before making a commitment to purchase the product; and
b. in the event that the client chooses not to seek advice from a financial adviser, he should consider whether the product in question is suitable for him

The “Notice On Reporting Of Misconduct Of Representatives By Financial Advisers” sets out the responsibilities and reporting requirements of financial advisers for the misconduct of their representatives.

A financial adviser shall submit to the MAS, not later than 14 days after the end of each quarter, reports of any disciplinary action taken against its representatives for misconduct including formal warnings issued to the representatives during the preceding quarter:
Acts Involving Fraud, Dishonesty or Other Offences of a Similar Nature
Acts Involving Inappropriate Advice, Misrepresentation or Inadequate Disclosure of Information
Failure to Satisfy the Guidelines on Fit and Proper Criteria
Other Misconduct: any type of misconduct other than those set out in sub-paragraphs (a) to (c), resulting in
non-compliance with any regulatory requirement relating to the provision of any financial advisory service under the Act; or
a serious breach of the financial adviser’s internal policy or code of conduct which would render the representative liable to demotion, suspension or termination of the representative’s employment or arrangement with the financial adviser
in the form set out in this Notice

The “Notice On Appointment And Use Of Introducers By Financial Advisers” shall apply to all licensed financial advisers and persons who are exempt from holding a financial adviser’s licence under Section 23(1)(a) to (e) of the FAA.

Requirement For Financial Advisers Appointing Introducers
Where a financial adviser appoints a person as an introducer, it should take reasonable steps not to appoint an introducer whose carrying out of introducing activities is its sole business activity or his full time occupation if the introducer is a corporation or an individual respectively.
A financial adviser should ensure that none of its employees or representatives enters into any arrangement with an introducer to carry out introducing activities other than on behalf of the financial adviser.
A financial adviser which engages the services of an introducer should institute adequate control systems and procedures.

In engaging an introducer to carry out introducing activities, the financial adviser is required to comply with the following requirements:
Written Agreement
Disclosure by Introducer
Provision of Script for Use by Introducers
Prohibition on Handling of Client’s Money or Property by Introducers
Maintenance of Register of Introducers

The “Notice On Minimum Entry And Examination Requirements For Representatives Of Licensed Financial Advisers And Exempt Financial Advisers” sets out the following:
minimum entry requirements;
application of the Capital Markets and Financial Advisory Services Examination (CMFAS Exam) requirements;
c. circumstances under which the CMFAS Exam requirements do not apply;
d. continuing education requirements for representatives.

MAS Notice 117 requires such representatives to obtain the requisite qualification in health insurance before they can provide any advice on or arrange such policies or both, unless the representatives fall within paragraph 6 or 7 of MAS Notice 117.

Minimum Entry Requirements
Application Of CMFAS Exam Requirements
Circumstances Under Which The CMFAS Exam Requirements Do Not Apply
Re-Taking Of Module 5
Continuing Education Requirements For Representatives

The “Notice On Prohibited Representations Made By Persons Exempted Under Regulation 27(1)(D) Of The Financial Advisers Regulations (Rg 2)” sets out certain prohibitions in respect of representations made by exempt persons and representatives of exempt persons regarding their exempt status.
Example:
An exempt person and its representatives shall not represent itself, nor cause to be represented, as being licensed, regulated, supervised or registered by the MAS, whether verbally or in writing.

The “Notice On Dual Currency Investments” applies to any licensed or exempt financial adviser or its representative, who advises on any dual currency investment.
Use Of The Term “Deposit” And “Structured Deposit”
Additional Product Information Disclosure
Warnings
Guidelines On Structured Deposits