CMFAS M5 Chapter 3: Written Directions

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:

1. 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. Those include policies that cover outstanding loans through

• personal loans
• car loans, and
• credit card balances

but exclude mortgage reducing term assurance plans; and

2. 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:

1. know your client;
2. needs analysis; and
3. 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 :

1. in the case of a collective investment scheme (CIS), 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
2. 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:

1. a summary of the information gathered by the financial adviser;
2. 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.

In considering whether a switch is detrimental, MAS may have regard to a number of factors, including:

1. whether the client suffers any penalty for terminating the original product;
2. whether the client will incur any transaction cost without gaining any real benefit from such a switch;
3. whether the replacement product confers a lower level of benefit at a higher cost or same cost to the client, or the same level of benefit at a higher cost; and
4. whether the replacement product is less suitable for 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:

1. general information about the financial adviser and status of a representative;
2. remuneration of the financial adviser;
3. conflict of interest;
4. designated investment products;
5. illustration of past and future performance of designated investment products; and
6. 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:

1. Clear
2. Adequate
3. 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:

1. its business name, business address and telephone number;
2. the type or types of financial advisory service that it is authorised to provide under the FAA;
3. the type or types of investment product in respect of which it is authorised to provide financial advisory service;
4. any other type of activity carried out by the financial adviser which is not regulated by the MAS, if any; and
5. 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:

1. his name;
2. the financial adviser(s) for which he acts;
3. the type or types of financial advisory service that he is authorised to provide under the FAA; and
4. the type or types of investment products in respect of which he is authorised to provide financial advisory service.

Remuneration Of The Financial Adviser

1. 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.
2. If a financial adviser charges a fee, it should disclose to the client details of the charges at the outset.
3. 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.
4. 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.
5. 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.
6. 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.
7. 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

1. A financial adviser shall ensure that all its marketing materials comply with the relevant guidelines issued by the MAS and/or industry association
2. A representative shall only use marketing materials approved by the financial adviser for which he acts
3. 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:

• the client may wish to seek advice from a financial adviser before making a commitment to purchase the product; and
• 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:

1. Acts Involving Fraud, Dishonesty or Other Offences of a Similar Nature
2. Acts Involving Inappropriate Advice, Misrepresentation or Inadequate Disclosure of Information
3. Failure to Satisfy the Guidelines on Fit and Proper Criteria
4. Other Misconduct: any other type of misconduct 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

The “Notice On Appointment And Use Of Introducers By Financial Advisers” shall apply to all licensed financial advisers and exempt financial advisers.

Introducing activities means [p.66]:

1. Introducing any client to an introducee in relation to the provision of financial advisory service; and
   
2. either or both of the following:

• recording the particulars of any client and forwarding such particulars to any introducee with the client's consent;
• providing factual information on investment product, including the name of the product, the product producer, the launched date, minimum subscription amount, and any fee or charge.
  

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:

1. minimum entry requirements;
2. application of the Capital Markets and Financial Advisory Services Examination (CMFAS Exam) requirements;
3. circumstances under which the CMFAS Exam requirements do not apply;
4. 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