CMFAS M5 Chapter 4: MAS Guidelines

Guidelines are intended to provide general guidance and are meant to be good practice. They do not create any legally enforceable obligations or duties. MAS has published the following Guidelines in relation to FAA:

1. Guidelines on criteria for the grant of a Financial Adviser's license and a representative's license;
2. Guidelines on fit and proper criteria;
3. Guidelines on license applications and payment of fees
4. Guidelines on standards of conduct for FA
5. Guidelines on the use of the term "independent" by FA
6. Guidelines on applications for approval of Arrangements under Paragraph 11 of the First Schedule of Financial Act.
7. Guidelines for exemption for specialised units serving High Net Worth individuals under FAA.
8. Guidelines for conduct of business for execution-related advice
9. Guidelines on Structure Deposits
10. Guidelines on switching of designated investment products
11. Guidelines on prevention of Money Laundering and Countering the Financing of Terrorism.
    

1. GUIDELINES ON CRITERIA FOR THE GRANT OF A FINANCIAL ADVISER’S LICENCE AND A REPRESENTATIVE’S LICENCE

They are intended to provide guidance on the licensing admission criteria for persons applying for a financial adviser’s and a representative’s licence under the FAA

• Who Needs To Apply For A Financial Adviser’s Licence And A Representative’s Licence?
• What Are The Admission Criteria For The Grant Of A Financial Adviser’s Licence?
• What Are The Admission Criteria For The Grant Of A Representative’s Licence?

Who Needs To Apply For A Financial Adviser’s Licence And A Representative’s Licence?

• Corporations, which carry on a business of providing any financial advisory service unless otherwise exempted.
• Individuals who are employed by or acting for the corporation to provide any financial advisory service are required to hold a representative’s licence under the FAA.

Those who provide any financial advisory service on behalf of a corporation exempt under Section 23(1) of the FAA are exempt from the requirement to hold a representative’s licence.

The financial advisory services specified in the FAA are as follows:

1. advising others concerning any investment product;
2. issuing or promulgating analyses or reports concerning any investment product;
3. marketing of any collective investment scheme; and
4. arranging of any contract of insurance in respect of life policies, other than a contract of reinsurance.

What Are The Admission Criteria For The Grant Of A Financial Adviser’s Licence?

• Minimum Financial Requirements
• Professional Indemnity Insurance
• Management Expertise
• Track Record
• Shareholding
• Supervision by Home Regulatory Authority
• Systems and Processes
• Fit and Proper
• Others
• Opportunity to be Heard – Requirement of Grant or Renewal of Financial Adviser’s Licence.

Minimum Financial Requirements:

1. Paid-up capital of $150,000 for those who do not handle futures contracts or foreign exchange (FX) trading.
2. Paid-up capital of $300,000 for those with futures contracts or FX trading.
   

Professional Indemnity Insurance

• not less than $500,000
• deductible allowed not more than 20% of applicant's NAV
  

Management Expertise

• All Executive Directors (ED), including CEO must of minimum of 5 years of relevant working experience.
• They must of acceptable academic qualifications and/or professional qualifications
• CEO must of at least 3 years of managerial experience in the relevant field.
• CEO, ED or Manager must be a tied-agent
  

Systems and Processes
Applicant should be adequate internal compliance systems and processes to ensure:

• compliance with the law
• good practices and
  
• professional standards.

This would include access to:

• research reports
• financial planning tools and services
• investment capability
  

What Are The Admission Criteria For The Grant Of A Representative’s Licence?
A representative’s licence will only be granted to an individual. The MAS may refuse an application for the grant of a representative’s licence if the applicant does not satisfy its requirements in terms of age, competence & education requirements, fit & proper criteria.

2. GUIDELINES ON FIT AND PROPER CRITERIA [p.105]

The MAS will consider a number of factors when assessing if a financial adviser or representative is fit and proper, key among which are:

1. honesty, integrity and reputation;
2. financial soundness; and
3. competence and capability.

GUIDELINES ON LICENCE APPLICATIONS AND PAYMENT OF FEES [p.109]

Procedures For Application For A New Licence
Procedures For Renewal Of Licences
Procedures For Applying Additional Type(s) Of Financial Advisory Service
Annual Licence Fees

The following forms are set out in the FAR for the application of:

• Form 1: FA's license;
• Form 2: additional types of service FA services under FA's licence
  
• Form 3: renewal of FA's license
• Form 6: representative's license
• Form 7: additional types of FA service for representative
  
• Form 8: application for renewal of representative's license

GUIDELINES ON STANDARDS OF CONDUCT FOR FINANCIAL ADVISERS [p.112]

This guidelines cover:

1. Integrity

2. Objectivity

3. Confidentiality

4. Competence

5. Due Care and Diligence

• Prompt and Best Execution
• Supervision of Representatives
• Cessation of Business

6. Disclosure to Clients

• General Information about the Financial Adviser
• Key Features of Products
• Warnings, Exclusions and Disclaimers
• Clear, Adequate and not False or Misleading
• Facts and Opinion
• Remuneration

7. Know your Client

• General
• Reasonable Basis
• Record Keeping
• Prevention of Money Laundering

8. Conflict of Interest

9. Complaints Handling

10. Compliance with Laws

GUIDELINES ON THE USE OF THE TERM “INDEPENDENT” BY FINANCIAL ADVISERS [p.119]

It gives guidance to financial advisers on the circumstances they may use the term “independent”. It adopt a principles-based approach rather than a detailed prescriptive approach in determining whether a financial adviser can use the term “independent”

Under FAR, no licensed financial adviser or exempt financial adviser shall use the word “independent” , unless the financial adviser:

1. does not receive any commission or other benefit from a product provider which may create product bias and does not pay any commission to or confer other benefit upon its representatives which may create product bias;
2. operates free from any direct or indirect restriction relating to any investment product which is recommended; and
3. operates without any conflict of interest created by any connection to or association with any product provider.

The basic test for independence is whether a reasonable investor, knowing all the relevant facts and circumstances would perceive the financial adviser as having conflicting interests with the investor and for the advice or recommendation not to be objective and impartial. In considering whether a financial adviser is independent, the MAS will consider all relevant facts and circumstances.

The MAS considers that a financial adviser can use the word “independent” if:

• it does not receive any of the following:

1. any commission (apart from commission that is rebated in full to the financial adviser’s clients);
2. any form of remuneration calculated at a rate or on a basis that varies having regard to all or any of the following: the number of transactions so arranged or effected; or the value of each transaction or of all transactions (for life policies, based on amount of premiums paid or payable or the amount of sum insured. For unit trusts, based on subscriptions paid or payable); and
3. any gift or other benefit from product providers which may reasonably be expected to influence the financial adviser.

• it operates free from any direct or indirect restriction relating to the investment products it provides financial advisory services on; and

• it operates without any conflict of interest that may:

1. arise from its association or relationship with product providers; and
2. reasonably be expected to influence it in carrying on the business of providing financial advisory services.

Commission and Other Benefits
The mere fact that a financial adviser receives commissions or other benefits from a product provider does not preclude it from calling itself “independent”. The key issue is whether such commission or other benefit is likely to create a bias in favour of a particular investment product, class of investment product or product provider. The guidelines are:

• Insignificant Commission or Other Benefits. The commissions received should be insignificant relative to its total revenue.
  
• Same Level of Commission. It should received similar level of commission for similar products.
• Commission Sharing Arrangement. Where representatives are entitled to certain percentage of the commission paid by the product providers, the arrangement should be similar for the investment products.
• Significant Commissions or Benefits. MAS would consider commissions to be significant if they contribute more than 20% of the total revenue. Differences in the rate of commissions amounting to more than 20% will generally be regarded to significant.
  

Product Restriction
A financial adviser’s independence may be impaired by any form of product restriction, whether direct or indirect.

• Direct Restriction: An agreement between FA and product provider whereby FA is limited to sell only a range of products selected by the product provider.
• Indirect Restriction: FA is required to meet sales targets agreed with product provider.

Relationship with a Product Provider
A financial adviser may be a product provider itself, such as a bank, fund management company or life insurance company. Under such circumstances, the financial adviser should not promote its services as being “independent”.

A financial adviser may also be related to a product provider. For instance, it may be a subsidiary of a product provider, the advisory arm of a financial services conglomerate that owns a fund management, life insurance or banking outfit, or a sister company of a product provider. In considering whether these ownership links create a product bias, the MAS will take into account:

• the ownership structure of the financial adviser;
• its relationship with the product provider;
• the products on which advice or recommendation is given

GUIDELINES ON APPLICATIONS FOR APPROVAL OF ARRANGEMENT UNDER PARAGRAPH 11 OF THE FIRST SCHEDULE TO THE FINANCIAL ADVISERS ACT [p125]

Advisory process includes "know your client", needs analysis and product recommendation.

Client Servicing process includes sales, marketing, solicitation, and other pre-contract and pre-transaction activities.

Prospecting refers to the process of searching for clients.

GUIDELINES ON EXEMPTION FOR SPECIALISED UNITS SERVING HIGH NET WORTH INDIVIDUALS UNDER SECTION 100(2) OF THE FINANCIAL ADVISERS ACT [p.129]

These Guidelines elaborate on:

• the criteria that the MAS would consider in assessing applications for exemption;
• the types of clients that may be served by the Unit; and
• the general conditions that will be imposed by the MAS.

High net worth individual:

1. has minimum $1 million of assets in the following items:

• bank deposits and structure deposits
• capital market products
• life policies
• other investment products as may be prescribed by MAS;

2. total net personal assets exceed S$2 million in value;
3. annual income not less than S$300,000.
4. who is assessed by the applicant to have the potential to become a person prescribed in (1) within 2 years.

GUIDELINES ON CONDUCT OF BUSINESS FOR EXECUTION RELATED ADVICE [p.131]

Execution activities means any of the following activities:
1. dealing in securities quoted on a securities exchange.
2. trading in futures contracts;
3. foreign exchange trading
4. leverage foreign exchange trading.

GUIDELINES ON STRUCTURED DEPOSITS [p.134]

These Guidelines set out the standards of conduct expected of licensed and exempt financial advisers and their representatives when advising on structured deposits. They provide general guidance and are not intended to replace or override any legislative provisions or written directions issued under the FAA in respect of conduct requirements specifically applicable to licensed or exempt financial advisers and their representatives.

Product Information Disclosure
Although a structured deposit is a relatively safe instrument, returns on such products are variable and often contingent on the performance of complex financial instruments that the average retail investor may not fully understand. These risks should be clearly disclosed to every investor to ensure that he or she is able to make an informed investment decision.

Past And Future Performance

• when using any forecast on the economy, stock markets etc, state that such forecast is not necessary indicative of the future performance of the structure deposit;
• when using past performance of the structure deposit, state that the past performance is not necessarily indicative of future performance.
  

Recommendations On Structured Deposits

Reasonable Basis For Recommendation

• Warnings
• Screening
• Training And Competency

Fit And Proper Criteria

Segregation Of Activities
FA to ensure that the marketing and advisory process for structure deposit is distinct from the process through which a client's funds are accepted.

Requirements Under The Banking Act

A road show location where applications for structure deposits are received would be considered a new place of business, for which the bank would have to seek the prior approval of MAS.

GUIDELINES ON SWITCHING OF DESIGNATED INVESTMENT PRODUCTS [p.140]

• To provide guidance on the controls, processes and procedures that the MAS expects licensed financial advisers and exempt financial advisers to implement in order to monitor switching and ensure that their representatives do not advise clients to switch products in a manner that would be detrimental to the clients.
• For the purposes of these Guidelines, “switching” includes a situation where a client disposes of, or reduces his interest in, all or part of an investment product to acquire, or increase his interest in, all or part of another investment product, and “switch” shall be construed accordingly.

Disclosure Requirements
A financial adviser and its representatives should disclose to a client in writing and draw the attention of the client to any fee or charge the client would have to bear if the client were to switch from an original product to a replacement product.

Monitoring Of Switching Of Designated Investment Products

• Front-End Monitoring Procedures: supervisor needs to review the switching recommendation, and indicated in writing, whether he agrees with the recommendation made and if not, the actions taken to rectify the situation;
  
• Back-End Monitoring Procedures: FA should institute controls to monitor and track the switching of designated investment product.

Supervisor refers to a person who is responsible for the conduct of a representative and equipped to assess whether a switch is appropriate.

Remuneration Structure
Any remuneration structure based solely on the sales volume generated by representatives may encourage product pushing and undesirable switching. A financial adviser should structure the remuneration package of its representatives to uphold their responsibility to provide good quality professional advice.