CMFAS M5 Chapter 8: Money Laundering

Key sections covered:

1. Customer Due Diligence
2. Record Keeping
3. Suspicious Transaction
4. Internal Policies
5. Terrorist Financing

DEFINITIONS

• AML/CFT - means anti-money laundering and countering the financing of terrorism;
• CDD – means customer due diligence;
• FATF - means the Financial Action Task Force; is an inter-governmental body founded in 1989 by the G7. The purpose of FATF is to develop policies to combat money laundering and terrorist financing. [Source: Wikipedia]
  
• STR - means suspicious transaction report;
• STRO - means the Suspicious Transactions Reporting Office, Commercial Affairs Department of the Singapore Police Force
• Beneficial Owner as defined in the MAS Notice on Prevention of Money Laundering and Countering the Financing of Terrorism means the natural person who ultimately owns or controls a customer or the person on whose behalf a transaction is being conducted and includes the person who exercises ultimate effective control over a body corporate or unincorporate.

GUIDELINES TO FINANCIAL ADVISERS
The Notice contains principles that serve as guidelines for the conduct of business:

1. A financial adviser must exercise due diligence when dealing with customers.
2. A financial adviser must conduct its business in conformity with high ethical standards.
3. A financial adviser should cooperate with law enforcement authorities to prevent money laundering and terrorist financing.

1. CUSTOMER DUE DILIGENCE (CDD)

A financial adviser shall perform CDD measures when:

1. the financial adviser establishes business relations with any customer;
2. there is a suspicion of money laundering or terrorist financing;
3. there are doubts about the accuracy or adequacy of any information obtained.

In non-face-to-face situations, the financial adviser shall:

1. put in place policies to address any related risks that may arise;
2. shall carry out CDD measures that are as stringent as face-to-face situations

When a financial adviser acquires the business of another financial institution, the acquiring financial adviser shall perform CDD measures on the customers acquired at the time of acquisition EXCEPT where:

1. there are no concerns about the adequacy of the information;
2. any due diligence conducted has not raised any doubts about the adequacy of the AML/CFT of the acquired institution.

Verification of customers:

1. A financial adviser shall complete verification of the identity of the customer and beneficial owner before business relations are established;
2. A financial adviser may establish business relations before verification if:

• the deferral of verification is essential in order not to interrupt business operations; and
• the risks of money laundering and terrorist financing can be effectively managed.

3. If business relations are established before verification, the financial adviser shall complete such verification as soon as possible.

Other pointers:

1. If CDD Measures are not completed, the financial adviser shall terminate the business relationship and consider if the filing of an STR is warranted.
2. In the case of joint accounts, a financial adviser shall perform CDD measures on all holders as if each were individual customers.
3. A financial adviser shall perform CDD measures on its existing customers after assessing materiality and risk.

A financial adviser may perform Simplified CDD measures:

1. if it is satisfied that the risks of money laundering and terrorist financing are low
2. but not in relation to customers that are related to countries known to have inadequate AML/CFT measures
3. in relation to a customer that is a financial institution supervised by the Authority (other than holders of money changer’s and remittance licences)

A financial adviser shall perform Enhanced CDD measures in addition to the standard CDD measures for “high risk” category of customers such as:

1. Politically Exposed Persons (PEP) – for example, persons with prominent public functions in a foreign country, heads of state and senior military officials.
2. customers assessed to have a higher risk for money laundering and terrorist financing.
3. persons from countries known to have inadequate AML/CFT measures.

Performance of CDD Measures by Intermediaries:

1. A financial adviser may rely on an intermediary to perform CDD measures if:

• the financial adviser is satisfied that the intermediary has adequate measures to comply with AML/CFT requirements;
• the intermediary has not been precluded by the Authority;
• any information needed can be relayed to the financial adviser without delay

2. The financial adviser shall not rely on an intermediary to conduct ongoing monitoring of customers.
3. Where a financial adviser relies on an intermediary to perform CDD measures, it shall document the basis except where the intermediary is a financial institution supervised by the Authority.
4. For the avoidance of doubt, the financial adviser shall remain responsible for AML/CFT obligations to Notice.

2. RECORD KEEPING

(a) A financial adviser shall maintain documentation on its business relations and transactions with customers such that:

1. legal requirements are met;
2. any transaction can be reconstructed to provide evidence for prosecution of criminal activity;
3. the Authorities and auditors of the financial adviser are able to assess transactions and level of compliance; and
4. the financial adviser can satisfy any enquiry from Authorities for information.

(b) A financial adviser’s record retention policies with regard to customer:

1. keep records for at least 5 years following the termination of business relations;
2. keep records for at least 5 years following the completion of transactions.

(c) A financial adviser may retain documents as originals or copies in any form provided they are admissible as evidence in a Singapore court of law.

(d) A financial adviser shall retain records for as long as needed such as in accordance with any request from STRO or other authorities.

3. SUSPICIOUS TRANSACTIONS REPORTING

• A financial adviser shall keep in mind the legal provisions regarding Corruption, Drug Trafficking and Terrorism regarding transactions suspected of being connected with money laundering or terrorist financing, including the following:

1. establish a single reference point within the organisation to whom all staff are instructured to promptly refer all transactions suspected of being connected with money laundering or terrorist financing, for possible referral to STRO via STRs; and
2. keep records of all transactions referred to STRO, together with all internal findings and analysis done in relation to them.
   

• A financial adviser shall submit reports on suspicious transactions to STRO, and extend a copy to the MAS for information
• A financial adviser shall consider if any circumstances are suspicious so as to warrant the filing of an STR

4. INTERNAL POLICIES, COMPLIANCE, AUDIT AND TRAINING

• A financial adviser shall implement internal policies to help prevent money laundering and terrorist financing and communicate these to employees.
• The policies shall include CDD measures, record retention, detection of suspicious transactions.
• A financial adviser shall take into consideration money laundering and terrorist financing threats that may arise from the use of new technologies.

5. TERRORIST FINANCING

Key Concepts of Notice:

• Money laundering is a process intended to mask the benefits derived from criminal conduct so that they appear to have originated from a legitimate source.
• The CDD function may be outsourced to third party but the financial adviser remains fully accountable.

Stages of money laundering:

1. Placement - physical disposal of the benefits of criminal conduct;
2. Layering - separation of the benefits from their source by creating layers of financial transactions designed to disguise the audit trail; and
3. Integration - provision of apparent legitimacy to the benefits of criminal conduct such that laundered funds return to the economy as “legitimate business funds”.

Placement: Disposal of bulk cash

• Smuggling bulk currency
• Mix illicit proceeds with legitimate deposits
• Deposit amounts in small denominations
• Subdivide bank or commercial transactions

Layering: Disguise origin of initial deposit through:

• Multiple transfers
• Multiple transactions

Integration: Use layered funds to purchase clean, legitimate assets

Terrorism seeks to compel governments into a particular course of action or seeks to intimidate the public. Sources of terrorist financing may be legitimate or illegitimate. Terrorist financing involves amounts that are not always large and the associated transactions may not necessarily be complex given that some sources of terrorist funds may be legitimate

Non-Face-to-Face Verification

As a guide, financial advisers should take one or more of the following measures to mitigate the risk associated with not being able to have face-to-face contact when establishing business relations:

1. telephone contact with the customers at a residential or business number than can be verified independently
2. confirmation of customer's address through an exchange of correspondence or other appropriate method
3. subject to the customer's consent, telephone confirmation of the customer's employment status with the customer's employer's personnel department at a listed business number of the employer.
4. confirmation of the customer's salary details by requiring the presentation of recent bank statements;
5. certification of identification documents by lawyers or notary publics presented the customers;
6. requring the customer to make an initial deposit using a cheque drawn on the customer's personal account with a bank in Singapore; and
7. any other reliable verification checks adopted by the financial adviser for non-face-to-face provision of financial advisory services.

Compliance

The responsibilties of ALM/CFT compliance officer should include the following:

1. ensuring speedy and appropriate reaction to ALM/CFT related matter
2. advising and training on development and implementing internal policies, procedures and controls on AML/CFT;
3. carrying out ongoing monitoring and sample reviewing of accounts for compliance.
4. promoting compliance with MAS Notice and Guidelines on AML/CFT.
   

SUMMARY

1. Definition of Money Laundering: A process intended to mask benefits derived from drug trafficking or criminal conduct so that it appears to originate from a legitimate source

2. The 3 stages of Money Laundering in the following order; Placement, Layering and Integration.

3. Verification of personal customers. If applicant and insured are different people, the applicant’s identity needs to be verified.

4. Non face-to-face identification procedures should be at least as stringent as those of face-to-face verification.

5. For Group Polices

• It is the identity of the holder of the master policy that has to be verified
• Clubs, societies and charities - constitution of the applicant to be produced
• Shell Companies, Trust, Nominee and Fiduciary Accounts – must obtain satisfactory evidence of beneficial owners

6. Record Keeping

• Setting Document Retention Policy (retention period: 5 years)
• Methods of Retention

7. Systems of Reporting Suspicious Transactions

• Licensees are required to set up a system for reporting suspicious transactions.
• It is the obligation of the employees to report suspicious transactions.

8. Compliance and Training

• Internal Audit should monitor the effectiveness of the measures taken to combat money laundering.
• New staff must be trained in specific areas of Money Laundering.
• Refresher training should be held at least once every 2 years.

CMFAS M5 Chapter 7: CPF and SRS

CPF MINIMUM SUM SCHEME (MSS)

A scheme which aims to help CPF members set aside sufficient savings to support a modest standard of living during retirement. All CPF members are required to set aside the Minimum Sum when they turn age 55 and pensioners may apply for exemption from the Minimum Sum.

Options To Meet The MSS Requirement

• When a member reaches age 55, the Minimum Sum that he sets aside is kept in a Retirement Account.
• Setting aside this Minimum Sum amount is a requirement and the amount increases by $4,000 on 1 July each year until it reaches $120,000 (in 2003 dollars) in year 2013, and will be adjusted yearly for inflation.
• (New) The Minimum Sum currently stands at $106,000 (for the period 1-7-2008 and 30-6-2009).
  
• (Old) The Minimum Sum currently was at $94,600 (for the period 1-7-2006 to 30-6-2007).

For members who do not have enough money in their Retirement Account, i.e. below the Minimum Sum amount, the Board allows them the following options:

• instead of withdrawing the savings in their OA or SA Accounts which they are entitled to, they may request for them to be transferred to the Retirement Account to make up to the Minimum Sum amount. However, such a transfer is irrevocable;
• they can pledge their properties up to 50% of the Minimum Sum (For 1 July 2006 to 30 June 2007, the maximum limit that one can pledge his property is up to a maximum of $47,300);
• they can use their future CPF contributions (i.e. if they are working after age 55) to make up the shortfall in the Minimum Sum;
• they can top-up their Retirement Account by cash.

Options To Invest The MSS
Members are given the following three options to invest their Minimum Sum when they turn age 55:

1. buy a life annuity from a participating insurance company;
2. keep it with a participating bank; or
3. leave it with the CPF Board.

For all three options, the member will only start to receive a monthly income when he reaches the statutory retirement age (currently at age 62) except for those whose job requires them to retire early, e.g. those in the police force.

Buying a life annuity is the best choice amongst the three options because the monthly payment will continue for as long as the annuitant is alive. As for the other two options, once the Minimum Sum is fully utilised, the monthly payment will be discontinued.

Option For Combined MSS For Married Couples
They can opt to set aside a combined Minimum Sum of 1.5 times the Minimum Sum provided they nominate each other as the beneficiary for the balance of their Minimum Sum. Once the nomination is made, it cannot be revoked. Should one of the account holders die, the deceased’s Minimum Sum would be transferred to the surviving spouse’s Retirement Account to make up the full Minimum Sum. Any excess amount will be paid in a lump sum to the surviving spouse as nominee of the money.

Commencement Date Of Monthly Payout
For members who reach age 55 before 1 January 1999, the Minimum Sum monthly payout will commence from age 60 and for those who reach age 55 on or after 1 January 1999, the Minimum Sum monthly payout will commence from age 62 .

Retirement Age Determined At Age 55
The retirement age is based on the one prevailing at the time a member turns 55 years old. This means to say that whenever the legislated retirement age is changed, it will only affect those who are below 55 years old.

Minimum Sum Plus Scheme (MSPS)
Members who are age 55 and above on or after 1 January 2001 can use the balance in their CPF savings in the Ordinary and Special Accounts as well as Medisave Account in excess of the Medisave Minimum Sum, beyond the Minimum Sum to buy Life Annuities. This is an extension of the Minimum Sum Scheme and is optional. Members who have set aside the full Minimum Sum amount as well as the Medisave Minimum Sum amount may make use of this scheme to buy life annuities when they are eligible for CPF withdrawal.

Topping Up The Minimum Sum
It is intended to help individuals (CPF and non-CPF members) set aside money for their own, their spouses’, parents’ or grandparents’ old age needs. The eligibility criteria for this scheme are as follows:

• both parties (i.e. the applicant and the recipient of the top-up) must be Singaporeans or Singapore Permanent Residents;
• the recipient of the top-up should be at least 55 years old;
• the party whose money will be used for the top-up must have more than 1.5 the prevailing Minimum Sum amount in their Ordinary and Special accounts, including amount withdrawn for investments

Besides the eligibility criteria, the CPF Board also lays down conditions for the use of this scheme as follows:

• the amount of top-up must not exceed the maximum limit allowed under the scheme
• members must follow the guidelines on the use of cash and/or CPF savings for the topping up

Guidelines On Use Of Cash And/Or CPF Savings For Topping Up

Person* Whose Account Will Be Topped Up	Using CPF Savings	Using Cash
Self		X
Spouse	X	X
Parents	X	X
Grandparents		X

* Must be Singaporeans or Permanent Residents of Singapore

From the above table, it can be seen that members may top-up their own as well as their grandparent’s Retirement Accounts using cash only. As for spouse and parents, they may do so using both cash and CPF savings.

Tax Treatment
MSS: All monthly tax payments are tax free.

MSPS: Amount is also tax free. However if the annuity is discontinued, money will be returned to member and no more exemptions for subsequent investments.

Top Up:

• Member who used cash to top up their parents’ or grandparents’ Retirement Account can also claim tax relief up to $7,000 per calendar year for the amount of cash top-up subject to the topping up limits.
• Member will also qualify for the relief if the member has made a top-up in cash for his/her non-working spouse who is 55 years old or older and whose income does not exceed $2,000 in the year preceding the year of top-up.
• Topping-up of accounts through transfer of funds from the member’s own CPF account to that of his/her own or spouse’s, parent(s)’ or grandparent(s)’ retirement account will not qualify for deduction.

Upon Death Of The Retirement Account Holder

• The Minimum Sum (or its balance) will be paid out in a lump sum to his CPF nominees
• If there is no nomination, the money would be channelled to the Public Trustee for distribution according to the law of intestacy
• Upon death of the member, the remaining balance in annuity or bank deposit would be transferred back to CPF to be distributed to the CPF nominees
• In the case of topping-ups by children or grandchildren, the money will be returned proportionately (based on the amount contributed) to the children’s or grandchildren’s respective CPF Accounts
• For the combined Minimum Sum cases where an irrevocable nomination had been made, the deceased’s Minimum Sum would be transferred to the surviving spouse to make up the full Minimum Sum for the surviving spouse

CPF FAQ on Minimum Sum Scheme (MSS):
http://ask-us.cpf.gov.sg/explorefaq.asp?category=23004

Q: Can I claim tax relief if I use cash to top up under the Minimum Sum Topping-Up Scheme?

A: You can enjoy tax relief of up to $7,000 per calendar year, if you use cash to top up for yourself and/or receive cash top-ups from your employer. You can enjoy an additional tax relief of up to $7,000 per calendar year if you use cash to top up for your siblings, spouse, parents or grandparents. To qualify for tax relief for cash top-ups for siblings/spouse, the sibling/spouse must have earned $2,000 or less in the preceding year. For cash top-ups made in the year, you can claim tax relief in the following year’s Tax Assessment.

CPF INVESTMENT SCHEME (CPFIS)

• The CPFIS comprises the CPF Investment Scheme–Ordinary Account (CPFIS-OA) and CPF Investment Scheme-Special Account (CPFIS-SA).
• The purpose of these two schemes is to give CPF members more options to enhance their retirement savings through investments.
• Currently, the CPF Board pays a guaranteed minimum interest of 2.5% per annum and 4% per annum on the Ordinary and Special Accounts respectively.

Eligibility Requirement Criteria. All CPF members who meet the following requirements are allowed to participate under the CPFIS:

• at least 21 years old;
• not undischarged bankrupts; and
• have savings in their Ordinary or Special Accounts

Limitations

• List Of Investment Instruments Allowed Under CPFIS And The Investment Limits
• Buying And Selling Of Investments From Service/Product Providers Under The CPFIS
• Mode Of Premium Payment For Life Insurance Products
• Admission Criteria for Funds Seeking to be Included under CPFIS

Types Of Investment Instruments And Amount Of Savings Allowed Under CPFIS-OA

Instruments	Investment Limits
Fixed Deposits Singapore Government Bonds Statutory Board Bonds Bonds Guaranteed By Singapore Government Annuities Endowment Insurance Policies Investment-linked Insurance Products Unit Trusts Exchange Traded Funds Fund Management Accounts	The full balance in the Ordinary Account
Shares Corporate Bonds Property Funds (real estate investment trusts)	Up to 35% of investible savings
Gold	Up to 10% of investible savings

Types Of Investment Instruments And Amount Of Savings Allowed Under CPFIS-OA

Instruments	Investment Limits
Fixed Deposits Singapore Government Bonds Statutory Board Bonds Bonds Guaranteed By Singapore Government Annuities Endowment Insurance Policies Selected Investment-linked Insurance Products Selected Unit Trusts Selected Exchange Traded Funds	The full balance in the Special Account

Mode Of Premium Payment For Life Insurance Products. With effect from 1 January 2001, the CPF Board has discontinued the practice of allowing members to use their CPF savings to purchase regular premium policies. Policies taken after this date have to be paid by single premium or recurring single premium. The insurance coverage is limited to three times the single premium paid. Members who had purchased regular premium policies before 1 January 2001 are allowed to continue with their policies on a regular premium payment basis.

Admission Criteria for Funds Seeking to be Included under CPFIS
From 1 Feb 2006, new funds must meet the following criteria for inclusion under CPFIS:

• Top 25 percentile in their global peer group
• Expense ratio lower than median of existing CPFIS funds in its risk category
• Preferably have a track record of at least three years
• CPF Board will publish on its website a list of funds which meets these criteria.

PFIS-OA	CPFIS-SA
Need to open an investment account with DBS/OCBC/UOB	No need to open account. Service Provider will liaise with CPF
Sales proceeds will be credited into Investment Account and if inactive for 2 months, money will be transferred to OA	Sales proceeds automatically transferred to SA
Profits cannot be withdrawn	Same
No need to make good loss	Same
Profits and interest earned are not taxable but dividend is taxed at individual tax rate	Same (since shares are not allowed, hence no dividend)
Guaranteed interest at 2.5%	Guaranteed interest at 4%

Release Of Investment Holdings Upon Member Reaching Age 55

• A member’s investments will be released to him when he withdraws his CPF savings at age 55 after setting aside the Required CPF Minimum Sum and Medisave Required Amount.
• If he is unable to set aside the Required CPF Minimum Sum and Medisave Required Amount, his investments will not be released to him.
• Upon liquidation of the investments, the proceeds will be credited to his CPF Investment Account for CPFIS-OA or Special Account for CPFIS-SA.
• Up to half of all his new contributions (including his proceeds from the sale of investments) will be transferred to top-up the shortfall in his Retirement and/or Medisave Accounts when he applies to withdraw his CPF savings.

The Funds Performance Tracking Committee (FPTC) was formed after CPF decided to invite the industry parties to play a more active role in funds performance tracking. It comprises of representatives from:

• Investment Management Association of Singapore (IMAS)
• Life Insurance Association (LIA), and
• Security Investors Association of Singapore (SIAS)

Treatment Of CPFIS Investments Upon Member’s Death

• When members die (irrespective of whether they were undischarged bankrupts or not), CPF investments and any cash held in their CPF investment account under the CPFIS-OA, as well as investments held under CPFIS-SA, form part of the deceased members’ estate and will be distributed according to applicable laws.
• These investments cease to be protected from deceased members’ creditors under the CPF laws and may be used to satisfy creditors’ claims in accordance with the Probate and Administration Act.
• This applies whether the deceased member is an undischarged bankrupt or not.

Supplementary Retirement Scheme (SRS)

The SRS was introduced by the government on 1 April 2001 as a voluntary scheme to encourage working individuals to save for their retirement, over and above their CPF savings, i.e. it complements the CPF scheme.

Eligibility Criteria

• Singaporeans, PRs and foreigners;
• at least 21 years old;
• not undischarged bankrupts; and
• not of unsound mind.

Maximum Limit Imposed On Amount Of Contributions Made Per Year

• All SRS contributions and withdrawals must be made in cash only
• Only single premium and recurring single premium polices are allowed
• Life cover (including total and permanent disability benefits) capped at three times the single premium
• Plans can allow for contribution continuation feature/benefit upon disability
• Other types of life insurance, such as Critical Illness Insurance, Health Insurance and Long-term Care Insurance policies are not allowed under the scheme
• SRS investments cannot be used as a collateral
• SRS balance is not protected from creditors
• Flexibility on frequency of contributions and the selling of investments
• Withholding tax is imposed on all SRS withdrawals by foreigners and PRs
• A participant is not allowed to contribute to SRS after he has started to withdraw from his SRS account at or after retirement, or after he has reach the prevailing statutory retirement age, whichever is earlier

Income Tax Advantages

Summary Of SRS Regulations Pertaining To Withdrawal Of SRS Savings

Situation	Max period* allowed for withdrawal	Amount of withdrawal subject to tax	5% Penalty
On or after the prevailing statutory retirement age at the time of first contribution	10 years**	50%	No
Before the prevailing statutory retirement age at the time of first contribution	N.A.	100%	Yes
Upon Death	N.A.	50%	No
Upon permanent incapacity or on medical grounds 10 years	50%	No
Bankruptcy	N.A.	100%	No
FULL withdrawal by a foreigner who has maintained his SRS account for at least 10 years from date of first contribution	N.A.	50%	No

* Period may be longer if the statutory retirement age has been increased.
** 10-year period does not apply to investments in life annuities. 50% tax concession will apply to annuity streams in perpetuity.

Similarities Between CPFIS And SRS

• both are voluntary schemes;
• both have eligibility criteria;
• investment returns accumulated are tax free except for dividends which are taxed at the individual tax rate (Note: Shares are not one of the CPFIS-SA instruments, hence, no dividend issues where this scheme is concerned);
• life insurance cover (including total and permanent disability benefits) is capped at three times the single premium;
• most financial instruments (except fixed deposits*) do not guarantee investment return;
  
• both allow investment in single premium and recurrent single premium products including annuities.

*Provided the fixed deposits are not withdrawn prior to its maturity date

Differences Between CPFIS And SRS

CPFIS-OA	CPFIS-SA	SRS
Limits are only set on investments in stock and gold. Members can invest up to the balances in their OA in professionally- managed products allowed under the CPFIS-OA scheme	No limits set on the amount of savings in the SA account that can be used for investment	Sets limits on the amount of contributions that may be made to SRS Account per year
Can only use the savings in the OA for investment	Can only use the money in the SA for investment	Can use earned employment income (excluding directors’ fees) as well as income from self-employment for participation in the SRS
Members need to open an investment account with one of the approved agent banks	Members need not open any investment account	Participants need to open an SRS account with one of the SRS operators
Can only maintain one investment account at any one time	Not applicable	Can only maintain one SRS account at any one time
Members may buy and sell their investments through the service/product providers allowed under the scheme	Members may buy and sell their investments through the service/product providers allowed under the scheme	Participants may buy and sell their investments from any financial institution
Members may buy and sell their investments through the service/product providers allowed under the scheme	Members may buy and sell their investments through the service/product providers allowed under the scheme	Participants may buy and sell their investments from any financial institution
Can only purchase investment instruments approved under the scheme	Can only purchase investment instruments approved under the scheme	Can purchase any investment instruments available in the market
Withdrawal of profits is not allowed	Withdrawal of profits is not allowed	Withdrawals allowed at anytime
Not applicable	Not applicable	Penalty charge imposed on early withdrawal
No charges imposed on the operation of the investment account (Transaction fees and service charges may be imposed by agent banks)	Not applicable	May need to pay charges for operating the SRS account
Withdrawals are tax-free, with the exception of dividends received which are taxable at individual tax rates	Withdrawals are tax-free	Withdrawals on or after retirement (prevailing retirement age at first contribution), 50% of the amount withdrawn will be subject to tax
Not applicable	Not applicable	Withdrawal before the statutory retirement age prevailing at first contribution, 100% of the amount withdrawn is subject to tax
Not applicable	Not applicable	Withholding tax imposed on withdrawals by foreigners and Singapore Permanent Residents based on the rate prevailing at the time of withdrawal
Investments cannot be assigned, pledged or used as collateral for any loan purposes	Investments cannot be assigned, pledged or used as collateral for any loan purposes	SRS account balance cannot be used as collateral, security or guarantee for any financial transaction outside the SRS
Investments will form part of the deceased’s estate except for insurance	Investments will form part of the deceased’s estate except for insurance and fixed deposits	Investments will form part of the deceased’s estate

CMFAS M5 Chapter 6: Financial Needs Analysis

Financial Needs Analysis (FNA)
A process designed to assist a prospective client in identifying his financial needs and goals so that he can make better informed decisions when deciding on the investment products to purchase that would meet his needs. Generally, this process involves:

1. fact finding;
2. identifying and quantifying client’s needs;
3. product recommendation and presentation; and
4. conducting a review of the client’s needs periodically

An FNA is not a financial plan although it can result in one. It should be construed as a guide for the representatives to use in deciding how best to attain his client’s financial goals in the areas of:

1. Accumulation. Planning to pay for children’s education and other financial objectives (e.g. saving to buy a bigger house.
2. Retirement Planning to provide the additional income needed to supplement CPF, pension plans and existing savings and investments.
3. Protection Planning to ensure that all financial obligations are met under the following circumstances:

• upon death;
• upon disablement;
• upon the contracting of critical illness;
• upon the loss of or damage to property;
• when a personal liability arises.

BENEFITS OF CONDUCTING FNA

• help to discover your client’s needs and advise the most suitable products to buy and how much to buy;
• spend more time on the client’s situation than you do on your product;
• if you sell the client additional products based on his plan, he will be able to see how the products fit into his overall plan;
• the client will be more committed to keeping to his plan as he understands the rationale for his purchases;
• enables you to establish a long-term relationship with your client.

Main Sources Of Money To Meet The Client’s Needs

• Central Provident Fund (CPF)
• Supplementary Retirement Scheme (SRS)
• other savings and investments, e.g. property
• client’s existing Life Insurance policy and Disability Income Insurance policy
• employee benefits provided by client’s employer

1. FACT FINDING

• Before you can perform a proper needs analysis, you must first of all know your client. To do this, you need to gather information from your client which include his:
• Personal Details;
• Employment Details;
• Number of Dependants (this piece of information is required for determining insurance needs);
• Financial Information;
• Monthly Income and Expenditure: committed (or Fixed) Expenditure and manageable (or Variable) Expenditure
• Assets and Liabilities.
• Existing Insurance Policies;
• Objectives:You need to find out your client’s objectives in order to recommend suitable products to meet their needs
• Preferences: Attitudes towards investment risk (risk averter, cautious, balanced, risk seeker;Areas of concern (keep pace with inflation; investment is easy to manage; capital growth; easy access to cash, investment income each year)
• Retirement Needs;
• Savings Goals.

2. IDENTIFYING AND QUANTIFYING CLIENT’S NEEDS

• analyse the data so as to identify and quantify the client’s needs
• pick up weaknesses or potential problems that can negatively affect the client’s ability to achieve his objectives
• do a detailed analysis of your client’s financial needs and tackle each of the needs that you have uncovered especially those that need immediate attention
• help your client to prioritise his needs. This is because the client’s resources are usually limited
• quantify your client’s needs

There are 2 methods of quantifying retirement needs, namely [p.177]

• the replacement ratio method, which computes the amount of funds required based on a certain percentage of the client's last drawn pay, and
• the expense method, which computes the amount of funds required based on the current level of the household expenses projected into the future at the expected inflation rate

For protection needs, you need to determine:

• the sum of the client's total liabilities
• his immediate expenses at the time of death, and
• the amount needed to provide for the dependents for as long as required

There are 2 common methods used for quantifying the amount needed to provide for dependants, namely

• the multiple approach, which computes the amount of funds required to meet a client's needs by multiplying the present value of the stream of the client's current yearly gross income (assumed to be constant until his retirement) by a constant future investment rate
• the needs approach, which calculates the amount needed by taking into account the specific position of the client. It involves estimating the income needed by the dependants to maintain their standard of living and the available funds that the client has to meet his needs. The difference between the two is the shortfall that the client needs to provide for his dependants.

TYPES OF INVESTMENT PRODUCTS TO MEET THE CLIENT’S OBJECTIVES

• Product Recommendations
• Product Suitability
• Client’s Objectives
• Affordability
• Taxation
• Client’s Risk Tolerance
• Prioritisation
• Effect of Inflation and Time Value of Money
• Investment Instruments for Meeting Accumulation Needs
• Investment Products to Meet Retirement Needs
• Investment Products to Meet Protection Needs

Two basic principle under product recommendation [p.178]

• client need - you should only recommend products if your client needs them
• product suitability - you should only recommend products which are the most suitable for your client given his circumstances

Investment Instruments for Meeting Accumulation Needs and the Risk of Losing Capital

• Money Market Securities (e.g. Treasury bills, banker’s acceptance and certificate of deposit, commercial paper, repurchase agreement, bank deposits): Low risk
  
• Fixed Income Securities, i.e. bonds: Moderate
• Equity Investments, i.e. ordinary and preferred shares: High
• Derivative Instruments, e.g. options and futures: High
• Property: High
• Unit Trusts: Moderate to High
• Whole Life Insurance: Low
• Endowment: Low
• Investment-Linked Products: Low to High depending on the underlying assets (i.e. whether the fund consists of bonds or equities, etc.)
• Annuities: Low

Types Of Life And Health Insurance Products For Meeting Protection Needs

• Term: Death as well as total and permanent disability
• Whole Life: Death as well as total and permanent disability
• Endowment Insurance: Death as well as total and permanent disability
• Investment-linked Life Insurance: Death as well as total and permanent disability
• Riders: To provide financial protection in addition to that of the basic policy at a low cost
• Critical Illness Insurance: To provide for a lump sum payment upon contracting one of the covered critical illnesses
• Long Term Care Insurance: To provide a regular income when one is unable to perform a specific number of activities of daily living, e.g. bathing
• Medical Expense Insurance and Managed Health Care Insurance" To provide protection against ill health
• Disability Income Insurance: To provide a monthly income when a person is disabled

General Insurance Products For Meeting Protection Needs

• Fire Insurance: For protection of the house against destruction by fire
• Householder/Houseowner Insurance: To protect the building or contents in the building
• Personal Accident Insurance: For protection against accidental death and disablement
• Personal Liability Insurance: To protect one against third party liability

3. PRESENTING YOUR RECOMMENDATIONS

• ensure that your client understands the products recommended and the reasons for your recommendations
• be able to explain the features and benefits of the recommended products and how these fit into his situation

4. CLIENT REVIEW

• The process of identifying and satisfying client needs does not stop with the implementation of the initial recommendations.
• Client’s personal circumstances are likely to change (e.g. the birth of a child) and new needs may surface.
• Regular review will ensure that your client continues to receive quality service from you and reinforces your relationship with him.
• External developments, such as changes to CPF rules may also indicate the need for a client review.
• The needs of your clients should be a long-term concern and your relationship with your clients, a continuing one.

CMFAS M5 Chapter 5: Development and Pricing of Insurance Products

MAS 302 – PRODUCT DEVELOPMENT AND PRICING
Comprises both mandatory requirements and guidelines. This Notice applies to any direct insurer registered to carry on life business.

Part 1 - Mandatory Requirements

• Prudent Management Oversight
• Approval For New Products
• Contravention Of Requirements Imposed

Approval For New Products
An insurer shall obtain written approval from the MAS before offering any product with any feature that does not appear in any product in the insurer’s then-existing business portfolio.
Any request for such approval shall be made in writing and submitted to the MAS no later than 1 month before the proposed official launch date of the product.

The paragraph above shall not apply in respect of:

• a short-term accident and health policy; or
• a term policy having a duration of 5 years or less.

Information And Product Documents To Be Submitted For Approval Of New Insurance Products

Part 2 – Guidelines
The standards set out in this section are not mandatory in that failure by an insurer to comply with any of the standards shall not of itself render the insurer to be in breach of this Notice.
MAS may take into account a failure to comply with these standards in considering whether to:

• approve a new product;
• revoke the approval for a product; or
• issue directions for the withdrawal of a product.

Notification For Products Launched
An insurer should notify the MAS in writing of any product launched by the insurer that does not require the approval of the MAS. Such notice should be given to the MAS within 7 working days after the official launch date of the product.

MAS 307 – NOTICE ON INVESTMENT-LINKED LIFE INSURANCE POLICIES

The MAS 307 was issued to ensure that insurers adhere to minimum standards of investment and disclosure requirements for ILPs. Under the MAS 307 Notice, an insurer shall seek written approval from the MAS for:

• the establishment of any ILP sub-fund; or
• any significant change to any ILP sub-fund, such as any change in the manager or investment objective of the ILP sub-fund.

Investment-linked sub-fund refers to each separate sub-fund within an ILP to which a policyholder can choose to allocate his or her premiums under the ILP.

Disclosure Of Information
It is important that all insurers issuing investment-linked policies should ensure that adequate and accurate information about the policies is provided to policyholders

1. Information For Applicants -Sales Materials/Policy Forms
2. Information For Policyholders

• Statement To Policyholders
• Reports To Policyholders

Sales Materials/Policy Forms

Sales materials and brochures shall not be written in language which may confuse or mislead an applicant due to his lack of experience. The shall include {p.155]:

1. a general description of the principal features of the policy;
2. a list of ILP sub-funds
3. investment policy of each sub-fund including:

• a description of the investment objectives intended
• principal types of investments,
• the markets and sectors intend;

4. the risks to be borne by the policyholder;
5. charges to be borne by the policyholders:

• initial charge
• management fees
• mortality cost
• any other charges
  

6. basis for computing all policy benefits
7. basis and frequency for valuing the assets
8. illustrations of benefits payable
9. investment performance of each sub-fund over the last 1-year, 3-year, 5-year, 10 years and since inception.

Statement To Policyholders. All policyholders shall be provided with a statement on the performance and value of their policies at least on an annual basis.

Report To Policyholders [p.157]

All policyholders shall also be entitled to receive from the insurer semi-annual and annual audited reports on the performance of each investment-linked sub-fund. The report shall include:

1.a summary of the financial statement of the sub-fund
2. the net investment performance
3. a list of investments held at market value and as percentage of net asset value
4. the top 10 holdings at market value and as a percentage of net asset value.
5. any charges levied against the sub-fund
6. a statement of any change in

• investment objective and the orientation
• any restriction or material quantitative or qualitative investment requirement.
  

Minimum Death Benefits. There is no prescribed minimum death benefit for an Investment-linked Life Insurance policy.

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.

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

CMFAS M5 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

4 key principles of FAA and FAR [p.13]

1. Customers’ Interest:
   
2. Consistency: financial advisers from different distribution channels would be subject to the same rules and standards.
   
3. Accountability
4. 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.

Market Value, in relation to assets refers to securities listed on a securities exchange, means:

• the last transacted price of the securities on the preceding business day
• if there was no trading on the immediately preceding business day, the lower of the transacted price and last bid price of the securities; or
• if there was no trading in the immediately preceding 30 days, the estimated value of those securities as approved by the MAS
  

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 2 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.

Officer in relation to a body corporate means [p.37]:

• director
• member of the committee of management
• chief executive
• manager
• secretary or other similar officer of the body, or
  
• a person purporting to act in any such capacity

Officer in relation to an unincorporated association means [p37]:

• president
• secretary
• members of the committee of the association
• persons holding positions analogous to the above