Singapore is pushing to change how financial advisors are paid to improve service quality - part of a larger trend in wealth management.

Singapore’s government has set out plans to reform the city-state’s financial advisory industry to raise levels of professionalism and independence, part of a trend of jurisdictions seeking to remove some of the biases they see from commission-driven sales.

This week, Lawrence Wong, who is minister of culture, community and youth as well as well as second minister for communications and information, moved two bills for first reading in Singapore’s parliament. The bills are The Financial Advisers (Amendment) Bill 2015 – or FAIR - and Insurance (Amendment) Bill 2015 (“I(A) Bill”), according to a statement on the Monetary Policy of Singapore website.

The legislation aims to improve how financial advisors are remunerated to promote fair dealing; raise professionalism of financial advisors and make provision of such advice a dedicated profession; enhance standards of registered insurance brokers which carry on a business of providing financial advice; make possible comparison of insurance products, and provide cheaper access to simple life insurance.

While there are differences, the moves by Singapore’s authorities have echoes of the UK Retail Distribution Review programme of reforms that have stamped out use of trail commissions and raised standards of financial advisor training. The RDR has been controversial: while it arguably makes financial advice less biased because of commissions, it has also raised regulatory costs and led to a much-talked about “advice gap” as firms have hiked minimums.

The timeline

The process in Singapore started when, in March 2012, the Monetary Authority of Singapore launched a review of the financial advisory sector. A panel came up with 28 proposals in January, 2013. The bills this week implement those recommendations.

Financial advice representatives and their supervisors are currently largely paid according to sales performance.

“Such remuneration structures create risks of product pushing and aggressive selling which could compromise the interests of consumers,” the Monetary Authority of Singapore said in a statement.

“To motivate FA representatives to provide quality advice and suitable recommendations to their clients, MAS will require financial advisors to put in place a balanced scorecard framework for remunerating their FA representatives and supervisors,” it said. It continued: “The BSC framework will prescribe minimum standards on non-sales key performance indicators that measure the quality of the advisory and sales process and suitability of recommendations made to clients. FA representatives and supervisors who are assessed to have poor grades under the BSC framework will not be entitled to a specified percentage of their remuneration over a specified period.”

The statement said MAS will also take the power to force financial advisors to set up an independent sales audit unit and to prescribe the processes, criteria and methods which the ISA unit must apply when conducting audits on the quality of the FA services provided by their FA representatives.

In terms of life insurance, the MAS said commissions paid to advisors and representatives for sale of such policies are often front-loaded and the bulk of commissions are paid in the first year of a policy’s life, which gives little incentive to offer high-quality after-sales service.

“To address these concerns, MAS will require the commissions payable within the first year to be capped at a specified percentage.  The total commissions for the sale of regular premium life insurance policies must also be spread over a minimum specified period,” the MAS said.

“It is also common practice for product providers to offer additional incentives which are over and above the commissions typically received by FA firms and FA representatives for the sale of certain investment products.  Such incentives create a misalignment of interests for financial advisers and their FA representatives with their clients. They also create a bias towards the sale of products that pay out a higher remuneration, notwithstanding that another product may be more suitable to meet the needs of a client.  To mitigate such conflicts of interest, MAS will be empowered to make regulations prohibiting the payment and receipt of these product-related incentives,” it said.