Dec 11, 2015

    Audits for financial advisers soon

    CUSTOMERS can expect higher standards of advisory and sales services from staff such as tied agents and financial advisory representatives when the balanced scorecard (BSC) framework kicks off on Jan 1.

    The scorecard involves assessing a representative's performance every quarter and assigning a grade from A to E, which in turn can affect remuneration.

    This audit process will factor in non-sales factors such as whether the representative has taken steps to understand the customer's needs, recommend suitable products and make adequate disclosures.

    Over the past year, financial institutions, insurers and financial advisory firms have been conducting trial runs to ensure that their sales forces and independent sales audit units understand the processes and straighten out the kinks before Jan 1.

    The BSC framework, which is part of the Financial Advisory Industry Review (Fair) recommendations, aims to raise the quality of advice and to mitigate risks of product pushing and pressure sales tactics.

    Each quarter, checks will be carried out on sampled transactions of each representative. At least one new sales case closed by the representative will be selected for an audit that will subject the sales and fact-find documents to close scrutiny.

    The audit team will assess if there is a reasonable basis for recommending the product and if it meets the financial objectives, investment horizon, risk profile and financial situation of the customer. That will help the team arrive at a grade from A to E for the representative.

    If infractions are uncovered during the audit process, more sampled transactions by the same representative in the same quarter could be audited to determine his score.

    And if the overall score is between B to E, the representative's commissions from the quarter's new business will be clawed back on a graduated scale, capped at 60 to 80 per cent.

    Representatives with an E grade have to be accompanied by a superior - who should be graded A - when he or she advises customers for the next three months. In addition, the representative should not be allowed to perform any supervisory role for at least a year.

    The kind of infractions that are likely to result in an E grade include misrepresentation, lack of reasonable basis for product recommendation, omission of material information and fraud, which affect customers' interests adversely.

    Life Insurance Association (LIA) president Khoo Kah Siang told The Straits Times that most insurers have gone through at least one quarter of testing. However, the LIA wants to continue to work with the regulator to understand the framework's potential grey areas and iron out potential administrative errors.

    It is not surprising that some insurers have imposed strict guidelines for their tied agents on how and what can be written in the sales and advisory documents.

    This has a been a drain on resources for licensed financial advisory firms, said Vincent Ee, president of the Association of Financial Advisers (Singapore).

    He told The Straits Times that the BSC is "resource intensive" both at the setting up phase and in its actual operation.

    "Nevertheless, the industry understands the objectives and benefits of the BSC framework," said Mr Ee.

    Many licensed financial advisory firms, such as Avallis Financial (previously known as First Principal Financial), do not have sufficient internal resources so they will engage the services of law firms to assist in the sales auditing process.

    Many banks have already implemented the BSC framework.