THE FINANCIAL ADVISERS ACT - PhillipCapital

THE FINANCIAL ADVISERS ACT

4 February 2010Prepared for Phillip Securities Pte. Ltd.

Presentation by: Regina Liew / Larry LimDesignation: PartnersContact details: 6232 0456 / 6232 0482

2© Rajah & Tann LLP

The Financial Advisers Act

Contents

• Legislative Overview

• Licensing Regime

• Conduct of Business Requirements

Legislative Overview




• Act of Parliament

• Subsidiary Legislation

• MAS Notices

• MAS Guidelines

• MAS Practice Notes




• Act of Parliament: Financial Advisers Act

• Key Subsidiary Legislation: Financial Advisers

Regulations




• MAS Notices

– Issued under s58, FAA

– Consequences of Non-compliance – s58(5), FAA

• MAS Guidelines & Practice Notes

– Issued under s64, FAA

– Consequences of Non-compliance – s64(4), FAA

Licensing Regime



Licensing Regime

• Licensable Activities under the FAA

– Financial Advisory Services

• What are financial advisory services?

• What are not financial advisory services?



Licensing Regime

What are Financial Advisory Services?

– Limb (1): Advising others concerning any investment

product• Includes direct advice• Includes advice through publication/writing (printed or

electronic)• Excludes advising on corporate finance (SFA)• Excludes advice through research analyses and reports



Licensing Regime

• What are Investment Products?- Capital markets products (SFA)

- E.g. securities, futures contracts, contracts for FX trading, contracts for leveraged FX trading etc.

- Life insurance policies (excl. reinsurance contracts)

- Structured Deposits

- Dual Currency Investments



Licensing Regime

• What are Financial Advisory Services?

– Limb (2): Advising others through research analyses

and reports on investment products

– Limb (3): Marketing CIS

– Limb (4): Arranging life insurance contracts



Licensing Regime

• What are not Financial Advisory Services?– Regulated Activities under the SFA

• Dealing in securities–What about “marketing of CIS”?

• Trading in futures contracts• Leveraged FX trading• Advising on corporate finance• Fund Management• Real estate investment trust management• Securities financing• Providing custodial services for securities



Licensing Regime• Advice, Execution-related Advice & Execution-only

– What is the difference?

• “Execution-related Advice” means “advice provided by persons who are exempt from holding a financial adviser’s licence under section 23(1)(a), (b), (d), or (e) of the Act and their representatives which is solely incidental to the execution activities of such person AND where no discrete fee is charged for the advice rendered.”

– Guidelines on Conduct of Business for Execution-related Advice

– Recent developments



Licensing Regime

• Licensing Requirements

– Financial Adviser’s Licence

– Representative’s Licence

– Recent developments



Licensing Regime

• Licensing Exemptions

– Excluded FAs

– Exempt FAs

– Representatives of exempt FAs

– Non-applicability of certain FAA/FAR requirements

•Section 23, FAA



Licensing Regime

• Key Entry Requirements– Fit & Proper Criteria

• MAS Guidelines on Fit and Proper Criteria

– also applies exempt FAs and their representatives

– Minimum Entry requirements• Minimum age

• Minimum academic qualification

• CMFAS requirements

– Continuing Education Requirements

Conduct of Business



Conduct of Business

1. Product information disclosure

2. Deceptive, false or misleading statements

3. Advice/Recommendations

4. Selling, Misselling and Fair Dealing

5. Warnings and Disclaimers

6. Furnishing information to MAS

7. Disclosure of interests in securities

8. Handling of client money and property

9. Use of the term “independent”

10. Execution-related Advice

11. Misconduct of Representatives

12. Use of Introducers under the FAA



Conduct of Business

1. Product information disclosure

– Disclose material information on CIS and life policies – s25, FAA

– MAS Notice on Information to Clients and Product Information

Disclosure

– Exemptions:• Advising institutional investors, related corporations and connected persons

• Recommendations to accredited investors and expert investors

• Advising Overseas Investors



Conduct of Business

2. Deceptive, false or misleading statements

• Making of false or misleading statements with intent to deceive – a criminal offence – s26, FAA

• Exemptions for s26 available BUT criminal and civil liability can still arise under other Singapore laws

• MAS looking to expand scope of provisions in FAA dealing with false or misleading statements - Standard: “ought to have known”



Conduct of Business

3. Advice/Recommendations– Reasonable basis for recommendations – s27, FAA– MAS Notice on Recommendations on Investment Products– Minimum information needed to form reasonable basis– KYC, Fact-find, Needs analysis– Exemptions:

• Advising institutional investors, related corporations and connected persons

• Recommendations to accredited investors and expert investors• Recommending Government securities• Advising Overseas Investors• Generally circulated advice • Research analyses on FX trading



Conduct of Business

4. Selling, Misselling and Fair Dealing– General duty to act in the best interest of the client– Avoid conflicts of interest– Integrity– Objectivity– Suitability – Competence– Compliance with MAS guidelines– Due Care & Diligence– Fair Dealing– Disclosure of remuneration structures to customers

• MAS Guidelines on Standards of Conduct for FAs• MAS Guidelines on Fair Dealing• MAS Information Paper on Good Practices for Licensed and Exempt FAs



Conduct of Business

5. Warnings and Disclaimers• Effectiveness of Warnings and Disclaimers

– May be ineffective if not brought to client’s notice

– May be ineffective if client is not capable of understanding

warning/disclaimer or the risks

– May be overridden by FAs/representatives’ inconsistent conduct

• Prescribed Disclaimers

• No requirement for ‘health warnings’, but MAS to develop guidelines on

clearer labelling of investment products



Conduct of Business

6. Furnishing information to MAS

– Obligation to provide information directed by MAS – s29, FAA

– Applies to licensed and exempt FAs and their representatives

– Criminal offence – s29(3), FAA



Conduct of Business

7. Disclosure of interests in securities• Concise statement of interest required for all circulars and written

communications containing recommendations – s36(1), FAA

– Criminal offence – s36(8), FAA



Conduct of Business

8. Use of the term “independent”• General prohibition on use of the term – r21, FAR

• Exception: (conjunctive)

– FA receives no commission or benefit from product provider

– FA operates free of restriction on products recommended

– no conflict of interest because of connection with product provider

• MAS Guidelines on the use of the term “Independent” by FAs

• Criminal offence



Conduct of Business

9. Execution-only TRs• Execution-only TRs – execute only

• Provision of information ≠ advice/recommendation

• Don’t give any advice or recommendation about the investment product

• Recent developments



Conduct of Business

What constitutes (execution related) advice?

Facts v Advice

Opinions v Advice

General Advice v Specific Advice/Recommendation



Conduct of BusinessMAS PROPOSALS: Review of Regime Governing Sale and Marketing of Unlisted Investment Products AND Regulatory Regime for Listed and Unlisted Investment Products (NEW!)

• Listed products v unlisted products (debentures, CIS).

• NEW! - Excluded Investment Products v Non-Excluded Investment

Products (“NEIP”) eg. CIS, asset-backed securities and structured notes

• For listed NEIP, before approving accounts to trade them, conduct

Customer Account Review to ascertain understanding of risks of

derivatives

• For unlisted NEIP, before selling, conduct Customer Knowledge Assessment

• Applies only to retail customers



Conduct of Business

- Listed NEIPs, if fail CAR, must explain risks and features of derivatives, and whether to approve accounts and with restrictions

- Unlisted NEIPs, if fail CKA, explain product and advise whether it’s suitable for customer. Customer entitled to advice in any event.

- Before selling NEIP, training of representatives on features and risk-reward characteristics of NEIP

- New CMFAS exam module- Products Highlight Sheet for offers of NEIPs – Simplified disclosure

document for retail customers

*Feedback on the latest Consultation Paper to MAS by 12 March 2010



Conduct of BusinessMAS will proceed on following proposals for unlisted investment

products:

- Enhance quality of customer information: Breach if policies and procedures discourage customer from going through fact-find. Failure affects fit and proper status

- Enhance documentation of basis for recommendation

- Overall aim is to promote effective disclosure and strengthen fair dealing.



Conduct of BusinessGuidelines on Fair Dealing – Board and Senior Management Responsibilities For Delivering Fair Dealing Outcomes To Customers

1. Customers have confidence that they deal with FI where fair dealing is

central to corporate culture.

2. FI offer products and services that are suitable for target customer

segments.

3. FI have competent representatives who provide quality advice and

appropriate recommendations.

4. Customers receive clear, relevant and timely information to make

informed financial decisions.

5. FI handle customer complaints independently, effectively and promptly



Conduct of Business

11. Misconduct of Representatives• Notice on Reporting of Misconduct of Representatives by FAs

• Quarterly Reports & Special Reports

• Records of Internal investigations

• Recent developments: Amendment to FAA to allow publication by MAS

of information on disciplinary proceedings against representatives

• NEW! Widening of civil liability regime under FAA

- Obligation to furnish product information to investors

- False or misleading statements (will also expand for wider scope of issues)



Conduct of Business

12. Use of Introducers under the FAA• Common confusion

– Introduction for provision of FA services vs introduction for provision

of SFA-regulated services

• Licensing exemption under Reg 31, FAR

– Not applicable to SFA-related services

• Recent updates to MAS FAQs on introducers

– Use of introducers by execution-only CMS licensees



Questions



THANK YOU

For more information, please contact:

Regina Liew or Larry LimTel: 6232 0456 or 0482Email: [email protected] or

[email protected]: http://www.rajahtann.com

THE FINANCIAL ADVISERS ACT - PhillipCapital

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