29 May 2019
On 6 May 2019, the Monetary Authority of Singapore (“MAS”) issued its response to the feedback received from the Consultation Paper on “Measures to address the risks posed by the use of sign-on incentives in the recruitment of financial advisory representatives” (“Consultation Paper”). The consultation period was from 7 March 2018 to 9 April 2018.
MAS has observed that, when recruiting experienced financial advisory (“FA”) representatives from other firms, FA firms usually offer hefty sign-on incentives which are pegged to sales targets. As the FA representatives risk losing or having the sign-on incentives clawed back if the sales targets are not met, the practice of offering large sign-on incentives increases the risks of pressure selling and improper switching of insurance policies. This is so despite existing MAS requirements for FA firms to put in place safeguards to guard against improper switching of insurance policies and to perform sample post sales transaction checks. Further, the current safeguards may not be adequate when there is a mass movement of FA representatives from one firm to another.
The Consultation Paper sought feedback on proposals to address these risks and promote responsible recruitment practices in the FA industry. Taking into account the feedback that MAS received pursuant to the Consultation Paper, MAS will be implementing the key proposals set out below.
Setting reasonable sales targets with a cap for the first year
MAS will require the first year sales targets that are pegged to sign-on incentives to be capped. To ensure consistency in the industry, MAS will require FA firms to set the first year sales targets based on First Year Commission (“FYC”) or its equivalent. FA firms are expected to demonstrate that any equivalent measure used corresponds to an amount that is not higher than the average of the FA representative’s past three years of annual achieved sales.
MAS will proceed with the qualitative factors cited in the Consultation Paper for setting sales targets for the second year onwards. FA firms are required to calibrate the sales targets and explain the basis for any increase in sales targets in the subsequent years, having regard to the qualitative factors. These factors should be considered in conjunction with other considerations that FA firms may have in setting sales targets. MAS will collect information from the industry on the sales targets set, including those from the second year onwards, and assess whether the basis for any increase in sales targets is reasonable.
Spreading sign-on incentives pegged to sales targets over minimum period of six years with a cap on amount payable in the first year
All sign-on incentives tied to sales targets are to be paid out over a minimum period of six years. MAS will proceed with the proposal to cap the payment of sign-on incentives in the first year and to spread the remaining payment evenly over the next five or more years to encourage FA representatives to continue providing after-sales service to their clients for a longer period.
Imposing additional measures on FA firms which conduct mass recruitment exercises
To ensure that FA firms are able to manage the heightened market conduct risks associated with large scale movements of representatives and the use of sign-on incentives in the recruitment of these representatives, MAS will require FA firms to put in place the additional safeguards set out below when they recruit 30 or more representatives from the same FA firm within a 60-day period (to be tracked on a 60-day rolling basis).
Pegging sign-on incentives to persistency of policies serviced by FA representative at previous firm
MAS will require the previous FA firm of migrated representatives to track the persistency of the whole block of regular premium life policies and Accident & Health (“A&H”) policies (collectively, “ring-fenced policies”) serviced by their former FA representatives for the next two years following the migration.
The computation of the persistency ratio of ring-fenced policies is based on the total number of regular premium life and A&H policies still in force at the end of the two-year period expressed as a percentage of the total number of such policies serviced by the FA representative at the point of his departure from the FA firm. Single premium policies will be excluded from the calculation of the persistency ratio.
Putting in place enhanced transaction monitoring for sales conducted by migrated representatives for two years
MAS will proceed with the proposal to require pre-transaction surveys to be conducted for all sales of investment products and A&H policies, with at least 50% of the pre-transaction surveys to be conducted via call-backs. MAS will require the pre-transaction surveys to be conducted by an independent external party to mitigate the heightened risks associated with the use of sign-on incentives in the recruitment of representatives. These measures are to be implemented for at least two years after any mass recruitment exercise.
Recruitment schemes subject to the above measures
MAS is of the view that recruitment schemes with the following features which are offered to experienced representatives should be subject to the measures discussed above as they pose similar risks as sign-on incentives:
- representatives are paid an additional monthly incentive (on top of the usual remuneration for the sale of insurance policies) upon meeting monthly sales target requirements;
- if the monthly sales target is not met, representatives will not be paid the additional monthly incentive;
- a tie-down period is imposed and there is a clawback of incentives received if the representative resigns during the tie-down period.
MAS is of the view that similar to sign-on incentives, these recruitment schemes are pegged to sales targets with clawback provisions which create sales pressure on representatives. However, MAS will grant exemptions to the following groups of individuals who receive such recruitment schemes:
- individuals who have less than two years of cumulative FA experience; and
- former FA representatives that have left the FA sector for two or more years and subsequently re-join a FA firm.
The above proposals will be set out in a new set of Notice and Guidelines on the use of incentives in the recruitment of representatives. The MAS Response stated that Life Insurance Association Singapore has undertaken to adopt and apply these measures on its members and related FA firms via its members’ undertaking.
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