28 March 2018
On 7 March 2018, the Monetary Authority of Singapore (“MAS”) issued a consultation paper on proposed measures to address the risks posed by the use of sign-on incentives in the recruitment of financial advisory (“FA”) representatives. The consultation closes on 9 April 2018.
MAS has observed that, when recruiting experienced 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 notwithstanding 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 proposals in the consultation paper seek to address these risks.
- Set reasonable sales targets with a cap for the first year;
- Spread sign-on incentives pegged to sales targets over at least six years with a cap on amount payable in the first year;
- Peg sign-on incentives to persistency of policies serviced by FA representative at previous firm; and
- Put in place enhanced transaction monitoring for sales conducted by migrated representatives for two years.
The first and second proposals will apply to any FA representative who receives sign-on incentives that are pegged to sales targets.
The third and fourth proposals are additional safeguards which FA firms will be required to put in place when they engage in a mass recruitment exercise, i.e. where 30 or more FA representatives are recruited from the same FA firm within a 60-day period (to be tracked on a 60-day rolling basis).
The four proposals will not apply to FA representatives serving non-retail customers as such customers are generally better informed or better able to access resources to protect their own interests.
Set reasonable sales targets with a cap for the first year
MAS proposes that the first year sales targets that are pegged to sign-on incentives should not be set at a level higher than the average of the FA representative’s annual achieved sales in the preceding three years, considering that the migrated FA representative would need to familiarise himself with the operational processes and products offered by the new FA firm as well as time to source for new clients.
Any increase in subsequent years’ sales targets (after the first year) should be set at a reasonable level having regard to factors such as the FA representative’s past sales performance, compliance track record, years of financial advisory experience, past persistency ratios and sales targets of the representative’s peers. MAS will assess on a supervisory basis whether the sales targets set for subsequent years are reasonable.
Spread sign-on incentives pegged to sales targets over at least six years with a cap on amount payable in the first year
To incentivise FA representatives to provide quality after-sales services, MAS proposes to require the sign-on incentives pegged to sales targets to be paid out over a minimum period of six years, consistent with MAS’ current rule on spreading of commissions. Further, it is proposed to cap the sign-on incentives payable in the first year to 50% of an FA representative’s average annual remuneration received for the sale of products that the representative was authorised to sell at his previous FA firm(s) in the last three years, with the remaining sign-on incentives to be paid evenly over the next five years or more.
Peg sign-on incentives to persistency of policies serviced by FA representative at previous firm
MAS proposes that for firms which conduct mass recruitment exercises, the amount of sign-on incentives that an FA representative is allowed to retain be pegged to the persistency of the regular premium life policies and accident and health (“A&H”) policies serviced by the FA representative at his previous FA firm. This persistency ratio, which is the percentage of insurance policies that remain in force without lapsing or being replaced by another policy, should be calculated two years after the representative had left his previous FA firm. The previous FA firm should share the persistency ratio of the relevant policies with the hiring FA firm.
The FA firm conducting the mass recruitment exercise will also be required to engage an independent external party at the end of the two-year period to verify and report to MAS that the FA firm has complied with this measure.
Put in place enhanced transaction monitoring for sales conducted by migrated representatives for two years
The MAS proposes enhanced transaction monitoring for at least two years after a mass recruitment exercise. For FA representatives that receive sign-on incentives pegged to sales target, MAS proposes that an independent external party conduct pre-transaction surveys for all sales of investment products and A&H policies. At least 50% of the pre-transaction surveys must be conducted via call-backs. The FA firm will be required to engage MAS on the suitability of the proposed entity and the work scope to be carried out. To supplement the call-backs, the FA firm’s independent sales audit unit will be required to conduct post-transaction documentation checks on the sales of the FA representatives, based on a sampling size of 10%.