Towards Better Transparency In Financial Services

Towards Better Transparency In Financial Services

Everyone – regulators, consumer bodies, clients and even product providers and distribution channels – agrees that better transparency in business process and products are good.

Yet, the reality is that there is still a lack of transparency in many areas.

The letter in The Straits Times headed “Onus on insurers to boost transparency” by Larry Haverkamp was a follow-up on the article by Lorna Tan “Excuse me, are you an independent adviser?”  The writer draws attention to advisers who do not qualify to be independent advisers posing as independent, and insurance products that pay high commissions but, in the writer’s opinion, are not favourable for clients.

To be exact, there is lack of transparency in many other areas and there are more complex products than endowment and whole life insurance products.  Let me share my views and suggestions and what clients can do to bring about better transparency.

Firstly, let me say that it is going to be a challenge to achieve greater transparency because, while everyone pays lip service to it, not everyone thinks it is good business to have simpler processes and products.  The reality is that there are more choices of product providers, channels of distribution and products today than 30 years ago.  And the products are getting more complex – just think about the structured products which failed and ruined millions of people’s lives.

Just imagine also the challenge for a typical customer, Joe Tan, who likes to know whether he has any protection needs and if so, what products he should purchase.

Who does Joe call?

1. His tied agency friend?
2. His bank relationship manager?  And which one, since they change so often?
3. The financial adviser representative from his stockbroker?
4. The financial adviser representative from his general insurance broker?
5. The financial adviser representative from his wife’s licensed financial adviser who claims to be independent?
6. The financial adviser representative from his friend’s licensed financial adviser who remains silent about whether he is independent or not?
7. His moneylender friend who says he can connect him to someone who will show him how he can use his CPF investment to work better for him?
8. His real estate broker who says he also doubles as a financial adviser representative?
9. His union supervisor who says that he is also licensed to sell insurance?
10. His accountant who also says he has a licence to sell insurance?

Now Joe is confused.  Since he has some time, he decides to call each of them to find out a few things.  And after making all the calls, he slumps on his chair, even more confused.

The tied agent tells him all the products of the different insurance and premiums are about the same, but he ensures that he will give Joe the best personal service.

A few others tell him that there are significant differences in the insurance products and premiums of different companies.  One even illustrated it by showing him a commission table of term insurance and the big difference in premiums, although the product is plain vanilla protection only without cash value.

Only one said that he is independent and claimed to give “fair and objective” advice.  What about the others?  They did not mention what kind of advice they give.  But he remembers everyone claimed to “take care of his interests”.

And one said he is “licensed”.  Are the others unlicensed?  But why are they still selling?

And one said he is able to offer choices, unlike the agent.  But he does not hear anyone say he is an agent, but all used terms like “consultant”, “planner”, private wealth manager, wealth planner, investment planner, and associate director.  So he scratched his head.  Who is the agent and who is the broker – terms his father mentioned over dinner.

One said he is willing to give a rebate.  One or two others said rebating is illegal and said it is unethical.  Will he be a criminal if it is illegal?

One said to be honest, “we are an exempt FA and not a licensed FA”.  What did he mean by “exempt”?  And why did he say “to be honest”?  Does it mean that the others are not honest?

And why does this guy keep on telling him “just buy term insurance”, and the other insisted that it is better to buy whole life because it is “pow chiah” – sure to win.  And another adviser insisted ILP is best.  And he wonders, what is ILP?

So trying to sort out his confusion, Joe decided he must find out more before deciding.  Good decision.  But how will Joe find out more – from friends, banks, magazines, Money Sense, newspapers?  Every one of his so-called friends warns him to be careful as if he is facing sharks.  His remembrance of all the articles he has read also advised him to be alert and diligent as if he is treading a field rigged with mines.

What can be done to make things simpler and less foreboding for people like Joe Tan?

Firstly, I would like to suggest that, while we should not go backwards to the days when we had a clear demarcation of business between banks, stockbrokers, investment, life insurance and general insurance, we should still return to the use of the legal terms “agent” and “broker” to describe the legal relationship between the representative and the company he represents (i.e. agent) and the legal relationship between the representative and the client (i.e. broker).  One way is to mandate that either of these terms be used in brackets after the title of the representative.  Whether this broker is independent or not should also be stated.  For example:

1. ABC Financial Consultant (agent)
2. XYZ Associate Director (independent broker)
3. MNO Relationship Manager (non-independent broker)

Secondly, whether the representative is licensed or not should be stated, since the representative who is licensed has to clear the MAS’ strict “fit and proper” criteria.  For example:

1. ABC Financial Consultant (agent, non-licensed)
2. XYZ Financial Consultant (independent broker, licensed)
3. MNO Relationship Manager (non-independent, non-licensed)

These descriptive differences should be in the business cards and disclosure forms.

A standard disclosure letter can be prepared by the regulator or the relevant association to explain the meaning of the different terms used – agent, broker, licensed, non-licensed, independent, non-independent, licensed FA, exempt FA, etc.

The above practices will go a long way to inform clients about the status or identity of the representative he is talking to and the company the representative represents or is promoting.

As for products, since the descriptive terms – whole life, endowment, term, annuity – are well-known – all products should have a basic description mentioning whether it is one of these or a combination.  From my experience, better transparency can be achieved if we adopt the following additional practices:

1. Removing the 9% returns illustration from ILP illustration and adding one with minus 5% to show clients about the possibilities of losses.
2. Requiring insurers to state the last five years’ actual bonus rate declared compared to their projection for cash value policies.
3. Requiring insurers to split the premiums between the protection risk and the cash value benefit.  This will allow whole-life polices to be used for keyman protection while the company only claims the premium for the protection as tax deductible expense.
4. Requiring insurers to inform clients they should seek independent financial adviser advice if they desire to have product choices.

In conclusion, let me say that the best long-term solution to bring about better transparency is to separate product providers totally from distributors (i.e. insurance companies do not have their tied agents) and to require all distributors to be licensed (both the firm and all their representatives) and all distributors are independent (to meet the higher standards for the benefit of clients).

Differentiating product providers from distribution would eliminate most of the biases and inefficiencies now present in tied agencies which are expensive to support and limit clients’ choices.  Given clients’ general ignorance and inertia, tied agents perpetuate the situation of companies utilizing excessive marketing, advertising, promotion and incentives to sell their products instead of focusing on real value to clients.  The direct impact is that the bigger companies’ products have higher premiums.  Tied agents who are serious about the business would become independent advisers and representatives.

Requiring all distribution channels to be licensed financial advisers and independent also, and all their representatives to be licensed as well, would raise standards immediately and significantly.  The total business production should not be affected but there would be a great saving of time of both the consumers and the representatives, and product providers would concentrate on improving their value to customers and not glitz and glitter.

Given the rather open system in Singapore, it would b left to market forces to bring about any changes.

Consumers need to press for better transparency and vote with their dollars.