Falling Short

The Money page in the Straits Times on the 23^rd of December 2008 carried news about MAS ordering three firms to stop giving financial advice.

Three insurance brokers which had also ventured into providing financial advice and distributing financial products, were found to have inadequate management oversight or control over policies and procedures for their financial advisory operations.

They were also found to lack adequate monitoring of the conduct of their representatives or introducers as well as complaints investigation and resolution process.

These three firms are licensed insurance brokers but were given exempt financial adviser status to advise and distribute financial products under the Financial Advisers Act.

MAS withdrew this exempt status and they would continue to be insurance brokers.

MAS’s action has hopefully drawn the public’s attention to the existence of two types of distributors, the licensed Financial Advisers and the exempt Financial Advisers. What’s the difference?

Licensed Financial Adviser firms have to apply for a license from the MAS, and have to fulfill stringent criteria. Their Representatives also have to apply for individual licenses and have to fulfill the “Fit and Proper” requirement.

On the other hand, Exempt FAs do not have to apply for a license for the firms or their Representatives. What this means is that many of the Exempt FAs have been tempted to grow their business quickly by relaxing their recruitment criteria and also their way of doing business.

The most rampant malpractice, from the grapevine, is the churning of investments particularly for clients using CPF funds, with the bait of offering cash rebates for every buy decision.

For example, if the fees charged were, as previously 5 percent, the cash rebate given to the clients would be 2 to 2.5 percent. With the capping of fees reduced to 3 percent, perhaps 1 to 1.5 percent could be rebated to clients.

Many CPF holders who may be financially strapped and in need of cash have been lured into the scheme either by the Representatives or organizers / introducers who recommended their friends or colleagues. Reportedly, this business is so lucrative that small groups or even big syndicate groups have operated for a few years. These are the ones that have either roped in Managers and Representatives of FA firms into their scheme, or have successfully planted their men in companies. In some companies, the practice is so rampant that it would be hard to believe that the Directors and Management are not aware of it.

It is also easy to investigate whether a firm or a Representative has done churning of investments. All buy and sell trades have to be recorded and can also be obtained from the unit trust platform providers, which understandably would have to furnish their records to MAS routinely or on request.

The action taken by MAS has been long expected and variously seen as strict and lenient. The opinion heard often is that if this is all the action that is going to be taken, then it is too lenient as thousands of clients have lost tens of thousands of dollars by way of fees to the churners.

Although the clients were unwise and wrong to be led or misled to join the scheme, and had pocketed the rebates, this does not diminish the responsibility and culpability of the Representatives and the firm. In the frenzy to make money, many had resorted to getting clients to sign blank forms or obtain the online code from their clients. Many had resorted to getting business from unauthorized introducers who unlawfully did the groundwork of getting forms filled, and the Representatives merely signed the forms.

There was no mention of fines and prohibition orders in the MAS action, but this may have been imposed as well or still contemplated.

The other point that is heard is that there are more than just three firms involved and surely this would not have escaped the eagle eye of MAS. The view expressed is that the syndicate groups will just move their business to other firms, or even induct existing firms or set up new firms, so concerted action is required.

It is relatively easy once you have knowledge of the clients involved in churning to trace where they have been moved from firm to firm.

There are still adverts in the papers to attract people to access their CPF money through the churning of investments. The present market is not so attractive, but when the economy and investment markets recover, will churning rear its head again? A lot depends on the action taken against offenders who have fallen short.