MAS proposes to refine tier structure requirements and introduce new remuneration requirements for financial advisory industry

23 July 2021

On 12 July 2021, the Monetary Authority of Singapore (“MAS”) issued a consultation paper seeking comments on proposals to refine the tier structure requirements and introduce new requirements relating to remuneration for the financial advisory (“FA”) industry. The consultation closes on 13 August 2021.

In the consultation paper, MAS seeks to:

• clarify the policy intent and refine the requirements on tier structures, including defining overriding benefits and stipulating the circumstances under which payment of overriding benefits is allowed;
• consolidate the tier structure requirements under the Financial Advisers Act (“FAA”) and extend their application to all financial advisers, including exempt financial advisers which operate tier structures, for consistency across the FA industry; and
• introduce restrictions on the direct payment of remuneration to, and acceptance of remuneration by, representatives and/or supervisors of other FA firms. These restrictions will apply to (i) volume-based incentives, and (ii) commissions which are subject to spreading and capping as prescribed in section 22A of the FAA, the Financial Advisers (Remuneration) Regulations 2015 and the Insurance (Remuneration) Regulations 2015 (together, “Remuneration Regulations”).

MAS will conduct a subsequent consultation on the necessary legislative amendments to effect the proposed changes.

Tier structure requirements

Currently, direct life insurers and licensed financial advisers (“LFAs”) that operate tier structures are required to ensure such structures are capped to a maximum of three tiers. A tier exists when overriding benefits are payable by the direct life insurer to a representative for the provision of financial advisory services by another representative.

As MAS has observed that tier structures and remuneration practices among some FA firms are not in line with MAS’ policy intent, MAS proposes to require that FA firms that operate a tier structure for the provision of any financial advisory service and/or the sale of any investment product ensure that such a tier structure consists only of the First Tier, Second Tier and Third Tier as set out below:

Source: MAS consultation paper

As the Second Tier and Third Tier are responsible for supervising the lower tiers in their financial advisory and sales activities, FA firms can only pay overriding benefits, which are computed based on the provision of any financial advisory service or the sale of any investment product following the provision of any financial advisory service by representatives, to individuals in the Second Tier and Third Tier. The Second Tier and Third Tier need not be representatives to be considered as part of the tier structure.

MAS also proposes that the term “overriding benefits” should include any remuneration payable to any person other than the representative who provided the financial advisory services (whether on a periodic basis or otherwise) where the person’s entitlement to that remuneration, or the amount of that remuneration, is determined by reference to one or more of the following factors:

• the total number or total value of all investment products in relation to which financial advisory services are provided by one or more representatives to clients;
• the total number or total value of all agreements, transactions or arrangements relating to investment products entered into by clients in connection with financial advisory services provided by one or more representatives;
• the total amount of remuneration payable to one or more representatives by the FA firm in connection with any financial advisory services provided; and
• the total amount of premiums payable in respect of all life policies purchased by the FA firm’s clients in connection with financial advisory services provided by one or more representatives.

In this way, the term “overriding benefits” will include (but not be limited to) any remuneration that is computed based on the provision of any financial advisory service, or the sale of any investment product following the provision of any financial advisory service by representatives, and payable to the Second Tier and Third Tier in connection with financial advisory services provided by one or more representatives of the FA firm under the supervision of the Second Tier and/or Third Tier.

FA firms should not design remuneration packages that in effect, pay overriding benefits to persons other than their own Second Tiers and Third Tiers. Supervisors will also be prohibited from accepting overriding benefits from any person other than the FA firm of which he is a supervisor. MAS has provided at Annex B to the consultation paper non-exhaustive illustrative examples of remuneration practices that would not be in line with MAS’ policy intent. Diagram illustrations of tier structures are also provided.

MAS proposes to impose these requirements under the FAA in order to harmonise the tier structure requirements for direct life insurers and LFAs. Other exempt financial advisers such as banks, merchant banks, finance companies, insurance brokers and capital markets services licence holders, will likewise be subject to the tier structure requirements for consistency across the FA industry.

Prohibitions on direct payment of remuneration to, and acceptance of remuneration by, representatives and supervisors of other FA firms

Volume-based incentives

FA firms and direct life insurers offer both monetary (e.g. commissions) and non-monetary incentives (e.g. incentive trips, shopping vouchers) to the representatives and supervisors for the sale of life business products, where the amount of incentives is determined by the volume of sales achieved by them (volume-based incentives or “VBI”).

To enable FA firms to exercise effective oversight and control of their own representatives and supervisors, MAS is of the view that the principal FA firms of the representatives should be the only party that pays remuneration to their representatives. However, MAS notes that direct life insurers also offer VBI directly to the representatives and supervisors of these FA firms, sometimes without the knowledge of the FA firms. MAS intends to prohibit persons, other than the principal FA firms, from determining, communicating and paying VBI (offered by the direct life insurers) directly to the representatives of these FA firms. Similarly, MAS intends to prohibit representatives of FA firms from receiving VBI for the sale of life business products directly from any person who is not their principal, such as direct life insurers and other product manufacturers.

Spreading and capping of commissions

The existing spreading and capping of commissions rules found in the Remuneration Regulations allow an FA firm to make commission payments to its own representatives and supervisors, and to representatives and supervisors of another FA firm, for the sale of regular premium life policies. Consistent with the proposals relating to VBI, MAS intends to amend the Remuneration Regulations to prohibit FA firms from making such payments to representatives and supervisors of other FA firms.

Reference materials

The consultation paper is available on the MAS website www.mas.gov.sg via the relevant webpage.