LegisWatch August 2011
New Obligations to Conduct Product Due Diligence, Customer Assessments and to Advise on Product Suitability In order to safeguard the interests of retail investors, the Monetary Authority of Singapore (“MAS”) has implemented new requirements in connection with the marketing of investment products. These include the following: Financial advisers are obliged to carry out a due diligence exercise before selling or marketing any new product in Singapore, to ascertain whether the new product is suitable for the targeted clients. This mandatory obligation is embodied in Regulation 18B, Financial Advisers Regulations (“FAR”) which came into force on 28 July 2011. The holder of a capital markets licence (“CMS Licence”) will be required assess whether a customer has the relevant knowledge or experience to understand the risks and features of Specified Investment Products (defined below) before transacting in the product for the customer. Notwithstanding a positive assessment, the CMS Licence holder (if also an exempt financial adviser) shall offer to provide advice concerning the investment product to the customer. These requirements are set out in the Notice on the Sale of Investment Products (Notice No. SFA 04-N12). A financial adviser is involved in making recommendations on investment products will be required to comply with similar requirements as those imposed on a holder of a CMS Licence as described above. These requirements are set out in Notice on Recommendations on Investment Products (Notice No. FAA-N16). The Notices described above were issued by the MAS on 28 July 2011 and will come into effect on 1 January 2012. In the interim, the MAS expects financial institutions intending to sell the investment products specified in the Notices to begin adopting the new measures as a matter of good practice in conducting business with customers. This Update takes a look at the mandatory obligation relating to product due diligence set out in Regulation 18B, FAR and the key requirements in the Notice on customer knowledge assessments and the obligation to advise on product suitability.
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© WongPartnership LLP
This update is intended for your general information only. It is not intended to be nor should it be regarded as legal advice.
WongPartnership LLP (UEN: T08LL0003B) is a limited liability law partnership registered in Singapore under the Limited Liability Partnerships Act (Chapter 163A).
LegisWatch August 2011
Product Due Diligence Sales to targeted clients
As noted above, Regulation 18B, FAR mandates product due diligence before selling or marketing any new product in Singapore to any targeted client, that is, any client to whom a financial adviser intends to sell or market the new product who is not an accredited investor, expert investor or institutional investor.
Products caught by requirement
The due diligence requirement only applies to a new product. This is an investment product that has not been previously sold or marketed by the financial adviser or any of its representatives. It includes any investment product which varies in any manner from any investment product which has been previously sold or marketed by the financial adviser or any of its representatives. Investment products that are not caught by the requirement are: Contracts or arrangements for the purpose of foreign exchange trading; Futures contracts traded on a futures exchange, overseas futures exchange or recognised market operator; and Securities quoted on a securities exchange, overseas securities exchange or recognised market operator.
Matters to consider in due diligence
The due diligence exercise is aimed at ensuring that the product is suitable for the targeted client. If the product is not suitable for the targeted client, no sales or marketing must occur. The matters that must be considered by the financial adviser in its due diligence are: The type of targeted client the new product is suitable for and whether the new product matches the client base of the financial adviser; The investment objective of the new product; The key risks that a targeted client who invests in the new product potentially faces; The costs and fees to be incurred by a targeted client investing in the new product as compared to other products with similar features sold by the financial adviser; The processes in place for a representative of the financial adviser to determine whether the new product is suitable for the targeted client, taking into consideration the nature, key risks and features of the new product;
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© WongPartnership LLP
This update is intended for your general information only. It is not intended to be nor should it be regarded as legal advice.
LegisWatch August 2011
How the new product is intended to be marketed or sold; Whether any additional measures are necessary to mitigate any conflict of interest between a representative of the financial adviser and his targeted client, arising from the remuneration of such representative as a result of the sale of the new product to that targeted client; The minimum qualifications or training required for a representative of the financial adviser before such representative commences financial advisory services in respect of the new product; and Whether the current systems of the financial adviser, including all relevant client sales documents, adequately support the sale of the new product to the targeted client.
CEO executive directors to be personally satisfied
Subsequently, each time the new product is to be sold or marketed to a targeted client, the chief executive officer (if there is one) and each executive director of the financial adviser must: personally satisfy himself that the new product is suitable for the targeted client; and personally approve the sale or marketing of the new product to the targeted client.
Delegation to employee / committee
This responsibility may be delegated to an individual or a committee, but this delegation must receive the unanimous consent of the chief executive officer (if there is one) and each executive director. They must also continue to assure themselves that the appointed individual or committee carries out their duties. Scope of the Notices
Excluded Investment Products
The Notices apply only to investment products that are not “Excluded Investment Products”. This refers to those products set out below (other than those which are listed for quotation or quoted only on a securities market or a futures market that is not operated by an approved exchange): Stocks and shares in an incorporated or unincorporated body (excepting collective investment schemes);
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© WongPartnership LLP
This update is intended for your general information only. It is not intended to be nor should it be regarded as legal advice.
LegisWatch August 2011
Share warrants; Rights, options or derivatives issued or proposed to be issued by an incorporated or unincorporated body in respect of its own stocks or shares; Units in a business trust; Units in a collective investment scheme that is a real estate investment trust; Debentures (excepting asset-backed securities and structured notes); Life insurance policies (excepting investment-linked life insurance policies); and Contracts or arrangements the effect of which is that one party agrees to exchange currency at an agreed rate of exchange with another party, where such currency exchange is effected immediately.
Specified Investment Products
Investment products which are not Excluded Investment Products are referred to in the Notices as “Specified Investment Products”.
Retail Customers
In addition, the stricter regulatory approach set out in the Notices only affects dealings in Specified Investment Products with an individual customer who is not an accredited investor or an expert investor as defined in the Securities and Futures Act (“Retail Customer”). Effect of the Notices
Customer’s knowledge of investing
Under the Notices, where a financial institution wishes to recommend or sell Specified Investment Products to a Retail Customer, it must first carry out: a Customer Knowledge Assessment on the Retail Customer before transacting in an unlisted Specified Investment Product; or a Customer Account Review before opening an account for a customer to transact in listed Specified Investment Products. This must be done even if the Retail Customer has undergone such an assessment with another financial institution.
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© WongPartnership LLP
This update is intended for your general information only. It is not intended to be nor should it be regarded as legal advice.
LegisWatch August 2011
Unlisted Specified Investment Products Criteria to be met
The Customer Knowledge Assessment requires the financial institution to ascertain if the Retail Customer meets any of the following criteria: He holds a diploma or has higher qualifications in an area of study specified in the Notices. These areas are essentially those that relate to finance, economics, and accounting. He has a professional finance-related qualification. He has transacted in the relevant type of Specified Investment Product at least six times in the preceding three years. He has a minimum of three consecutive years of working experience in the past 10 years in an area of work specified in the Notices. These are areas of work that relate to financial products such as financial risk management or treasury activities.
Option of learning module
If a Retail Customer does not satisfy the Customer Knowledge Assessment, he must be informed in writing of the result. In this situation, he may choose to undergo a learning module to be prescribed by the MAS as to the features and risks of the relevant Specified Investment Product. If he is successful, he may be deemed to possess the knowledge to transact in that unlisted Specified Investment Product.
Client to receive financial advice
Alternatively, the Retail Customer may still go ahead with the transaction but only with safeguards which include the following: Where the financial institution is a CMS Licence holder that is not also an exempt financial adviser, it cannot act for him any further in the transaction. Where the financial institution is a CMS Licence holder that is also an exempt financial adviser, it must provide financial advisory services to the Retail Customer. This would entail the financial institution providing advice to the client taking into account the client’s investment objectives, financial situation and particular needs, as well as the outcome of the Customer Knowledge Assessment.
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© WongPartnership LLP
This update is intended for your general information only. It is not intended to be nor should it be regarded as legal advice.
LegisWatch August 2011
Confirmation by CEO or executive director
Customers that satisfy the criteria
If the Retail Customer does meet the criteria, the financial institution (if it is also an exempt financial adviser) must nevertheless offer to provide advice concerning that unlisted Specified Investment Product. If the Retail Customer does not wish to receive advice, the financial institution must take the following measures: This decision must be documented. The Retail Customer must be notified, in writing, that it is his responsibility to ensure that the product is suitable for his needs. He must also be notified that the effect of this decision is that he will not be able to rely on the FAA to file a civil claim in the event that he alleges that he has suffered a loss. He must then confirm if he wishes to proceed without receiving financial advice.
Duration of validity of assessment
A positive Customer Knowledge Assessment is only valid for a year. Hence, the Retail Customer must be reassessed the following year if he wishes to continue to transact in the unlisted Specified Investment Product. A Retail Customer that satisfied the Client Knowledge Assessment in the previous year may not do so in the following year if he did so on grounds such as the following: He has three consecutive years of working experience in any of the relevant industries in the past 10 years. He has transacted in the relevant Specified Investment Product at least six times over the last three years.
Where the financial institution is a financial adviser, in addition to obtaining confirmation of the Retail Customer’s intentions, its chief executive officer or executive director must approve the transaction after confirming that the requirements of the Notice have been followed. The chief executive officer or executive director must also not have been involved in that particular sales transaction and is not a connected person to the Retail Customer.
These conditions, being time sensitive, may result in a negative Customer Knowledge Assessment in the subsequent year.
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© WongPartnership LLP
This update is intended for your general information only. It is not intended to be nor should it be regarded as legal advice.
LegisWatch August 2011
Need to retake a learning module?
The Notices are silent as to whether a client who satisfied the Customer Knowledge Assessment only by successfully undergoing a learning module as to the features and risks of the relevant Specified Investment Product may need to retake the learning module in the subsequent year if he is still unable in that year to satisfy any of the other grounds under the Customer Knowledge Assessment. Listed Specified Investment Products
Customer Account Reviews
Where a Retail Customer wishes to open a securities account to trade in listed Specified Investment Products, the steps to be followed by the financial institution are largely the same as those set out for sales of unlisted Specified Investment Products. Some of the differences include: A chief executive officer or executive director has to approve the opening of the trading account regardless of the result of the Customer Account Review (essentially a similar procedure as the Customer Knowledge Assessment). The validity of the Customer Account Review is three years and the Retail Customer must have, during that period, transacted in a listed Specified Investment Product at least once.
If you would like information on this or any other area of law, you may wish to contact the partner at WongPartnership that you normally deal with or contact any of the following partners:
HUI CHOON YUEN Head – Capital Markets Practice; Joint Head – Financial Services Regulatory Practice DID: +65 6416 8204 Email:
[email protected] Click here to see Choon Yuen’s CV.
ELAINE CHAN Joint Head – Financial Services Regulatory Practice DID: +65 6416 8010 Email:
[email protected] Click here to see Elaine’s CV.
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© WongPartnership LLP
This update is intended for your general information only. It is not intended to be nor should it be regarded as legal advice.
LegisWatch August 2011
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© WongPartnership LLP
This update is intended for your general information only. It is not intended to be nor should it be regarded as legal advice.
