Investment-linked policies (ILPs) will now require a product highlights sheet (PHS), and the Monetary Authority of Singapore (MAS) has proposed to remove a requirement for investors to seek mandatory financial advice when purchasing “complex products”.
These are part of a slew of measures announced by the central bank and financial regulator on July 1.
Collective investment schemes (CIS), for example, invest in simple products like shares or gold, and use derivatives solely for the purpose of hedging or efficient portfolio management. These are classified as products “generally understandable” by the market and are “non-complex”, according to MAS.
On the other hand, CIS that generally meet investment restrictions but can still invest a small part of investor funds outside the scope of its primary investment approach are classified as “complex products”.
Meanwhile, PHS are documents that summarise the key features, benefits and risks of a financial product, such as shares, bonds and units in a collective investment scheme.
According to MAS, the revised PHS template aims to help investors better understand key product information by listing them on the first page. In addition, a “question and answer” format is used to better engage investors on factors to consider.
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Complex products will be “clearly indicated with a red label” to alert investors of the need to seek advice “as appropriate”, says MAS. The distributor is then required to assess a retail investor’s educational, work and investment experience.
Where the investor is assessed not to have sufficient knowledge or experience, they will have to complete a learning module, or receive mandatory financial advice.
MAS says its objective is to “strengthen the effectiveness of a disclosure-based regime” for investors to make informed choices on their own, while requiring an appropriate level of intervention for consumers who need more assistance.
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Streamlining the complex product framework
MAS has also made three proposals to simplify the complex products framework, which was introduced in 2012 to aid retail investors in better understanding the features and risks of a complex product before they invest.
Firstly, MAS is proposing to remove the requirement for mandatory financial advice during product purchases, even where the investor does not have the qualifications, experience or knowledge to invest in the product, except in the case of those who require added protection.
“With clearer complex product labelling and investor-friendly PHS disclosures, investors will be in a good position to make considered, informed investment decisions,” says the regulator.
Secondly, MAS is introducing the product knowledge assessment (PKA) as an alternative to assessing an investor’s knowledge in complex products. This is in addition to the existing criteria of educational and professional qualifications.
The PKA comprises questions on the key features and risks of a complex product and serves as a “self-assessment and awareness-building tool”, notes the MAS.
Lastly, investors who require additional protection will still be required to go through the mandatory financial advisory process before they purchase complex products.
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During the process, the adviser will consider the needs and objectives of the investor and make a recommendation accordingly.
This will ensure investors remain protected by the safeguards MAS has implemented for selected clients, such as having a trusted individual present during the financial advisory process and a “call-back process” to confirm the investment decision before proceeding.
Should an investor wish to buy a product against the adviser’s recommendation, however, the move will require senior management approval, says MAS.
MAS is inviting views and suggestions on the proposed changes by Sept 1.
