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FAIR But Not Simple

The following article was written For the AFA Newsletter, 6 March 2014

It is hard to argue with the ideals of the five thrusts of the Financial Advisory Industry Review or FAIR, namely, raise competence of Representatives, raise quality of Financial Advisers, make Financial Advisory a dedicated service, lower distribution cost and promote a culture of fair dealing.

The FAIR dealing outcomes promoted before FAIR were also hard to fault since they are all for clients’ good and all Financial Advisers agree they must put clients’ interest first.  However, while the three main recommendations of FAIR, namely, balanced scorecard framework, direct sales channel for basic insurance and web aggregator, have good intentions, they will not be easy to swallow and stomach although they may eventually prove good for the industry.  All three recommendations are client-centric and, therefore, worthy but they will not be easy or cheap to implement.

Of the three major recommendations, the balanced scorecard (BSC) will impact IFAs most.  No doubt there was great relief for all Representatives and the insurers when commissions were not banned totally, but the BSC pushed forward in its place to raise standards of practice will definitely prove costly.  The additional costs include increased compliance (the need for independent sales audit), new software to implement the penalty system, customer call-back and mystery checks.  These costs come on top of the inexorable increase in rentals and salaries, and already high compliance costs to implement AML/CFT and PEP procedures.

There is certainly a need for BSC and its monitoring of the four non-sales key performance indicators – understanding customers’ needs, suitability of product recommendations, adequacy of information disclosure and standards of professionalism and ethical conduct.  The challenge is how to achieve uniform implementation among the widely different firms with different business models, KYCs and compliance structures.  Fact-finding is not exactly a science much less analysis of the facts and recommending solutions.  It is also widely agreed that it is harder to have agreement on what is suitable for investment than for life insurance.  No two clients are alike and no two representatives think the same way, but somehow the BSC requires the FAs to set standards which are bound to differ from firm to firm.  The expectation must be that, given time, the industry will find its level but how will this come about?  Even if the sales process can be standardised, and it does not appear to be anytime soon, e.g. a standardised KYC, clients differ and their needs differ, and their choice will thus differ.

It will also be interesting to see how the independent sales auditor will go about his work and how he will settle disputes with representatives and managers who are likely to be more experienced in the business than him.  The procedure for settling dispute has been left to each firm to handle and this will also lead to difference in standards.  Since financial penalties are involved, disputes are to be expected.  Also to be expected will be more changes when BSC is actually implemented in 2015.

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