Some Thoughts on the Recent MAS Notices and Guidelines Issued on the Financial Advisers Act

This article examines the impact of the recent MAS Notices and Guidelines on the conduct of financial advisory business in Singapore.

The Financial Advisers Act (Cap 110)¹ (‘the Act’) came into force in November 2001 and since then has caused ripples in the financial industry as regards some of the changes which it has introduced to the conduct of financial advisory business in Singapore. Recently, with the issuance of five Notices² and five sets of Guidelines³ under the Act by the Monetary Authority of Singapore (‘MAS’), these financial advisory businesses are likely to feel the changes introduced by the Act even more keenly. The Notices and Guidelines were issued on 1 October 2002 and save for two Notices, which were stated to come into effect on 1 April 2003,⁴ were immediately applicable. This article examines some of these recent Notices and Guidelines and explores certain aspects of their impact on the provision of financial advisory services in Singapore.

The Act

The Minister of Finance, BG Lee Hsien Loong, said that the Act is intended to ‘govern all financial advisory activities in respect of investment products and the marketing of specific investment products, namely, life insurance policies and collective investment schemes across all financial institutions, from banks, life insurance companies and insurance brokers, to independent advisers’.⁵ With investment product lines being increasingly blurred and the distribution channels for investment products no longer confined to their traditional boundaries and institutions, there was a need for an integrated regulatory and supervisory framework to ensure consistent dealing across the financial advisory industry. To this end, the Act was engendered to consolidate the regulatory regime set out in the Securities Industry Act, Futures Trading Act and the Insurance Intermediaries Act.

Given this rationale, the Act is understandably wide in its application. The term ‘financial adviser’ is defined in the Act to mean ‘a person who carries on a business of providing any financial advisory service’, which is in turn defined not only to include the rendering of financial advice but also the promulgation of analyses and reports concerning any investment product and the marketing of any collective investment scheme and the arranging of any contract of insurance in respect of life policies.⁶

Persons who are subject to the Act may be broadly categorised into licensed financial advisers and exempt financial advisers. An exempt financial adviser is simply a financial adviser who is not required to be licensed under the Act.⁷ Although banks, financial institutions, insurance companies or societies, certain finance companies⁸ and holders of capital markets services licences⁹ are deemed to be exempt financial advisers within the meaning of the Act,¹⁰ they are nonetheless stated to be subject to certain provisions of the Act.¹¹

The Notices and Guidelines, which are the subject of this article, were promulgated under some of these provisions. This article will focus on the following Notices and Guidelines:

1. Notice FAA-N01: titled ‘Notice on Recommendations on Investment Products’.
2. Notice FAA-03: titled ‘Notice on Information to Clients and Product Information Disclosure’.
3. Guideline FAA-G04: titled ‘Guidelines on Standards of Conduct for Financial Advisers’.
   

The Notices and the Provisions of the Act Under Which They Were Promulgated

Notice FAA-N01

Notice FAA-N01 contains detailed requirements as regards the recommendations which a financial adviser is allowed to make on an investment product. The Notice serves as an elaboration of s 27 of the Act which in summary provides that:

1. no financial adviser (licensed or exempt) shall make a recommendation with respect to any investment product to a person who may reasonably be expected to rely on the recommendation if the financial adviser does not have a reasonable basis for making the recommendation to that person;
2. a financial adviser is deemed not to have a reasonable basis for making a recommendation unless he has, after having regard to all relevant information, reasonably considered and investigated the subject matter of the recommendation and the recommendation is based on such consideration and investigation;
3. where a recommendation which contravenes these requirements is made to a person who reasonably relies on it to do an act or refrain from doing any act, that person shall be entitled to damages against the financial adviser if he is able to show that he suffered loss and damage as a result of his reliance on the recommendation.
   

The Notice sets out its requirements under three general headings:

1. know your client;
2. needs analysis;
3. documentation and record keeping.
   

Under these general headings, a financial adviser is, inter alia, required to:

1. understand the financial objectives of the investing client, the risk tolerance of the client, the employment status and financial situation of the client and the client’s current investment portfolio.¹² The financial adviser is required to state in writing that the information furnished by the client forms the basis of the financial adviser’s recommendation and further that any inaccurate or incomplete information given by the client will affect the recommendation;¹³
2. conduct a needs analysis based on the information furnished by the client and explain to the client the basis of the recommendation eventually made. This basis is required to be documented. If the client chooses not to accept the recommendation made, the decision of the client is also required to be documented;
3. furnish to the client specific documents. In the case of designated investment products, this includes prospectuses, profile statements, product summaries and benefit illustrations.¹⁴ The financial adviser is also required to render a written summary of the information gathered from the client as well as the recommendation made by the financial adviser and the basis for the recommendation. If the client chooses not to give any information to the financial adviser, or to receive the financial adviser’s recommendation or to accept the same, a statement to such effect must be given to the client.¹⁵
   

Notice FAA-N03

Notice FAA-N03 was promulgated under ss 25 and 26 of the Act. Section 25 obliges the financial adviser to ‘disclose, to every client and prospective client, all material information relating to any designated investment product that [is] recommend[ed] to such person’. These include:

1. the terms and conditions of the designated investment product; and
2. the benefits to be, or likely to be, derived from the designated investment product, and the risks that may arise from the designated investment product.
   

Section 26 provides that no financial adviser¹⁶ shall, with intent to deceive, make a false or misleading statement as to any amount that would be payable in respect of a proposed contract in respect of any investment product or as to the effect of any provision of a contract or a proposed contract in respect of any investment product.

Notice FAA-N03 sets out the standards of conduct to be maintained by the financial adviser with respect to the information to be furnished to the investing client. In this sense, it may be said to embellish Notice FAA-N01. The Notice, however, goes beyond simply placing a positive obligation on the financial adviser to furnish certain information. It also provides that the financial adviser is not to make false and misleading statements and is to ensure that it does not omit any matter which is material to any statement of information made.¹⁷

The Notice sets out general disclosure principles which a financial adviser is expected to meet. This includes the use of plain language¹⁸ and giving sufficient information to the client in accordance with ‘industry best practices’ to help the client to make an informed decision.¹⁹ In particular, warnings and important information such as the nature and objective of the investment product, the risks involved, the fees and charges, and the contractual rights and obligations of the client are required to be ‘prominently presented and clearly explained’.²⁰ Financial advisers are further required to disclose information to clients which is unambiguous, objective and unbiased.²¹ Where statements of opinion are expressed, the Notice requires that there should be a reasonable basis for expressing the opinion and further that it be ‘unambiguously stated that it is a statement of opinion’. Documents which are given to clients are required to be kept up-to-date and reviewed annually.²²

Specific disclosure requirements are also set out in the Notice. Of these specific requirements, the following are of note:

1 the financial adviser is required to disclose, in writing, to its clients any actual or potential conflict of interest arising from any connection to or association with any product provider, including any material information or facts that may compromise its objectivity or independence in the provision of financial advisory services;²³

2 in respect of designated investment products,²⁴ the financial adviser is required:

1. to disclose and explain to the client the party against which the client may take action to enforce his rights with respect to the product purchased;²⁵
2. to disclose and explain to the client all warnings, exclusions and disclaimers in relation to the product it has recommended to the client;²⁶
3. when using any forecast on the economy, stock market, bond market and economic trends of the markets, advise the client that such forecast is not necessarily indicative of the future or likely performance of the product. The same pertains to using information on the past performance of the product.²⁷
   

Criminal sanctions for breach of the notices

A breach of the provisions of the Notices attracts criminal sanctions under s 58(5) which prescribes a fine not exceeding $25,000 or a term of imprisonment not exceeding 12 months or both. In the case of a continuing offence, a further fine not exceeding $2,500 is prescribed for every day or part thereof during which the offence continues after conviction.

It should be noted that ss 25 and 26 of the Act also contain their own criminal penalties.

Guideline FAA-G04

The Guidelines issued by MAS under the Act occupy a different legal status from the Notices. One evident difference is that the criminal sanctions set out in s 58(5) of the Act do not apply in the case of a breach of the Guidelines. Further, it is possible that a breach of the Notices may attract civil liability in the form of a cause of action for breach of statutory duty. Such a cause of action will not be possible when there is a breach of the Guidelines.

Insofar as noteworthy provisions are concerned, the Guidelines substantially repeat what has already been stated in the Notices, with a few interesting additions:

1 a financial adviser is expected to act with due care and diligence in conducting its business activities;²⁸

2 this, inter alia, means that:

1. a financial adviser should take all reasonable steps to process client orders promptly, in accordance with the instructions of clients and on the best available terms;²⁹
2. a financial adviser should provide its clients with prompt written confirmation or documentation that the clients’ orders have been executed;³⁰
3. a financial adviser should have adequate systems and processes in place to ensure proper supervision of its representatives and their activities;³¹
4. prior to the cessation of its business of providing financial advisory services, a financial adviser should ensure that its liabilities and obligations to all clients have been fully discharged or provided for and that proper arrangements have been put in place to ensure that its clients continue to be serviced by another financial adviser.³²
   

It is clear from the provisions of the Guidelines set out above that the Guidelines apply to the conduct of financial advisory services in their various forms. It is worth repeating that the Guidelines themselves state that they set out the conduct requirements for persons acting as ‘financial advisers’ under the Act, including where appropriate, conduct requirements for representatives who perform ‘any financial advisory services’ on behalf of the financial advisers.³³  It has been pointed out that a financial adviser is defined in the Act to mean any person in a business of providing any financial advisory service.³⁴

It should also be noted that the powers of MAS under s 64 of the Act to issue codes, guidelines, policy statements, practice notes and no-action letters are suitably wide. What is to be borne in mind is that the Notices and Guidelines issued under the Act are possibly of wider applicability than the mere provision of financial advisory services.

Some Aspects of Impact

On causes of action

To some in the financial advisory business, the Act, the Notices and the Guidelines seek to raise the bar insofar as the conduct of financial business is concerned. Whilst this may not be strictly true, what the Act and the Notices and Guidelines have done is to introduce to the financial advisory services sector, consistent professional standards against which the conduct of every financial adviser is to be judged. In fact, MAS in the introductory paragraph in Guidelines FAA-G04 states that it ‘expects all financial advisers and their representatives to have regard to these Guidelines, so as to help foster professional standards and enhance confidence in the financial services industry’.³⁵

It may be said that, in the tort of negligence, the Act and the new Notices and Guidelines have identified the standard of care owed by the financial adviser to his client with more precision than was previously discernible under common law. In common law, the starting point for determining the standard of care in professional negligence cases has been the famous direction given by McNair J in Bolam v Friern Hospital Management Committee,³⁶ which is that:

The test is the standard of the ordinary skill of a man exercising and professing to have that special skill. A man need not possess the highest expert skills, it is well established law that it is sufficient he exercises the ordinary skills of an ordinary competent man exercising that particular art.

The common law standard of care, in cases where negligent financial advice is alleged, is established by the calling of expert evidence on what an ordinary competent financial adviser would have advised in circumstances similar to the dispute in question. The range of opinion expressed by the experts on this question is often very wide and the opinions of a plaintiff’s and a defendant’s expert are often startlingly different. The consistent standards propounded by the Act, the Notices and Guidelines are likely to put to rest some of the polarised views expressed by experts in these cases. A court hearing a dispute arising from the provision of financial advisory services is likely to regard a failure to adhere to these standards as a breach of the standard of care in negligence.³⁷ Although the Bolam test is unlikely to be discarded by the courts,³⁸ its application, in areas which have been provided for by the Act, the Notices and Guidelines, will probably entail an application of the standards set out in the Act, Notices and Guidelines.³⁹

Alternatively, the standards laid down by the Act, the Notices and the Guidelines could well be regarded as impliedly incorporated into the contract which the client enters into with his financial adviser for the provision of financial advisory services. A breach of these standards by the financial adviser may therefore sound in damages for breach of contract.⁴⁰ Given their statutory nature, it will not be possible to contractually exclude liability arising from a breach of the provisions of the Act and the Notices. Although this is less clear as regards the Guidelines, given MAS’s stated objective that they are to foster professional standards, it is unlikely that the courts will allow a contractual exclusion of the same. Such exclusion may possibly be struck down under the Unfair Contract Terms Act (‘UCTA’) for being unreasonable, if UCTA applies.

Most interestingly, the Act and the Notices may confer on the client a cause of action for breach of statutory duty which has a potentially wide area of application. Section 27 of the Act makes it clear that any person who has received a recommendation from a financial adviser which he relied on to do an act or refrain from doing an act and who has thereby suffered loss and damage has a right of action against the errant financial adviser. It is likely that a breach of the provisions of Notice FAA-N01, which basically elaborate on s 27, will also give the client a cause of action for breach of statutory duty.

It is questionable if a breach of ss 25 and 26 of the Act and of the provisions of Notice FAA-N03 would similarly give rise to a cause of action for breach of statutory duty. The courts have held that it is a requirement of the tort of breach of statutory duty that Parliament must intend a breach of the relevant statutory duty to be actionable by the individual who is harmed by the breach.⁴¹ The fact that s 27 of the Act expressly preserves such a right of action whilst ss 25 and 26 (under which Notice FAA-N03 was promulgated) do not, is likely to be relied on as an argument that Parliament did not intend breaches of ss 25 and 26 and of Notice FAA-N03 to be actionable.

The statutory action under s 27

Compared to the tort of negligence, the statutory action provided for in s 27 reverses the client’s burden of proof. Whereas in negligence the burden of proof rested on the client to show that the financial adviser had acted in breach of the standard of care required of him, s 27(1) now requires the financial adviser to show that he had a reasonable basis for making a recommendation to the client. Section 27(2) states the circumstances under which the financial adviser is deemed not to have a reasonable basis for making a recommendation. These include the failure to take certain positive steps required of the financial adviser which have already been set out above. These positive steps are elaborated on in Notice FAA-N01.⁴²

Under s 27, a failure to take these positive steps will result in the financial adviser being deemed as not having had a reasonable basis for making his recommendation to the client. This raises the question of whether minor breaches of s 27 and of the Notice FAA-N01, albeit not having a causative effect on the loss suffered by the client, may nonetheless expose the financial adviser to liability.

A prima facie reading of s 27 suggests that this question is answered in the affirmative. Under s 27, there is no provision for a causative link between the breaches committed by the financial adviser under s 27 and Notice FAA-N01 and the client’s loss and damage. The latter is instead pegged to the issue of whether the client has reasonably relied on the financial adviser’s recommendation to do an act or refrain from doing an act. So long as it can be shown that:

1. in making his recommendation, the financial adviser had failed to comply with the positive steps set out in s 27 and in Notice FAA-N01; and
2. loss and damage arise as a result of the client reasonably relying on the recommendation to do an act or refrain from doing an act,

the statutory cause of action is established.

It is evident that s 27, if literally applied, can lead to highly unsatisfactory results. Fortunately, with our pragmatic judiciary, it is likely that further requirements may be injected into the application of s 27 which ameliorate the conclusions reached in the preceding paragraph.

On the positive duties of persons handling investment products

Prior to the introduction of the Act, the position in case law has been that unless there is an express or implied contractual term requiring a person who is handling an investment product on behalf of his client to advise the client, no such duty would be imposed by the courts.⁴³ Section 25 of the Act, however, now makes it a requirement for financial advisers who recommend designated investment products to their clients to disclose material product information. The product information required to be disclosed include the ‘benefits to be, or likely to be, derived from the designated investment product, and the risks that may arise from the designated investment product’.

Notice FAA-N03 has elaborated further on this requirement such that even information relating to the intended client profile of the product including the product’s intended investment horizon, the ease of converting the investment in the product to cash and the expected risk tolerance of the client are required to be disclosed and explained. The end result is that although the requirements of s 25 and Notice FAA-N03 have been put under the rubric of ‘Disclosure of Product Information’, the obligation placed on the financial adviser is essentially one of advice.

Although s 25 is limited to designated investment products, parts of Notice FAA-N03 are not so limited. Thus the general disclosure principles set out in the Notice apply to all manner of investment products handled by a financial adviser. These general disclosure principles require the financial adviser to, inter alia, provide sufficient information to the client to make an informed decision and further to prominently present and clearly explain information such as the nature and objective of the product and the risks involved. Such obligations are again essentially advisory.

Arguably, the financial adviser is no longer able to limit his role to merely recommending an investment product without advising the client. The financial adviser would be placed under a positive duty to accompany such recommendations with the required advice. There would be little capacity for any financial adviser not to perform some advisory services in relation to the products he recommends. This is the intended effect of the Act and the Notices. The clear objective is to protect the investing public such that no investment product may be recommended without the investor being properly advised. For the financial adviser, however, he has to bear in mind that his advisory obligations are now entrenched by legislation and that contractually there is little room for him to limit the role which he undertakes vis-à-vis the client.

Conclusion

The matters set out above constitute some of my observations on the provisions of the Act and the Notices and Guidelines promulgated thereunder. Whether these observations are ultimately borne out by the courts remains to be seen.

The Act, the Notices and the Guidelines are a step towards the laudable objectives of protecting the investing public and making Singapore a world class financial centre. From a legal viewpoint, the precise manner in which the Act, the Guidelines and the Notices have defined the duties of a financial adviser is a move to be welcomed since it reduces the scope for uncertainty in disputes involving financial advisory services. Contrary to the perception of some that the Act, the Notices and the Guidelines are burdensome and harsh, they could operate to exonerate a financial adviser from the allegations raised by his client if the financial adviser has consistently complied with the requirements. The Acts, the Notices and the Guidelines should therefore be looked at in a positive light and implemented in like fashion.

Tan Kok Quan, SC
Tan Kok Quan Partnership
E-mail: tankokquan@tkqp.com.sg

Endnotes