Duties of Disclosure

This article discusses the obligation of financial advisers to disclose all material product information.

Under common law, there is no general principle requiring the disclosure of material facts during contractual negotiations. This is sometimes said to follow from the philosophy of caveat emptor, or ‘let the buyer beware’. However, the common law recognised an important exception for transactions with fiduciaries and contracts of insurance, in which both the insurer and insured are subject to a duty of uberrimae fides — utmost good faith. Indeed, the retailing of financial products, many of which are based on life insurance, has proved to be a context in which the obligation of a person providing financial advisory services to disclose material facts is of great practical significance.

In Singapore, the duties of a licensed financial adviser¹ (‘licensee’) to disclose product information are set out in:

1. the Financial Advisers Act (Cap 110)² (‘the Act’);
2. the MAS³ Notice on Information to Clients and Product Information Disclosure (‘the Notice’);
3. the MAS Guidelines on Standards of Conduct for Financial Advisers (‘the Guidelines’).
   

The importance of the duties of disclosure can be seen in light of:

• the fiduciary relationship between the financial advisers and consumers;
• the fact that the financial advisers are in a position of influence;
• the need to secure the appropriate degree of protection for consumers and consumers’ need for advice and accurate information.
  

The Act

Under s 25(1) of the Act, a licensee has a statutory obligation to disclose to its clients and prospective clients all material information relating to any designated investment product it recommends. This information includes:

1. the terms and conditions of the designated investment product;
2. the benefits and risks of the designated investment product;
3. the premiums, costs, expenses, fees or other charges to be paid in respect of the designated investment product;
4. if the designated investment product is a unit trust, the name of the manager of the collective investment scheme and the relationship between the licensee and the manager;
5. if the designated investment product is a life policy, the name of the registered insurer and the relationship between the licensee and the insurer;
6. such other information as may be required by the MAS.
   

The definition of ‘designated investment product’ appears in sub-s (6) as a unit in a collective investment scheme, a life policy (including a group life policy), or such other investment product as the MAS may prescribe.

The form and manner in which the above information is to be disclosed, as well as the penalty for breaching these provisions, are also prescribed in s 25.

Section 26 of the Act provides that no licensee shall, with intent to deceive, make a false or misleading statement as to:

1. any amount that would be payable in respect of a proposed contract relating to any investment product; or
2. the effect of any provision of a contract or a proposed contract relating to the investment product.

As can be seen, the core of the above provisions of the Act cater to product disclosure. It is therefore fitting that other disclosure requirements arising from the conduct of financial advisers’ activities be regulated and guided by the Notice and the Guidelines, as discussed below.

The Notice

The Notice came into effect on 1 April 2003. It applies to all licensees, exempt financial advisers and their representatives.

The Notice sets out:

1. the general principles that apply to all disclosure by a financial adviser to its client;
2. specific requirements as to the form and manner of disclosure as prescribed by ss 25 and 26 of the Act;
3. matters relating to:
   
   • general information about the financial adviser and status of a representative;
   • remuneration of the financial adviser;
   • conflicts of interest;
   • designated investment products;
   • illustration of past and future performance of designated investment products;
   • marketing materials.
     

General disclosure principles

In addition to the duties set out in s 25 of the Act, a financial adviser has to ensure that:

1. any statement or representation made to its client is not false or misleading;
2. any matter material to the statement or representation made is not omitted.
   

Generally, all product information disclosures should be:

1. clear:

• presented in plain language, in a form that is easy to understand;
• technical terms explained;
  

2. adequate:
   

• meet regulatory requirements and industry best practices, sufficient to help the client make an informed decision;
• clear presentation and explanation of warnings and important information, eg nature and objective of the product, risks, fees and charges, clients’ contractual rights and obligations; and
  

3. true and not misleading:

• not ambiguous in language or presentation;
• objective and unbiased;
• reasonable basis whenever an opinion is expressed, clear explanation that it is a statement of opinion;
• up-to-date documents given to clients, reviewed at least annually.
  

General information about the financial adviser and status of a representative

A financial adviser has to disclose the following information in writing to its clients:

1. its business name, business address and telephone number;
2. the type or types of financial advisory service that it is authorised to provide under the Act;
3. any other type of activity carried out by the financial adviser which is not regulated by the MAS, if any; and
4. any change to the above information in subsequent dealings with the client;
5. the product providers whose products the financial adviser:
   

• procures on behalf of its clients;
• recommends or markets to its clients; or
• markets to its clients on behalf of the product providers.
  

Remuneration of the financial adviser

A financial adviser has to disclose all remuneration in writing to a client, including fees it intends to charge, and commissions, trailer commissions, soft commissions or other benefits it will receive from a product provider. Where such remuneration cannot be quantified or established in advance, the financial adviser has to give a description or an estimate as appropriate. In the case of a life policy, a financial adviser only has to disclose to its client the ‘distribution cost’ item in the Benefit Illustration.⁴

Conflicts of interest

Where a connection to or association with a product provider will result in an actual or potential conflict of interest, the financial adviser has to disclose this in writing to the client. It should disclose any material information or facts that may compromise its objectivity or independence when providing financial advisory services.

Designated investment products

When recommending any designated investment product to a client, the financial adviser must disclose the following information:

1. nature and objective of the product;
2. details of the product provider;
3. contractual rights of the client in respect of the product he is purchasing;
4. intended client profile of the product;
5. commitment required from the client;
6. benefits of the product;
7. risks of the product;
8. pricing of the product;
9. fees and charges to be borne by the client;
10. reports to the client;
11. free-look period for life policies;
12. cancellation period for unit trusts;
13. withdrawals, surrenders or claims;
14. warnings, exclusions and disclaimers.
    

Illustration on past and future performance of designated investment products

When illustrating past and future performances of designated investment products, the financial adviser has to comply with the following:

1. not to disclose in writing or orally any matter in respect of the future performance of a collective investment scheme, unless such matter is disclosed in the registered prospective of the scheme;
2. advise the client that any forecast on the economy, stock market, bond market and economic trends of the markets may not be indicative of the future or likely performance of the product;
3. advise the client that the past performance of the product may not be indicative of its future performance, and provide source of data used in the illustration;
4. make appropriate reference to the Benefit Illustration when advising on a life policy; and
5. not to make any predictions, projections or forecasts when advising on a collective investment scheme, except where permissible under cl 1 of Annex A of the Notice.
   

In addition, the following rules apply where advice is provided on a collective investment scheme:

1. a financial adviser may orally disclose to the client any information on past or future performance contained in the registered prospective of the scheme, if such disclosure is made at the time when the client is given a copy of the prospectus and the financial adviser:
   
   • highlights to the client all assumptions, warning statements and other information relating to the past or future performance contained in the prospectus; and
   • informs the client if the illustration given in the prospectus relates to a past performance occurring more than three months before the date of the disclosure;
     
2. in all other cases, a financial adviser may orally disclose to the client any information on past or future performance, if a written disclosure of such information is provided to the client at the same time and the financial adviser:
   
   • highlights to the client all assumptions, warning statements and other information relating to the past or future performance contained in the written disclosure;
     
3. any written disclosure of past or future performance has to comply with the requirements set out in Annex A of the Notice.
   

Marketing materials

A financial adviser has to ensure that all its marketing materials:

1. comply with the above requirements on using past and future performance illustrations;
2. comply with the above general disclosure principles;
3. comply with the relevant guidelines issued by the MAS and/or industry associations of which it is a member.
   

A representative may only use marketing materials approved by the financial adviser for which he acts.

Where designated investment products are marketed through mailers, TV, radio, electronic media and the like, the marketing materials must display a prominent warning that:

1. the client may wish to seek advice from a financial adviser before purchasing the product;
2. if the client does not wish to seek advice from a financial adviser, he should consider whether the product is suitable for him.
   

The Guidelines

The Guidelines set out conduct requirements for persons acting as financial advisers under the Act and apply also to representatives who perform financial advisory services on behalf of financial advisers. The purpose of the Guidelines is to provide general guidance on the standards of conduct expected of financial advisers and their representatives. They are to be read in conjunction with the provisions of the Act and other legislative provisions or written directions issued by the MAS from time to time.

The Guidelines are essentially covered in the Notice. In summary, a financial adviser should disclose the following to its clients.

General information about the financial adviser

• Adequate information about its business, including its business address and telephone number.
• The types of financial advisory service it is authorised to provide, including the type of investment products it is allowed to advise on or market.
• Where a financial adviser is part of a financial services group and its representative also acts for one or more related companies, the representative should inform the client of the capacity in which he is acting.
  

Key features of products

• Benefits of investing in the product.
• The risks involved.
• The pertinent terms and conditions of the product.
• The fees and charges payable by the client, including any recurring fees or charges.
• Any other material facts relating to the key features of the product.
  

Warnings, exclusions and disclaimers

• Warnings, exclusions of liability and disclaimers in all documents, advertising materials and literature relating to the product.
  

Information that is clear, adequate and not false or misleading

• Any representations made and information provided to the client must be clear, adequate and not false or misleading.
  

Fact and opinion

• Facts and opinions should be distinguished when presenting recommendations to the client.
  

Remuneration

• Fees which the client has to pay.
• Commissions, trailer commissions, soft commissions or other benefits which the financial adviser will receive from a product provider.
• Where such remuneration cannot be quantified or established in advance, the financial adviser has to give a description or an estimate as appropriate.
• In the case of a life policy, a financial adviser only has to disclose to its client the ‘distribution cost’ item in the Benefit Illustration.
  

Penalties for Breach of Duties of Disclosure

Under s 25(5) of the Act, any licensee who contravenes the requirements of s 25 shall be guilty of an offence and be liable on conviction to:

• a fine not exceeding $25,000; or
• imprisonment for a term not exceeding 12 months; or
• both of the above.
  

In addition, s 58(5) of the Act provides that any person who contravenes any requirement specified in a written direction issued by the MAS shall be guilty of an offence and be liable on conviction to:

• a fine not exceeding $25,000; or
• imprisonment for a term not exceeding 12 months; or
• both of the above.
  

Conclusion

It is clear that local legislation does not simply provide for product disclosure. We see a broader disclosure regime which is designed to achieve greater consumer protection by covering other disclosure requirements, such as information relating to the financial advisers’ business, terms of business and contractual rights of their clients. It even regulates the obligations of financial advisers at the advertising stage. Indeed, it is possible to envisage situations in which consumers are able to maintain that had they been provided with the required information, they would not have entered into the transaction. The duties of disclosure discussed above therefore play a significant role in educating and guiding consumers, enabling them to make informed decisions whenever the services of financial advisers are engaged.

Kemmy C Chan
Goodwins Law Corporation
E-mail: kemmy_chan@goodwinslaw.com

Endnotes