Financial Advisors – Balanced Scorecard Requirements
Monetary Authority of Singapore (“MAS”) issued Notice FAA-N02 Requirements for the Remuneration Framework for Representatives and Supervisors (“Balanced Scorecard Framework”) and Independent Sales Audit Unit. MAS also released a Guidelines on the Remuneration Framework for Representatives and Supervisors (“Balanced Scorecard Framework”), Reference Checks and Pre-Transaction Checks.
Balance scorecard requirements apply to all licensed financial advisers and exempt financial advisers. The regulations set our specifically the design and operation of the balance scorecard framework, and the roles and responsibilities of the independent sales audit unit, that financial advisers must put in place in the remuneration structures for their representatives and supervisors.
The balance scorecard was introduced by MAS under the Financial Advisory Industry Review (“FAIR”) which seeks to align the interests of financial advisory representatives and supervisors with those of their customers so as to promote a culture of fair dealing.
Principles of Balanced Scorecard Framework
The balance scorecard framework is based on four key performance indicators and focuses on non-financial indicators.
- KPI 1 – understanding a client’s needs;
- KPI 2 – suitability of product recommendations;
- KPI 3 – adequacy of information disclosure; and
- KPI 4 – professional and ethical conduct in providing service.
Financial advisers need to take reasonable steps to conduct sufficient fact-find to understand the circumstances and needs of customers. A representative must have a reasonable basis for any recommendation made to a client and must take into account the client’s financial objectives, investment horizon, risk profile, financial situation and particular circumstances and needs. Financial advisers, as part of balance scorecard framework, are required to ensure adequate disclosures are made to customers especially on material information and not make false or misleading statements. Financial advisers must demonstrate they have shown high ethical standards and professionalism in conducting their business with customers. This includes ensuring financial advisers are not falsifying customer responses on fact-find documents, delaying execution of customer instructions, harassing customers who are not interested in doing further business and failing to meet customer in person and making an unauthorised person to meet him or her.
Workings of Balanced Scorecard Framework
The balance scorecard requires a system whereby sales transactions and performance of all representatives and supervisors are regularly checked and assessed by independent sales audit unit (“ISA Unit”) and overseen and acted upon by the company’s board and senior management.
The ISA Unit has to be independent of the financial advisory services unit (or sales unit) which it audits; it must not directly or indirectly supervise or manage the conduct or performance of the representatives it is auditing. The persons in the ISA Unit need to be competent (a point to which we will return). The ISA Unit’s responsibilities can be done internally, such as by its compliance or risk management department/unit, or outsourced to a third party provider.
The role of the ISA unit as part of the balance scorecard requirements are as follows:
- To carry out post-transactions checks on sampled transactions, using documentation reviews and client surveys (via phone calls, face-to-face interviews, written surveys and electronic surveys);
- To classify infractions uncovered by the post-transaction checks as either Category 1 infractions or Category 2 infractions; and
- To report to the financial adviser.
If the ISA Unit resides within the FA Services Unit and reports to the Head of the FA Services Unit, the financial adviser must ensure that the ISA Unit does not report matters relating to the BSC framework to the Head of the FA Services Unit. To mitigate any inherent conflict of interest given that the Head of the FA Services Unit has responsibilities over the advisory and sales function of the financial adviser, the financial adviser must ensure that all BSC matters be reported directly to the Board and/or the Chief Executive Officer, or to a unit which is independent from the FA Services Unit, such as the risk management or compliance unit.
Consequences of Balanced Scorecard Rating
Based on the number and category of infractions an individual financial adviser receives in a quarter, they will be given a grading from A (the best) to E (the worst). Receiving a rating other than A will result in series of actions such as closer supervision, more checks, and a reduction in commissions earned. If a particular team has bad BSC grades, the grades of their manager will be affected, which can result in them receiving commission penalties themselves, and not being allowed to mentor or supervise juniors until their grade improves. Also to note that the consequences of the balance scorecard rating has long lasting impact. When financial advisers change company, their balance scorecard grade remains with them. Their new company needs to be made aware of their balace scorecard grade and is responsible for continuing to enforce the required remedial actions and additional checks.
How can Argus (now Waystone Compliance) Assist?
We, at Argus Global (now Waystone Compliance), are a team of consultants who specialize in regulatory compliance for regulated institutions. We assist to do the following:
- Assist to carry out independent balance scorecard reports based on assessment of qualify of advice provided by financial advisers
- Assist to review balance scorecard reports generated by company and assist to identify gaps in the procedures
- Prepare comprehensive balance scorecard policies and procedures template.
- Conduct mystery shopping tests as part of the balance scorecard assessment if required.
Please reach out to us for an initial discussion at [email protected].
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