An overview of regulations and practices around payment for financial advice and distribution of mutual funds in Australia, Hong Kong SAR, India, and Singapore. Can regulatory initiatives reduce conflicts of interest and improve customer outcomes?
Sales commissions paid by manufacturers of investment products to financial advisers and distributors create a conflict of interest. With an eye on increasing their commission revenue, such intermediaries may engage in mis-selling, provide bad advice or churn clients’ portfolios. Such behaviour erodes the public’s trust in financial advice.
The report by CFA Institute, “Sales Inducements in Asia Pacific”, provides an overview of regulation and industry practices around sales commissions and fees for advice in Australia, Hong Kong SAR, India and Singapore. It is a result of in-depth research and more than 40 interviews with industry practitioners and experts in these markets.
While the issue of sales inducements is sometimes boiled down to the question whether to ban sales commissions outright, the experience of the markets that have done so does not provide clear evidence that consumer outcomes have improved.
Australia banned sales commissions paid to advisers, including trailer fees, in 2012. However, misconduct and mis-selling practices have continued. The 2018-19 Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry uncovered numerous cases of fees being charged for services not provided and of delivering poor advice. The reasons for this include a grandfathering provision, which watered down the strength of the commission ban, the entrenched sales culture, the vertically integrated structure of the industry, and weak enforcement of penalties for misconduct.
The issue of the quality of financial advice in Hong Kong SAR came to the fore after the Lehman Brothers mini-bonds fiasco during the global financial crisis of 2008. The Securities and Futures Commission opted not to impose a ban on sales commissions, but tightened regulations on the selling process, suitability assessment, client profiling, fee transparency and disclosures of conflicts of interest. The sales commission model still dominates the distribution of mutual funds, which is highly concentrated within the banking channel.
The Monetary Authority of Singapore (MAS) took a similar path, after a survey of investors revealed that the market is not ready for broad adoption of a pay-for-advice regime. MAS has implemented regulation that impose management accountability, enhance transparency, improve skills of advisers and promote integration of non-sales factors in remuneration frameworks. It has also strengthened the protection of accredited (high-net-worth) investors.
India’s fund distribution landscape is undergoing a dramatic transformation. Long dominated by mutual fund distributors (often individuals or small firms), the sector was upended in 2018 by a ban on upfront commissions and a limit on trailer fees. The intention of the Securities and Exchange Board of India was to drive business towards Registered Investment Advisers (RIA) – licensed, qualified professionals who charge fee for advice. The RIA segment, however, has been growing very slowly, while distributors have switched to promoting other products, such as insurance and unregulated alternative investment funds, which pay higher commissions.
With the goal of improving investor protection, access to quality advice, and minimizing conflicts of interest, CFA Institute recommends:
- A holistic approach to protection of investors in all wealth segments
- Consistent regulation of all investment products, to minimize regulatory arbitrage
- Full disclosure of the duty of care owed to the customer by advisers and distributors, and their level of independence
- Comprehensive product disclosures, enabling investors to make informed decisions
- Promoting investor education
- Aligning adviser remuneration with long-term interests of clients