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 inducements in Asia Pacific

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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.

Market Highlights

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) – licenced, 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.

Our Recommendations

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

About the Author(s)

Sara Cheng
Sara Cheng JD

Sara Cheng, JD, is Senior Director of Capital Markets Policy and Strategy, Asia Pacific at CFA Institute. She is responsible for advocating policy development in Asia Pacific, writing research centered on capital markets and financial regulation and engaging with financial regulators and standard-setting bodies on policy advocacy. Sara’s work experience spans close to 20 years in the finance industry having worked in investment banking, legal, compliance and securities regulation. Before CFA Institute, she worked in the CEO office of the Hong Kong Securities and Futures Commission from 2012 to 2017. Before becoming a regulator, she worked at Goldman Sachs in New York, Mumbai and Hong Kong where she held a range of diverse compliance roles in asset management, investment banking and investment research from 2004 to 2011. At Goldman Sachs in Hong Kong, she was Head of Research Compliance for Asia with oversight across key markets, including Hong Kong, China, Japan, Singapore, Korea, Taiwan and India. Sara also previously worked as a US corporate lawyer and holds licenses in the states of New York and New Jersey. She is a strong supporter for diversity and mentoring. While at the Securities and Futures Commission, she founded and chaired the Women’s Network for which she received the 2015 Employee Award for outstanding contribution to the Commission. She is also a mentor to many young professionals.

Piotr Zembrowski
Piotr Zembrowski CFA

Piotr Zembrowski, CFA, is manager, advocacy research and content, Asia Pacific Advocacy & Policy Outreach, at CFA Institute. He conducts research into financial regulation, to support the advocacy team's development and promotion of capital markets policy perspectives in Asia Pacific. He is also responsible for content management and editorial aspects of Asia-Pacific Research Exchange (ARX), an online research-publishing platform. Piotr has four years of experience as a financial journalist in Hong Kong, covering asset management, fintech and ESG, among other topics. Previously, he worked at TD Bank in Canada, where he was responsible for development of online and mobile banking and investing platforms. Piotr has a Master of Science degree in astronomy from University of Toronto and a Master of Journalism degree from the University of Hong Kong. He earned his CFA charter in 2006.

Mary Leung CFA

Mary Leung, CFA, is the head, standards and advocacy, Asia Pacific, at CFA Institute. She is responsible for the development, maintenance, and promotion of capital markets policy perspectives in the APAC region. She also oversees the promotion and development of CFA Institute professional standards in the region. Mary has over 20 years of experience in the global financial industry, having worked in corporate finance, wealth management advisory, and fund management. Previously, she was with Coutts & Co, where she was director of Business Development and Management for North Asia. Prior to that she was executive director at UBS AG, where she led the Corporate Advisory Group in Hong Kong. With experience in both the buy- and sell-sides, Mary has a strong understanding of the drivers and dynamics of different investor groups, including institutional investors, corporates, family offices, asset owners, and high-net-worth individuals. Mary graduated from Peterhouse, Cambridge with a degree in Engineering. She is a CFA charterholder and speaks English, Putonghua, and Cantonese.

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